A special commissioner decided that the sum of £200,000 paid to a church of which the taxpayer was a member fell to be treated as part of the consideration for the disposal of his shares in a company and so was properly assessed to capital gains tax.

Facts

This appeal concerned the sale of a company (‘G Ltd’) to a company (‘S Ltd’) which was in turn owned by C Ltd, a substantial international enterprise having a value of about £400m in October 1999. Prior to the transaction involved in the appeal, the taxpayer, his wife and the sales director (Y) owned between them the entire issued share capital (consisting of 100,000 ordinary shares) of G Ltd. Section 703 and s. 137 clearances were obtained in September 1999 for a sale of the shares in G Ltd for consideration consisting of shares in S Ltd together with loan notes and cash. The consideration was at that time expected to be £3.7m. A view was expressed that G Ltd was overvalued at £3.7m in comparison with some of the other companies being acquired. It was proposed by the taxpayer that G Ltd reduce its price to £3.5m. When Y became aware that the price had been reduced from £3.7m to £3.5m he complained to the taxpayer. To compensate him the taxpayer gave him 2,353 shares which represented the value of the difference to Y of an overall sale at £3.7m on the one hand and £3.5m on the other hand.

During informal meetings relating to the corporate acquisitions, the taxpayer and C Ltd discussed the church with which the taxpayer was involved. The church was based in temporary accommodation which the local planning authority was reluctant to allow to be extended. C Ltd offered to make a gift of the sum of £200,000 towards the cost of renovating a farm building leased from a trust. As a consequence of that offer, architects were instructed to design and obtain planning permission for the renovation work. Planning permission was obtained at some point in the summer of 1999; the donation was made on or about 15 October 1999, whereupon building work began and was completed in the spring of 2000.

By a clearance application under TCGA 1992, s. 138, the taxpayer stated that the proposed consideration for the disposal of G Ltd was estimated to be £3.7m, to be divided in different proportions amongst the selling shareholders. It was also stated that C Ltd (which would be the major shareholder of S Ltd) was to make a gift of £200,000 to the taxpayer's church and it had been agreed that the taxpayer would gift an equivalent number of shares (estimated as 2,226 shares) to Y prior to the sale to S Ltd of the G Ltd shares. The letter proceeded to note that once the transactions had been completed S Ltd would own 100 per cent of G Ltd and the taxpayer and Y would be employed by S Ltd. S Ltd was also involved in acquiring other companies.

The taxpayer appealed against a notice of assessment for the year 1999–2000 in the sum of £80,000 relating to assessed capital gains of £200,000, charged at 40 per cent, on the sale of the taxpayer's shares in G Ltd.

Issue

Whether the sum of £200,000 paid by C Ltd not to the taxpayer but to the church, a recognised charity of which the taxpayer was a member, fell to be treated as part of the consideration for the disposal of the shares.

Decision

The special commissioner (J Gordon Reid QC) dismissing the appeal) said that the commercial reality of the transaction was that the purchase price for the shares was £3.7m; that figure did not change.

However, part of the purchase price was by agreement diverted to the taxpayer's church. There was no doubt that, had that not been done, the deal would not have been carried into effect. In the light of the correspondence, it could not be concluded that the payment of £200,000 by pure coincidence exactly bridged the gap between the sums of £3.7m and £3.5m and was not part of the consideration for the shares. The taxpayer's evidence that the charitable donation had been offered before the share purchase deal began to be arranged could not be accepted. No documents identifying the consideration had been produced apart from C Ltd's file note that linked the donation with the overall price.

On the facts, the commissioner was simply not satisfied that the donation of £200,000, which bridged the gap between £3.7m and £3.5m was just coincidence. At some stage C Ltd and the taxpayer had decided upon the donation as a commercial expedient to push through the deal. The donation was part of the overall commercial consideration. Y had to be compensated but the taxpayer had the comfort that his church obtained a substantial benefit. That was an extremely large charitable donation compared with C Ltd's charitable donations of £17,000 for the previous year. The taxpayer had failed to satisfy the tribunal that the sum of £200,000 was not part of the consideration for the shares. He had thus failed to show that the assessment to which the appeal related was flawed. No question on quantum was argued and accordingly the assessment would stand. (2007)

(2007) Sp C 640.
Decision released 13 July 2007.