The First Tier Tribunal (FTT) found that a shareholder with a 4.99998% shareholding qualified for Entrepreneurs’ Relief (ER). A spreadsheet rounding error meant that 5% was not held, but the FTT decided that the High Court would have rectified this mistake, meaning that ER was available. 

  • In Jonathan Cooke v HMRC [2024] TC09118, Mr Cooke invested in ISG Holdings Limited in 2017, purchasing 245,802 shares from two founder shareholders.
  • The agreement made between Mr Cooke and the founders was that he would buy 5% of the company’s shares for £500,000.
    • The purchase of precisely 5% was an essential requirement of Mr Cooke, to ensure that he would qualify for Entrepreneurs’ Relief (ER) (now Business Asset Disposal Relief) on any future sale.
    • Mr Cooke also requested the introduction of an anti-dilution clause in the shareholders' agreement to ensure that his 5% holding was protected, and entitlement to ER preserved.
  • In February 2019, Mr Cooke sold his entire shareholding, realising a gain of around £600,000. He claimed ER on the disposal.
  • HMRC denied Mr Cooke's ER claim as his shareholding represented 4.99998% of the Ordinary share capital in the company, not the required 5%.
    • The error in Mr Cooke's percentage shareholding arose due to the spreadsheet used to calculate the number of shares he was purchasing rounding percentages to two decimal places.
  • Mr Cooke Appealed to the First Tier Tribunal (FTT) arguing that:
    • If proceedings were brought to the High Court, it would order rectification of the share issue documents, such that he held 5% as intended.
    • Following the decision in Lobler v HMRC [2015] UKUT 0152, the FTT should proceed as though such rectification had been ordered.

The FTT found that:

  • There was a clear intention and agreement between the parties that Mr Cooke would hold a minimum of 5%, to allow him to qualify for ER.
    • Mr Cooke's request for, and the existence of, the anti-dilution clause in the shareholders’ agreement supported this.
    • While the founder shareholders were clear that they did not want to transfer more than 5%, they would have considered the transfer of one additional share each to be nothing more than giving effect to what they believed was their agreement.
    • The Heads of Terms constituted an outward expression of agreement to a 5% holding.
    • The common intention of the parties continued throughout. The parties were surprised when it later transpired that 5% had not been sold to Mr Cooke.
    • All individuals agreed that there was a mistake due to the spreadsheet rounding to two decimal places.
  • It had the jurisdiction to consider what the High Court would do if it were to be asked for rectification. It was concluded that the High Court would:
    • Treat the matter as being capable of rectification.
    • Grant rectification of the share redesignation documents, stock transfer agreement and share certificate, to reflect a 5% shareholding.
  • As a result, the ER conditions would have been met on Mr Cooke's disposal in 2019.

The appeal was allowed.

Useful guides on this topic

Business Asset Disposal Relief (Entrepreneurs' Relief): Disposal of shares or securities in a company
When can you claim Business Asset Disposal Relief (BADR) on a share sale? What is the rate of Business Asset Disposal Relief (Entrepreneurs' Relief)? How do you claim BADR? What case law is there on BADR? 

Share capital: What's an ordinary share?
What is an ordinary share? Why is it important?

CGT: How to calculate a capital gain or loss
How do you calculate a capital gain or loss? What costs are deductible? Can you set losses against capital gains?

Which investment relief: IR, BADR, SEIS or EIS?
What is the difference between Business Asset Disposal Relief (BADR) and Investors' Relief? How do they compare to investments in the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS)?

External link

Jonathan Cooke v HMRC [2024] TC09118