In Rupert Grint vs HMRC [2024] TC09337, the First Tier Tribunal (FTT) found that a sum of £4.5 million declared by Harry Potter star Rupert Grint on his tax return as a capital gain should have been declared as income, arising from his role in the films.
Mr Grint, who began starring in the Harry Potter films at age 13 as Ron Wesley, had his tax affairs managed by his father, Nigel Grint.
- Nigel Grint, now deceased, Incorporated Clay 10, a company of which he was the sole director and Mr Grint, the sole shareholder.
- Mr Grint’s rights to be paid for previous and future films were transferred to Clay 10 in 2011. The rights consisted of £4,086,814 consideration for accrued income and £4,500,000 for the transfer of rights, records and Goodwill.
- Both Clay 10 and Rupert agreed to leave the debt outstanding creating a debt due from Clay 10 to Mr Grint.
- The £4,086,814 was declared as income during the 2011-12 tax year and the £4,500,000 was declared as a disposal for Capital Gains Tax (CGT) purposes attracting Entrepreneurs' Relief (now Business Asset Disposal Relief) at a rate of 10%.
- In 2014, HMRC opened an enquiry into Mr Grint’s Self Assessment return. After five years, a Closure notice was issued charging the sum of £4,500,000 to Income Tax, under s.778 Income Tax Act 2007.
The main argument in the proceedings centred around the Sales of occupation income provisions in sections 778 and 779 ITA 2007.
S.773 provides an outline of the provisions stating that a charge to Income Tax arises on individuals:
- Under s.778: income arising where capital amount other than derivative property or right obtained.
- Under s.799: income arising where derivative property or right obtained.
Income is treated as arising if:
- Arrangements are made to exploit the earning capacity of an individual in an occupation.
- The aim of the arrangement was the reduction of Income Tax.
Mr Grint argued that:
- The main objective was never one of avoidance or reduction of Income Tax, therefore the second condition above was not met. Witness evidence suggested Nigel Grint was less interested in tax savings and more interested in the protection a company offered, due to a family history of third-party allegations.
- Only s.779 ‘income arising where derivative or right obtained’ was relevant based on the fact Mr Grint received a capital sum.
- If s.799 applied, the closure notice was incorrect as the assessment was raised on the wrong tax year. S.799 can only apply when the capital asset was sold or ‘otherwise realised’ which occurred in a later year than the one being assessed.
HMRC argued:
- The avoidance test was met. HMRC argued that the sole reason to put the arrangements in place was to avoid tax and reduce overall liability. They did not accept they were put in place for the financial protection for the actor.
- S.778 applied as opposed to s.799.
- The closure notice was validly issued, regardless of which section applies.
The First Tier Tribunal (FTT) found that:
- Mr Grint received a capital amount which consisted of property/a right which derived substantially the whole of its value from the activities of Mr Grint which was otherwise realised in the 2011-12 tax year such that income was treated as arising in that year.
- Mr Grint received money’s worth in the form of a right to receive £4.5 million as consideration for the sale of his business to Clay 10.
- The value of that property/right was substantially derived from Mr Grint's activities.
- It was clear from emails submitted to the court that the main objective of the planning was to reduce the overall tax paid by Mr Grint. His marginal rate of Income Tax at that time being 50%.
- Mr Grint was seeking to avoid paying Income Tax on a stream of residual income by transferring the rights to the company.
- Evidence suggested there had been consideration that the £4.5 million could be drawn by Mr Grint tax-free, and the company could be wound up at a later date with profits extracted at 10%, further adding to the motive of seeking to avoid tax.
- While there was some intention on Nigel Grint’s part to incorporate to achieve limited liability, this was not the main objective. The main objective was to shelter the £4.5 million from Income Tax.
- S.779 applied in this scenario and not s.778. The alleged capital sum was ’derived from’ Mr Grint’s employment activities in the 2011-12 tax year. The closure notice was valid.
The appeal was dismissed.
Useful guides on this topic
Sale of occupational income: Anti-avoidance
What are the tax effects of the anti-avoidance sale of occupational income provisions? How do you tax a capital sum received on the sale of an individual's earnings?
Business Asset Disposal Relief
Entrepreneurs' Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020. When does BADR apply? What is the rate of BADR? How do you claim BADR? What BADR case law is there?
Incorporation
Incorporating an existing sole trader or partnership business: these guides and checklists explain the pitfalls and planning points.
Closure Notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
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