Value of shares at dates of allotment found to be negligible, therefore shares had not “became” of negligible value for the purpose of tax relief.

An appeal was brought by the taxpayer (“Harper”) against Revenue's refusal to allow a claim for loss relief in the year 2003/04. The negligible value claim was made in accordance with section 574 of the Income and Corporation Taxes Act 1988 and section 24(2) of the Taxation of Capital Gains Act 1992.

The parties to this case all agreed that the shares held by the taxpayer were of negligible value at the date of claim. However the acquisition value of the shares was in dispute. The taxpayer claimed that they were worth what he paid for them, their par value at the respective acquisition dates. Revenue submitted that they were of negligible value then and accordingly they did not thereafter “become” of negligible value.

Facts

The taxpayer purchased a ship and the associated business through a company which was incorporated for the purpose of acquiring and thereafter exploiting the ship. An initial issue of 1,000 shares was made of which 610 were allotted to the taxpayer for an aggregate price of £980,000. The agreement for sale required, in addition, to pay deferred consideration and for the repair and refurbishment work.

The company encountered difficulties and the taxpayer injected a further £149,890 in June 2002 in return for a share allotment. Further cash injections were made in September 2002. At that time the ship and business were valued as a going concern at £2,750,000. In December 2003, the taxpayer was allotted more shares for a price of £250,000.

The company continued to trade but by June 2004 it was compelled to enter into administration. The ship, the goodwill and the assets were disposed of for £250,000. The company thereafter went into liquidation.

The taxpayer argued that although the net asset value of the company at June 2002 and December 2003 was less than the gross value of the ship and the business, it nevertheless had a significant positive value and the value of the shares at the time he subscribed for them was in excess of their nominal value of £1 each. Revenue contended that as the net asset value of the shares was nil in June 2002, the shares for which the taxpayer subscribed then and in December 2003 were already of negligible value. Alternatively the taxpayer had not established that they had any value. The shares for which the taxpayer subscribed on formation of the company were then worth their nominal value (£610).

Decision

The Court held that the taxpayer failed to establish that in June 2002, and separately in December 2003, the shares for which he subscribed had any value. There was no reliable evidence to confirm that the company had a positive value and accordingly the Court concluded that the shares did not “become” of negligible value because they were always of negligible value. Therefore the relief claimed was not available.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=4679