In Conegate Limited v HMRC  TC06340 the FTT denied a claim for capital loss relief: market value should have been applied to the disposal and one of the main purposes for entering into the transaction was to secure a tax advantage.
The taxpayer entered into arrangements involving the purchase of shares in a company he controlled:
- Ordinary shares were converted into deferred shares and
- This was intended to lower their value to £1, allowing for them to be repurchased for a lower amount than the original purchase price and generate a capital loss
- He argued that this was not the primary intention of the transactions, which was to generate funding for a football club.
The First-tier Tribunal (FTT) dismissed his appeal finding.
- Applying section 29 of TCGA 1992, the taxpayer was treated as having disposed of his ordinary shares and acquired the deferred shares in exchange, at a value of £1.
- The consideration that could have been received was considerably higher, and the taxpayer had not presented evidence to show that he could not have achieved any greater consideration than £1.
- Therefore, the disposal must be treated as not being at arm’s length, with s17 TCGA 1992 applying and the market value of the shares replacing the actual consideration received for the purposes of calculating the capital loss.
- Whilst the transactions had been intended to generate funding for the football club, the capital loss anti-avoidance rules at Section 16A TCGA 1992 only require the securing of a tax advantage to be “one of the main purposes” not “the main purpose” of the arrangements, and so relief would have been denied on this basis anyway. There was more than one way for the taxpayer to provide funds to the club and he chose the route he did because of the capital loss which would result.
The case also considered issues regarding the waiver of legal professional privilege.
- HMRC claimed that the taxpayer had waived privilege in respect of communications between them and their legal advisors because it had relied on the material in a witness statement, but the taxpayer denied he had made such a waiver.
- The FTT concluded that privilege had been waived, and drew adverse inference from the taxpayer’s failure to disclose these documents.
What the tribunal said here is that, where the test is that one of the purposes of a transaction is achieving a tax advantage, then even if that advantage is a by-product of another, non tax related purpose, the tax advantage can be cancelled by HMRC.
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