Beneficial Ownership of Shares: Terrance Raine v HMRC
In the case of Terrance Raine v HMRC, the First-Tier Tribunal considered whether the taxpayer (Raine) was the sole legal and beneficial shareholder in a company, or whether he had transferred a 50% interest in his shares to his long-term partner (Hamilton).
- Raine acquired an ‘off-the-shelf company’ to work through from an accountancy firm. The firm was responsible for the accounting, company secretarial requirements, and payroll of the company.
- Raine claimed that he and Hamilton were advised that they would be appointed as director and company secretary respectively, with each allocated one share each. It later transpired the accountancy firm never completed the paperwork to allot the shares.
- The accountancy firm completed annual returns, approved by Raine, showing him as the sole shareholder.
- For several years the accountancy firm arranged the paperwork for the payment of dividends and dividend vouchers. These showed equal dividends payable to Raine and Hamilton.
- After becoming aware of a possible discrepancy between the shareholdings and the dividend payments, Raine requested that the accountancy firm provide him with the formation documents of the company. Included was a note of the proposed shareholdings showing 100% and 0% for Raine and Hamilton, respectively. Raine took no further action and did not transfer shares to Hamilton.
- HMRC investigated the disparity between the dividends declared on Raine’s tax returns and the shareholdings declared at Companies House and subsequently raised assessments to income tax on and issued penalties for incorrect returns.
Raine argued that 50% of the shareholding belonged to Hamilton on three possible bases:
1. Express Trust
An express trust of 50% of the company’s issued shares existed.
For the valid creation of an express trust, there needs to be certainty of: (i) subject matter (the shares), (ii) object (Hamilton), and (iii) intention.
The question in point was whether Raine intended 50% of his interest to belong to Hamilton.
Raine argued that the dividend vouchers issued to Hamilton and himself demonstrated his intention that 50% of the shares in the company belonged to Hamilton. On this basis, Raine was taxable on 50% of the dividends declared only and his returns were correct.
2. Equitable Assignment
There was an equitable assignment of 50% of the company’s issued shares.
In order for there to be an equitable assignment, it must be demonstrated that: (i) there was an intention to assign, and (ii) sufficient steps were taken that it would be inequitable to hold that an assignment did not take place.
Raine argued that, on the same basis that an express trust was created, it was clear that he intended that he and Hamilton should each own 50% of the issued shareholding.
He gave the company’s accountants his instructions which were not followed, therefore it would be inequitable if he were held to be the sole shareholder
3. Common Intention Constructive Trust
A common intention constructive trust over 50% of the company’s issued shares.
For a constructive trust to arise, it is necessary for the beneficiary to have acted detrimentally in reliance on the agreement that they are entitled to a share of the property.
Raine argued that Hamilton, believing that she was an equal 50% partner, did not draw a salary despite working for the company on a daily basis which amounted to detrimental reliance.
Raine argued that as he had always been an employee charged to tax under PAYE, he had never been involved in the day-to-day management of a company and had very little knowledge of shares, the remuneration of directors, and the link between company returns and dividend payments.
He claimed that he did not notice that the shareholdings of the company as per the annual accounts did not correspond to his understanding and that he had no reason to believe that all necessary formalities had not been undertaken correctly.
The Tribunal disagreed with Raine and found him to be the sole legal and beneficial owner of the issued share capital in the company.
While Raine’s original intention may have been to make Hamilton an equal shareholder, he never acted on that intention. Therefore he was held to be the sole legal and beneficial owner of the issued share capital.
The reasons for the acquisition of the company, coupled with the fact that its sole source of income was derived from his services, demonstrated that the company was in his sole ownership. Furthermore, after becoming aware of the share discrepancy, Raine failed to enquire into transferring 50% of his interest to Hamilton.
With respect to the creation of a constructive trust, the courts did not believe that Hamilton’s duties and functions performed were detrimental to her.
While Raine may have had no experience with running a company, a layperson with no knowledge of company law would assume that only individuals holding a share would be entitled to a dividend, and that Hamilton was not a shareholder.
It was held that he could not have reasonably believed that he and Hamilton each owned one share as Raine signed off the company accounts and returns which clearly stated that both issued shares in the company were in his name.