Capital gains tax

Appeal dismissed on entrepreneurs’ relief

Three taxpayers have lost their appeal to claim entrepreneurs’ relief (ER), now known as business asset disposal relief. The activities carried on by a company owning land did not amount to a trade.

A company with an investment business owned land. Three individuals who disposed of their shares in the company in 2016 when it went into liquidation argued that it was carrying on a trade from 2013, so they were entitled to ER on the disposals.

HMRC argued that no ER was available, as the company did not meet the requirement to have been trading for at least a year before its trade ceased, and for that cessation date to be within the three years before the shares were sold.

The land owned by the company was previously the offices of another company. There were a number of commercial buildings on the site, with amenities. Some of the buildings were sold off individually and the company acquired permissions to redevelop the rest before it was sold. Throughout the period of ownership, parts were subject to short term lets, for example of parking space. These were to mitigate business rates, and did not change the overall loss-making position of the claimed trade. The taxpayers gave evidence about the complexities of running the business, and the changing plans for development. At one point, the site was appropriated from investment to trading stock.

The First-tier Tribunal (FTT) took a multi-factorial approach, using the badges of trade to inform its decision, and found that the company was not trading. All the company had in fact done was decide to sell the land and take steps to enhance its value before sale. The FTT noted that “to be held to be trading, a person such as SGL, which acquired the asset which it says is trading stock otherwise than as trading stock, needs to do something more decisive to escape the fetters of the past than simply decide to sell the asset and then do no more than take steps to enhance the asset's value prior to sale.”

Stolkin & Ors v HMRC [2024] UKFTT 160 (TC)

From Tax Update March 2024, published by Evelyn Partners LLP

Treaty residence, trusts and unpublished decisions

The Upper Tribunal has dismissed the taxpayers’ appeal in the capital gains tax case Haworth and others v HMRC. The case involved the use of a ‘round the world’ scheme, involving overseas family trusts. The parties agreed that the scheme could only have had its intended effect if the ‘place of effective management’ (POEM) of the trusts used was Mauritius. 

The First-tier Tribunal (FTT) held that the POEM at the material time was the UK. On appeal, taxpayers’ counsel argued that the FTT had applied the wrong test for POEM to the facts, and that it ought to have applied a test derived from the Court of Appeal’s judgment on corporate tax residence in Wood v Holden. The Upper Tribunal judges disagreed, finding that the FTT had applied the test for POEM, first set out by the Special Commissioners and subsequently endorsed by the Court of Appeal, from the similar double tax treaty / trust residence case of Smallwood.

In an annex to their decision, the Upper Tribunal separately considered whether it could have had regard to a different decision of the First-tier Tribunal included in HMRC’s arguments that had not been published at the time of the hearing. While stressing that there is no rule of law that prohibits reliance on an unpublished decision, after weighing the factors, the judges considered that fairness and justice required it to refuse permission for HMRC to rely on the decision in its unpublished state.

Geoffrey Richard Haworth & Ors v HMRC [2024] UKUT 58 (TCC)

From the Weekly Business Tax Briefing dated 8 March 2024, published by Deloitte

Income tax

Arrangements to create tax-free dividend rejected by CA

The Court of Appeal (CA) has agreed with the tribunals that arrangements designed to avoid a tax charge on a dividend were ineffective. Diverting the distribution through a settlor-interested trust did not leave the liability with the settlor company, as the company shareholders retained ultimate control and on a purposive interpretation they received the distribution.

The taxpayers entered into arrangements whereby funds left a company (WY) of which they were the sole shareholders and directors, and reached their hands indirectly. WY subscribed for two classes of shares, A and B, in a new subsidiary (WS), and settled the B share, whose only significant right was a right to distributions, on trust for the shareholders. WY subscribed for further shares in its subsidiary WS; this was followed by a reduction of share premium creating distributable reserves. A dividend was then paid by WS on the B share. Although the company was to receive a small portion of any trust income, and the trust property was to revert to it, B reduced its share capital and declared a dividend, which was paid to the trust beneficiaries. This was the lead case for several appeals on similar arrangements.

The taxpayers contended that under the settlements legislation, as WS retained an interest in the trust it settled, by virtue of the A shares, the income of said trust was taxable solely on WS. HMRC argued that under a purposive construction of the legislation the income was simply a distribution from WY to the taxpayers. The CA agreed with HMRC and the tribunals and dismissed the appeal. Before the year in which this marketed tax arrangement was used, WY had made yearly distributions to the taxpayers in the normal way. The taxpayers did not dispute that the main purpose of the arrangements was to negate tax on the dividend. Under the Ramsay principle, the income was a direct distribution rather than income from a settlement.

HMRC also suggested that the taxpayers were the true settlors, so taxable on the income, as they had retained full control over A. The CA agreed with the Upper Tribunal that they were indeed the settlors.

Clipperton v HMRC [2024] EWCA Civ 180

From Tax Update March 2024, published by Evelyn Partners LLP