JK Moore v HMRC – What is the date of disposal for CGT?
Entrepreneurs’ Relief (ER) is a valuable relief that enables business owners to pay capital gains tax at 10% (as opposed to up to 20%) on all gains on qualifying assets.
A key condition for the availability of ER is that the seller must be an officer or employee of the business throughout the 12 month period up to the date of disposal.
The date of disposal for capital gains tax purposes is when beneficial ownership is transferred from the seller to the purchaser. Therefore, where the disposal is made by way of contract, the disposal date is when there is a binding and unconditional contract to sell the asset.
The recent case of John Kenneth Moore v HMRC illustrates the importance of structuring transactions correctly so as not to jeopardise the availability of ER on the sale of business assets.
- John Kenneth Moore (the taxpayer) was a founding shareholder and director of Alpha Micro Components Ltd.
- A disagreement as to the future direction of the company resulted in the taxpayer agreeing to resign and sell his shares back to the company.
- In May 2009, the sale of the taxpayer’s shares was approved by a general meeting of shareholders and recorded on the company statutory records.
- On the same day, the taxpayer signed an agreement for his resignation, however the documents stated the effective date of his termination was from February 2009.
- The taxpayer made a gain on the sale of his shares and made a claim for ER.
- HM Revenue & Customs denied ER on the basis that the taxpayer was not an employee or an officer on the date of sale.
The taxpayer initially claimed that he disposed of his shares and resigned as director on the same day in May 2009.
However, before the hearing, the taxpayer accepted that he had ceased employment and was no longer an office holder from February 2009.
Therefore, the taxpayer instead contended that the date of disposal of the shares was in February 2009, when negotiations were completed and resulted in a binding contract.
In contrast, HMRC argued that there was no binding agreement to dispose of the shares, and therefore the disposal did not take place until the shares were sold in May 2009.
The First-Tier Tribunal stressed that the time of disposal is to be determined by reference to when the unconditional contract for sale was made.
For a company’s purchase of own shares to be effective, it must be approved by a special resolution. As the resolution was not passed until May 2009, the company was incapable of entering into a valid contract before this date, regardless of the terms that may have been agreed between the directors previously.
On this basis, the Tribunal agreed with HMRC that ER was not available.