In David Briggs & Others v HMRC [2019] TC07166 the FTT held that a change in a right to earnout consideration from loan notes to cash was a disposal of that right and triggered the gain deferred on the original disposal.
Under the principle in Marren v Ingles:
- Where all or part of deferred consideration is unascertainable, such as on an earnout, the seller must account for the tax payable based on the best estimate of the present value of what he might receive.
- The right to receive the remaining amount is a capital asset in its own right. If the amount received is more than estimated more tax is due and reliefs available on the initial disposal can't be claimed. If it is less there is a loss.
- S138A TCGA operates to defer tax on disposals with an earnout element and an issue of loan notes until the loan notes are disposed of. A specific election must be made to opt out of s138A.
The appellants were three individuals who were also trustees of the Briggs Accumulation and Maintenance Trust. They jointly owned, with the trust, 100% of two TV companies which owned the rights to “Who wants to be a Millionaire”. In December 2006 both companies were sold.
- Part of the consideration was a “pass through payment” (PTP) relating to a possible future settlement from an ongoing litigation in respect of unpaid or underpaid royalties.
- The appellants took loans notes for the PTP. In 2006 it could not be determined whether the PTP would ever be received or how much it might be.
- Nothing was declared in their 2006/07 tax returns for the PTP; it was assumed that s138A had been applied to defer the PTP gain until the disposal of the loan notes as no opt out elections were made. Business asset taper relief at 75% applied to the initial consideration received in 2006.
- In 2013/14 the PTP was paid in cash at the request of the appellants and HMRC assessed the taxpayers to CGT on the total amount received for that year.
- They appealed; the change in payment method did not create a disposal; a right to receive the PTP had been created in 2006/07 which should now be taxed in that year, with only any increase between the value of the right and what was actually received being taxable in 2013/14. In fact, they argued, there was a capital loss in 2013/14.
The FTT dismissed the appeal disagreeing with the appellants’ analysis’ of the transactions.
- In December 2006 each appellant received a PTP right i.e. a contingent right to an unascertainable amount of loan notes, an “earnout” right.
- No CGT arose in respect of the right at that time because section 138A TCGA applied; any gain in respect of the PTP right was deferred until such time as the PTP right became uncontingent and ascertainable. No opt out election had been made and it was now too late to make one.
- When the PTP cash payment was received the right was disposed of and the deferred gain was triggered.
- The appellants were only arguing for the PTP to be taxed in 2006/07 because of the availability of business asset taper relief.
There were some errors in HMRC’s closure notices; they referred to the wrong companies and two of the appellants asked that they be declared invalid as a result. The judge refused and found that any reasonable taxpayer would have understood that this was just an error, it had been pointed out to HMRC immediately, and was not so gross and fundamental as to invalidate the notices.
This case is of equal relevance now for a disposal eligible for entrepreneurs’ relief as it was to a claim for business asset taper relief. Had the taxpayers opted out of s138A and paid their tax on the earnout upfront, whilst there would have been a clear cashflow disadvantage, they would have jointly saved £16,364,035!
Links to our guides:
Selling the business: deferred consideration and earn outs
Loan stock: QCBs or Non-QCBs (subscriber guide)
How to appeal an HMRC decision
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