This case examined whether, for the purposes of entrepreneurs’ relief on the material disposal of business assets within section 169I TCGA 1992, the individual was an officer or employee of the company at the relevant time despite having been removed from the Company’s payroll over 7 months prior to the share sale.

Background

The taxpayer (Mrs Corbett) in her self-assessment tax return for the 2009–10 year recorded a disposal in October 2009 of 1,500 shares in a company known as Optivite International Limited (“the Company”). Entrepreneurs’ relief (ER) was claimed on that disposal. HMRC issued a closure notice subsequently disallowing the ER claim on the basis that the statutory qualifications for ER had not been met in full. That decision was upheld by a formal internal review issued a few months later. Mrs Corbett subsequently appealed to the First Tier Tribunal against that decision.

The relevant legislation is in section 169H TCGA 1992 et seq. which provides for entrepreneur’s relief on qualifying business disposals defined as a “material disposal of business assets”.

The definition of same is contained in section 169I TCGA 1992 which provides that there is a material disposal of business assets where:

• “(a) an individual makes a disposal of business assets (see subsection 30 (2)), and
• (b) the disposal of business assets is a material disposal (see subsections (3) to (7)).
• (2) For the purposes of this Chapter a disposal of business assets is—
• (c) a disposal of one or more assets consisting of (or of interests in) shares in or securities of a company.
• (5) A disposal within paragraph (c) of subsection (2) is a material disposal if condition A or B is met.
• (6) Condition A is that, throughout the period of 1 year ending with the date of the disposal—
• (a) the company is the individual’s personal company and is either a trading company or the holding company of a trading group, and
• (b) the individual is an officer or employee of the company or (if the company is a member of a trading group) of one or more companies which are members of the trading group”

Section 169S(3) provides:

• “(3) For the purposes of this Chapter “personal company”, in relation to an individual, means a company—
• (a) at least 5% of the ordinary share capital of which is held by the individual, and
• (b) at least 5% of the voting rights in which are exercisable by the individual by virtue of that holding.”

In June 2008 negotiations began concerning a potential acquisition of the Company with the share sale completing on 7 October 2009. Mrs Corbett had previously been an employee of the Company on a salary of £14,000 per annum paid into a joint bank account and acting in the role of clerical assistant to her husband, who was a Company director. She worked from home alongside her husband and her duties comprised answering the telephone, managing his diary, passing on messages, faxing documents, filing, and general office work. Occasionally she worked alongside other employees.

At the end of February 2009 she was removed from the Company’s payroll and she received a P45 as a result. However, her duties remained exactly the same. Her removal from payroll was part of a general operation to clean up the Company before sale and in order not to jeopardise negotiations as there had been discussions concerning employment of spouses of senior executives. The potential acquirer particularly felt that such a matter could compromise leadership so she was removed at the end of the 2009 accounting period.

After his wife was removed from payroll, Mr Corbett’s gross salary was specifically increased by £1,200 per month. The Company cited that this was to compensate for the loss of his wife’s salary as she was still performing the same duties. Mr Corbett’s salary further increased again thereafter as part of an exercise to align all executive salaries to market rates before the sale was completed.

HMRC accepted that all the statutory conditions for ER were satisfied except for s169I(6)(b), which requires that “throughout the period of 1 year ending with the date of the disposal ... the individual is an ... employee of the company ...”.

The date of disposal was 7 October 2009 and thus the one year period in this particular case was the period 8 October 2008 to 7 October 2009. HMRC contended that Mrs Corbett ceased to be an employee of the Company in February 2009 and thus the condition was not satisfied.

In support of this argument HMRC cited that on Mrs Corbett’s Form P14 for 2008–09 in the box labelled “Date of leaving if during tax year” the Company had entered “25/02/2009”.

Whilst Mrs Corbett’s “resignation” in February 2009 was acknowledged in a letter to HMRC in July 2011, the letter also outlined the rational for doing so, specifically that the acquiring company as an AIM listed company has a policy that they do not employ senior directors families. The letter also stated that Mrs Corbett was employed and continued to work for the company though no documentary evidence of the acquiring company’s purported policy was provided to HMRC.

Subsequent correspondence by Mrs Corbett’s accountants to HMRC cited that although Mrs Corbett was removed from the payroll, she continued to carry out the same duties. The letter also stated that persons can be employed by a business without being paid.

HMRC were not made aware of the increase in Mr Corbett’s salary which was said to be to remunerate him for his wife’s work until July 2011. They argued that the technical requirements for ER had probably been overlooked in preparing to sell the Company, and on belatedly realising that mistake, there had then been an attempt to rectify the position by doing so.

HMRC did not accept that Mr Corbett had been remunerated for his wife’s work. Although Mr Corbett’s remuneration had increased after February 2009, there was no exact annual match to his wife’s previous salary. Also, if there was additional work for him in preparing for the sale then a pay rise could have been attributable to that. Even if there had been a transfer of salary between Mrs Corbett and her husband, that did not evidence a contract of employment between Mrs Corbett and the Company as there was still no consideration.

HMRC cited the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions [1968] 1 All ER 433 in support of this assertion. That case stated that a contract of service exists:

• “if the following three conditions are fulfilled:
• (i) The servant agrees that in consideration of a wage or other remuneration he will provide his own work and skill in the performance of some service for his master.
• (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.
• (iii) The other provisions of the contract are consistent with its being a contract of service.”

On the basis of the foregoing, HMRC argued that without remuneration there could be no employment. HMRC also argued that if Mrs Corbett had remained an employee then she was also entitled by law to be paid the National Minimum Wage (NMW) and thus the Company had clearly not considered her to be an employee, otherwise it would have been deliberately breaching the NMW legislation.

In addition, in the share sale agreement, there was no reference to Mrs Corbett being an employee. The formal share sale agreement provided for formal disclosure of details of all employees and, although HMRC had not been shown that disclosure, it was reasonable to assume that Mrs Corbett would not have been so listed. Thus HMRC argued that the Company had represented to its acquirer that Mrs Corbett was not an employee of the Company at that time.

On the basis of all the foregoing HMRC argued that the condition in s 169I(6)(b) was not satisfied and ER was not available.

The taxpayer submitted a number of counter arguments essentially stating that she had remained an employee of the Company until it was acquired in October 2009. At end of February 2009 she was removed from the payroll in order not to give cause for concern to the potential acquirer, which was a listed company. As the Company operates a computerised payroll system, the only way to do so was to produce Forms P45 and P14.

However, from March 2009 Mrs Corbett did exactly the same work in exactly the same way as previously and she had an implied contract of employment up until the sale of the Company. Whilst HMRC relied on the Readymix case, that case was 45 years old and the practicalities of employment relationships had greatly changed since then.

In addition, HMRC’s point concerning the NMW was a moot point because HMRC’s own manuals confirmed that remuneration is not required for eligibility for ER: “There are no specific requirements regarding either working hours or the level of remuneration. The condition is simply that the individual should be an officer or employee.”

Further, the taxpayer argued that the requirement for NMW had been satisfied by the increase in her husband’s salary from March 2009 which was visible from his payslips. That salary was paid into a joint bank account and arguably Mrs Corbett did continue to receive consideration.

Decision

The First Tier Tribunal was thus required to determine whether Mrs Corbett was an employee of the Company in the twelve months up to October 2009 and, in particular, whether her removal from the Company’s payroll at the end of February 2009 was the end of her employment by the Company.

The First Tier Tribunal found the written evidence of the company’s former Finance Director persuasive although HMRC did not have the opportunity to put questions to him (nor did the Tribunal) or challenge his evidence.

That limitation was borne in mind however, the fact that the availability or otherwise of ER to the taxpayer was of no financial concern to the Company made, in the Tribunal’s view, the Finance Director an independent witness, and one whose explanation fully supported the evidence given.

The Tribunal accepted that the motivation for removing Mrs Corbett from the payroll at the end of February 2009 was to keep her out of sight of the potential purchaser because of its sensitivity to the employment of spouses of senior executives. That was also the reason why she was not (apparently) disclosed on the list of employees scheduled to the share purchase agreement.

In relation to the adjustment to Mr Corbett’s salary from March 2009, the Tribunal did not accept HMRC’s suggestion that this was just a convenient explanation invented after the event to gloss over the absence of any remuneration for Mrs Corbett after February 2009. Mr Corbett’s sworn oral evidence was that his wife’s salary was directed to him from March 2009 and this was confirmed by the former Finance Director of the Company.

On the basis of all the foregoing, the Tribunal was satisfied, on the balance of probabilities that the Company continued to remunerate Mrs Corbett after February 2009 by directing her salary to her husband. This, taken together with her continued performance of her duties, was sufficient for her to have continued to be an employee of the Company in the period from February 2009 to October 2009.

Accordingly the condition in section 169I(6)(b) was satisfied and the taxpayer was entitled to ER in respect of the share disposal. The appeal was allowed.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j7682/TC03435.pdf