In Assem Allam v HMRC [2020] TC7532, the First Tier Tribunal (FTT) dismissed a claim for Entrepreneurs' Relief on a sale of shares to the seller's own company. It found the disposal to be of capital, not income. The non-trading activities in the company being sold were substantial. The purpose of the transaction was not income tax avoidance.
Dr Allam was a non-domiciled UK resident claiming the remittance basis and who owned three UK-resident close companies with his wife.
- One of these was ADL, a property company. It had engaged in some property development activities, including demolition to create a car park and attempts to obtain planning permission for a site it owned. Its turnover came almost entirely from property rentals.
- The other companies were AML, a trading business and Allamhouse (AH), a holding company formed in connection with the acquisition of Hull City Football Club. AH acquired AML in 2010.
- In 2011, Dr Allam sold his shares in ADL to AML for £4,950,000 and claimed Entrepreneurs’ Relief (ER). In 2009, HMRC had refused clearance under the Transactions in Securities (TiS) rules for a similar transaction.
- HMRC enquired into the 2011/12 return and issued a closure notice denying ER on the basis that ADL was not a trading company.
- They also issued a preliminary notification that the TiS rules may apply to the transfer of shares in ADL. A counteraction notice was issued in 2017 assessing the £4,950,000 to income tax as a distribution.
- In 2012/13, Dr Allam made loans to AH using funds from previously unremitted Egyptian property income. He made Business Investment Relief (BIR) claims which HMRC accepted. In 2013/14, AH made payments to Dr Allam and his wife in respect of previously declared and unpaid dividends which had been subject to UK tax. HMRC withdrew the BIR previously granted.
- Dr Allam appealed against:
- The closure notice denying ER.
- The counteraction notice assessing the proceeds from the shares to income tax on the grounds that the purpose of the transaction was commercial, being to group AML and ADL obtain bank funding for AML and personal to provide funds for his retirement.
- The closure notice denying BIR.
- He also contested that the relevant returns were not made in response to notices issued by an officer of HMRC under s.8 TMA, as the notices he received were automated notices. He said that the provisions at s.12D TMA which can deem such returns to be in response to an s.8 notice did not apply, making both the enquiries and closure notices, invalid. The judge refers to this as the s.12D issue.
The FTT dismissed the first ground of appeal, allowed the second but disallowed the BIR claim.
- Whilst ADL had some development activities they were, to a substantial extent, not trading activities when considering its income and assets. It was not a trading company for the purposes of ER.
- The sale of the shares in ADL was not a transaction in securities. The purpose behind the transactions was personal with the income tax benefit being merely incidental. The judge agreed that the fact that the result of the transactions may have been achieved in a different way and one which would have given rise to an income tax receipt does not automatically mean that a main purpose of the transaction was to obtain an income tax advantage.
- The unpaid dividends were part of a single investment with the loans on which BIR had been claimed. The payments to Dr Allam were repayments of those loans and should be treated as remittances to the UK and taxed accordingly. Double taxation relief was due for Egyptian tax already paid on these amounts.
On the s.12D issue, the FTT followed the decision of the Upper Tribunal in Rogers and Shaw and agreed that returns made in response to automated notices remain returns made under s.8 TMA. Enquiries opened into those returns are valid. This part of the appeal was therefore dismissed too.
Links to our subscriber guides
Entrepreneurs' Relief: disposal of shares or securities in a company
Entrepreneurs' Relief (ER) is a Capital Gains Tax (CGT) relief that is available on the disposal of business assets, including disposal of qualifying shareholdings in trading companies or trading groups by an officer or employee.
Business Investment Relief
Business Investment Relief is a special relief for non-UK domiciled individuals designed to encourage them to remit funds to invest in UK businesses
Non-domicile status, deemed domicile & tax
Who is non-UK domiciled? What does this mean for UK Income Tax, Capital Gains Tax and Inheritance Tax? What reliefs are available to non-doms?
Transactions in Securities
The Transactions in securities (TIS) rules are anti-avoidance rules: they allow HMRC to counteract a 'tax advantage'.
S.8(1) notice to file a tax return
When HMRC issues a notice under s.8(1) TMA 1970 a taxpayer must file a Self Assessment tax return for the year in question.
How to appeal an HMRC decision
What type of decision can you appeal? What are your different options when you disagree with HMRC? What are the key steps in making an appeal?
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