Small and family company owners are generally very busy trying to build successful businesses. Formalities of operating and administering the company can easily be overlooked. However, aside from any adverse company law implications, this can have unfortunate tax consequences.

For example, if a small owner-managed trading company proves to be unsuccessful, the value of its shares may become negligible. The company’s individual shareholders may be able to claim income tax relief for an allowable loss in value of the shares against their net income, if certain conditions are satisfied (ITA 2007, Pt 4, Ch 6).

One condition for share loss relief in such circumstances is that the individual must have subscribed for the shares (ITA 2007, s 131(2)(b)). This condition might appear straightforward to prove. However, some case law might suggest otherwise.

Were shares issued?

For example, in Alberg v Revenue and Customs [2016] UKFTT 621 (TC), the appellant entered into a trading venture with a business partner, and paid £250,000 into a company in February 2008. The venture proved unsuccessful. The company went into administration in February 2009, and was dissolved in September 2011. HM Revenue and Customs (HMRC) refused the appellant’s share loss relief claim (under s 131) for 2008/09 of £250,000. The key question was whether the company issued shares to the appellant in consideration of the £250,000 he put into the company.

Unfortunately for the appellant, he was unable to demonstrate the issuance of additional shares. The First-tier Tribunal noted that important forms of evidence of his shareholding in the company were not produced (e.g. the company’s register of members, or share certificates for the appellant’s shares). A draft shareholders agreement had been prepared by solicitors in February 2008, indicating a further allotment of shares to the appellant. However, the tribunal concluded that the shareholders agreement was never finalised and executed, and additional shares were never issued.

Share subscription

By contrast, in Murray-Hession v Revenue and Customs [2016] UKFTT 612 (TC) a company (GT Ltd) was incorporated in May 2011 by its initial shareholder (AG). Subsequently, the company’s annual return to 13 May 2012 filed at Companies House included a list of shareholders showing that the appellant held 225 ordinary shares (22.5%). However, a further annual return to 14 May 2012 (i.e. one day after the date shown on the previous return) was filed showing AG as owning 100% of the ordinary shares, and the appellant holding none. Subsequently, the company entered administration. HMRC refused the appellant’s claim for share loss relief against his other income. HMRC argued (among other things) that the appellant lent £272,372 to GT Ltd, and that the 225 shares had not been subscribed for.

However, the First-tier Tribunal found: the appellant had an agreement with AG that he would invest £272,000 in GT Ltd by way of subscription for shares; consequently, AG was from the outset holding a percentage of the shares as nominee, agent etc. on behalf of the appellant until the shares could be registered in the appellant’s name; and that AG subsequently transferred the legal title to the appellant. The tribunal concluded that the appellant had subscribed for 225 shares in GT Ltd for share loss relief purposes.

Practical point

The First-tier Tribunal in Alberg considered that the issuance of shares required the appellant to be written up in the register of members of the company as the owner of the shares (following National Westminster Bank Plc v Inland Revenue Commissioners [1994] STC 580 (‘NatWest’)).

However, in Murray-Hession, the tribunal considered that HMRC’s reliance on the NatWest case was misplaced for various reasons, including that it concerned the offering of shares to the public and the more rigorous requirements applicable to a plc. Furthermore, company law had changed since NatWest.  Even if the shares had been allotted to the appellant in Murray-Hession without being registered, the tribunal was not sure that NatWest would have affected the issue for other reasons. Taxpayers facing similar challenges by HMRC about the issuance of shares may therefore find the tribunal’s comments on the NatWest case helpful.

The above article was first published in Tax Insider in January 2017 (www.taxinsider.co.uk).