In Paul Hunt & Ors v HMRC [2025] TC09519, the First Tier Tribunal (FTT) disagreed with the taxpayers’ interpretation that £10 million received from cancelled shares in April 2015 was exempted from the Transactions in Securities (TiS) legislation.
On 22 April 2015, PH, JH and RD (the taxpayers) received a consideration totalling £10 million for the cancellation of shares in Golf Holdings Ltd (GHL), a close company owned by them.
- The taxpayers declared the amounts received on their tax returns as capital and so subject to Capital Gains Tax.
- In 2002, the taxpayers had used GHL to acquire shares in other Close companies controlled by them. In March 2010, the taxpayers received £10 per share in a Capital reduction that cancelled a total of 1,000,000 shares in proportion to their percentage ownership.
- At the time of cancelling the shares in 2015, GHL had distributable reserves in excess of £10 million.
On 28 June 2018, HMRC wrote to each taxpayer stating that the Transactions in Securities (TiS) legislation may apply to the 22 April 2015 transactions.
- At the time of the 22 April 2015 transactions, the TiS legislation in force was contained in Chapter 1 of Part 13 of ITA 2007 as amended by Finance Act 2010.
- Following correspondence between the taxpayers’ agent and HMRC, HMRC sent each taxpayer a section 695 notice, which stated that section 684 might apply.
- Section 684 specifies the conditions in a securities transaction where a person becomes liable to have their Income Tax advantage counteracted. One of those conditions is the circumstances covered in section 685, which subsequently became the focus of the case.
- Each taxpayer subsequently made a statutory declaration that section 684 did not apply.
On 8 February 2022, HMRC made a counter-statement and the matter was submitted to the tribunal to consider whether there was sufficient evidence for further action to be taken.
- The tribunal published its conclusion that there was a case on 10 March 2022.
On 4 April 2022, HMRC issued counteraction notices and notices of assessment for the year ended 5 April 2016, totalling over £2.1 million for the three taxpayers.
- A counteraction notice allows HMRC to counteract an Income Tax advantage.
- The taxpayers appealed against the notices to HMRC on 29 April 2022. HMRC upheld their decision on 13 May 2022.
On 26 May 2022, the taxpayers Appealed to the First Tier Tribunal (FTT).
- The appeal centred on the taxpayers’ assertion that the transactions fell outside the conditions specified in section 685, meaning the amounts received were excluded from ‘relevant consideration’ for TiS purposes.
- They relied on subsection 685(6) and interpreted the wording 'despite the fact' as meaning 'even where'. They asserted this meant that returns of sums paid by subscribers on the issue of securities were excluded from the TiS rules.
- HMRC contended that there was a drafting error in the cross-reference in subsection 685(6). However, they asserted that regardless of which provision is referred to, subsection 685(6) was inapplicable and therefore the payments received by the taxpayers were not excluded.
- The FTT stayed the appeal to await the determination of a case (Osmond and Allen v HMRC [2024] TC09163) that also dealt with an issue on relevant consideration. The stay was lifted on 25 September 2024.
The FTT found that
- The words 'despite the fact' in subsection 685(6) meant 'where' and not 'even where'.
- This had the effect of limiting the exclusion of returns of share capital to only those where the share capital is lawfully distributable by way of dividend.
- GHL, a limited company incorporated in the UK, could not legally do this. This meant subsection 685(6) could not apply to the distributions in question, and the consideration received by the taxpayers was caught by the TiS legislation.
- There was no obvious drafting error in subsection 685(6).
- This was contrary to the view of the FTT in Osmond and Allen v HMRC [2024] TC09163. However, in that case all parties held the same view and the technical arguments were not explored in the same depth as in this case.
- For the FTT to correct a drafting mistake they would have to be abundantly sure (1) of the intended purpose of the provision at question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision; and (3) of the substance of the provision Parliament would have made if the error had been noticed. (Inco Europe Limited v First Choice Distribution (a firm) [2000] 1 WLR 586).
- The FTT accepted that there was support for the first requirement, but could not be satisfied on the second requirement. There was an argument that the wording may have satisfied an intention to simplify the legislation.
- More crucially, they also found that the outcome of the appeal was the same regardless of which of the two provisions subsection 685(6) referred to.
The taxpayers’ appeals were dismissed.
It is worth noting that the Finance Act 2016 made changes to the equivalent of subsection 685(6) that ‘corrected’ the cross-reference. That subsection also now uses the word 'merely' instead of 'despite the fact'.
Useful guides on this topic
Transactions in Securities
What are the Transactions in Securities rules? When do they apply?
Capital reduction: Distributing capital reserves
What is a capital reduction? How do you implement one? When should a capital reduction be undertaken?
Close companies, definitions & control
What is a Close company? What are the tax consequences? What is a Participator? What is meant by control of a company? What are the tests for control?
TiS blocks EIS disposal
Attempts to claim EIS disposal relief on share buybacks were denied by the First Tier Tribunal (FTT). The FTT determined that the Transactions in Securities (TiS) legislation applied because the main purpose of the transaction was to obtain an Income Tax advantage.
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