Capital Gains Tax-Consideration

Introduction

This High Court case dealt with the consideration on the disposal of shares where part of the monies was paid to a company to make a pension contribution on behalf of the person disposing of the shares.

The Facts

The taxpayer was a director and shareholder of the company. In April 1997 he announced his intention to retire from the company, and began discussions with his advisers about pension contributions to be paid in respect of his past service. On 25 March 1999, the taxpayer and the other shareholders entered into a Share Sale Agreement, whereby all the shares in the company were sold to an outside purchaser.

The Company was originally formed to carry on a joint business venture between the taxpayer and another person. The Company carried on business as insurance brokers and also provided financial services to clients.

As part of the terms of agreement for the sale of the shares by the taxpayer, £15,267 was paid by cheque; and £95,179 paid to the Company, at the direction of the taxpayer. The purchaser had to procure the Company to make a pension contribution on behalf of the taxpayer, of £120,480 (i.e. £95,179 grossed up at the then small companies corporation tax rate of 21%). If the Company received a benefit of deducting part or all of the contribution for corporation tax purposes it was agreed that it would pay a cheque equivalent to the amount of the benefit to the taxpayer up to a maximum of £25,301.

In his tax return for 1998/9, the taxpayer declared the sale of his shareholding in the Company, but did not include the sum of £95,179 as part of the disposal proceeds.

The sole issue dealt with by the Special Commissioner was whether a sum of £95,179 formed part of the consideration for capital gains tax purposes obtained by the taxpayer when he disposed of his shareholding in the company. The Special Commissioner decided the appeal in the taxpayer's favour, holding that the £95,179 did not form part of the consideration for the sale of the shares in the Company.

The Revenue appealed against the decision to the High Court.

The Issue

Whether the £95,179 was properly to be regarded as part of the consideration for the disposal of the shares, where it was paid to a third party for the purposes of making a contribution to a pension scheme for the purposes of the taxpayer.

The Decision

The High Court allowed the Revenue's appeal, i.e. the £95,179 should form part of the consideration received by the taxpayer for the disposal of his shares in the company.

In between the time of appealing and the actual hearing, the taxpayer made additional arguments, which the High Court permitted.

The sums payable by the purchaser on completion, on account of the consideration for the taxpayer's shares, consisted of two sums. The first sum was £15,267 to be paid by cheque to the taxpayer. The second sum was £95,179, to be paid at the direction of the taxpayer to the Company, which was then obliged to make a pension contribution on his behalf.

In the Judge's view there was no doubt about the answer to the question whether the £95,179 formed part of the consideration for the disposal of the taxpayer's shares. The answer was found in the true construction of the Share Sale Agreement. The terms of the agreement were clear and unambiguous – the £95,179 was part of the consideration payable on completion for the taxpayer's shares.

The Judge specifically addressed the obvious question – the fact that the sum was not payable to the taxpayer himself, but to the Company at his direction; this was irrelevant. The sum still formed part of the consideration agreed between the parties for the sale of his shares. It was equally irrelevant that the agreement went on to specify what the Company was to do with the payment. The Judge noted that the Special Commissioner had erred by basing his decision on the “irrelevant” fact that the taxpayer did not himself receive the £95,179.

It was agreed that the contribution to the pension scheme was in respect of past service of the taxpayer with the Company. It was also an agreed fact that the Revenue subsequently confirmed that the pension contribution was an allowable deduction for tax purposes for the Company. If the Company had made the pension contribution before the date of the share agreement, and if the price payable for the taxpayer's shares had been correspondingly reduced, there would have been no question of the sum forming part of the consideration for the sale of the shares. This was not done as otherwise the assets of the company would have been diminished by the amount of the pension contribution before the sale, which would have been to the detriment of the other shareholder.

In relation to the additional arguments opened by the taxpayer, it was the Judge's view that the only effect of allowing them to be raised would be to provide another, and more fundamental, ground for disallowing his claim in its entirety. The Judge decided to leave open the question whether the taxpayer should be permitted to raise the new points.

The judgment is available online at http://www.bailii.org/ew/cases/EWHC/Ch/2009/284.html.