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KEY POINTS
- Importance of the procedure for share issues.
- Shares issued prior to payment were conditional.
- Previous pattern saved later issues made after payment.
- However, there was no pattern for the first share issue, so it was not relievable.
Among my staff, my organisational skills are legendary; that is to say that they are rumoured to exist, but no concrete evidence of them has ever been displayed.
Perhaps that’s why, when I had my own small accountancy practice, I had a lot of actors as clients, because they were even more disorganised (and don’t get me started on the subject of dancers).
I therefore have a lot of sympathy with Mr Alan Blackburn, whose case came before the Court of Appeal at the end of last year.
His case is a salutary reminder that the job’s not over until the paperwork’s done, but it also raises questions about whether the tax system should have to create such bear traps for people who are trying to run a business rather than a paperwork factory.
Throughout the case it was accepted that Mr Blackburn had paid the company £1 in cash for every £1 share he had received, and that all he wanted was to get enterprise investment scheme (EIS) relief against capital gains for doing so. It seems strange that the tax system threw quite so many obstacles in his way.
The facts
Mr Blackburn ran a company called Alan Blackburn Sports Ltd. He had formed it in August 1998 to own and operate the Isle of Wight Sports Club, and he and his wife were the sole directors and shareholders.
In October 2002 he submitted claims for EIS relief against capital gains tax liabilities totalling some £475,000.
The Special Commissioner, Dr John Avery Jones, politely said that Mr Blackburn was ‘not a details man’.
He relied to a considerable extent on the company’s accountant, a Mr Tausig (practising as Michael Cole & Co), who had unfortunately died before the case came before the Commissioner.
The problem with the ‘details’ was that the procedure for many of the share issues was handled very informally.
There were six share issues concerned in the case, set out in the share issue Table:
Partly paid
In cases 2, 3 and 4, the shares had been issued prior to the payment of the funds concerned. In a typical case, Mr Blackburn would write to his accountant saying that he intended to put money into the company and that he wanted to get EIS relief for it by purchasing shares at par.
The accountant would then send back a ‘package’ consisting of a draft resolution, share certificate, return of allotment and claim for EIS relief, which Mr Blackburn would sign and return. The money would be paid into the company later.
The argument put forward by HMRC in respect of these issues was that they breached the provision in TCGA 1992, Sch 5B para 1 that the shares should be issued ‘fully paid up (disregarding for this purpose any undertaking to pay cash to the company at some future date)’.
Since the shares had been allotted prior to the payment by Mr Blackburn, the provision was not met.
The Special Commissioner looked at the authorities and concluded that the issue of shares is the whole process which results in the person concerned becoming a member of the company, and that if the paperwork is handled correctly the last step in that process is the registration of the shareholder.
In respect of these shares, the taxpayer contended that, since the intention was to issue fully-paid shares, the issue of the shares was not in these cases complete until payment was received.
HMRC argued that, regardless of intention, the shares had been issued prior to the payment and therefore had been issued partly paid.
The Special Commissioner concluded from the paperwork that the intention was indeed to issue fully-paid shares.
He therefore felt, particularly in the context of what was essentially a ‘one-man company’, that it was more accurate to characterise this as a conditional issue of shares, requiring the receipt of the payment to make it unconditional.
As such, the shares were not issued partly paid, since they were not unconditionally issued at all until the payment was received. This decision was not appealed by HMRC.
Receipt of value
The other three share issues, 1, 5 and 6, had a different problem. TCGA 1992, Sch 5B para 13 deals with a situation where an investor receives value from the company at any time within the ‘designated period’, which at the time was seven years from the acquisition of the shares.
Receipt of value includes the repayment of any debt owed to the individual unless it was incurred on or after the date of subscription for the shares.
In respect of the first issue, Mr Blackburn had paid £111,000 to the company three days prior to asking the accountant to issue the shares. At some point within the next three weeks or so the shares were allotted to him, and a further amount of approximately £26,000 was paid.
In respect of the second issue, Mr Blackburn had paid £96,000 to the company prior to asking for shares, and paid the remainder in part before the shares were issued and in part after.
For the third issue, the share formalities were not completed until some months after the money had been paid over.
Again, HMRC’s case was straightforwardly based on the provisions in the statute. In all these cases money had been paid to the company before any allotment of shares had been decided on by the directors.
The only conclusion to be drawn from this was that the payment had created a debt in favour of Mr Blackburn which had subsequently been settled by the issue of the shares.
This meant that he had received value from the company and was therefore precluded from claiming relief on the shares.
The Special Commissioner agreed with HMRC’s contention, but this was overturned by the High Court. Mr Justice Peter Smith had a case argued before him which had not been put to the Special Commissioner, Kellar v Williams [2000] 2 BCLC 390.
On the basis of that Privy Council case, he accepted that where money was advanced to the company prior to the allotment of shares it should be characterised as a contribution to the capital of the company, and not as a loan.
Court of Appeal
The Court of Appeal first considered the last two share issues, the 350,000 and 240,000 share issues, 5 and 6 in the table. It had been accepted throughout that there was a ‘generalised intention’ on the part of Mr Blackburn to make the payment in respect of shares.
The argument that this constituted an ‘informal application for shares’ was rejected at the earlier hearings, and also by the Court of Appeal.
However, Lord Neuberger (giving the judgment of the Court of Appeal) said he had ‘real difficulty with the notion that any money paid in advance of [the] allotments should be treated as giving rise to a debt in the normal sense of that word’.
As he saw it, there was a consistent pattern of Mr Blackburn paying in money over the previous year, for which he had always received a share for every pound that he had paid.
It was clear that Mr Blackburn expected to receive shares for his money, and that as the sole effective controller of the company he could ensure that he would.
Lord Neuberger therefore concluded that, both in his personal capacity and in his capacity as director of the company, when Mr Blackburn made the payments he intended that he would receive the shares in exchange.
Debt was not the right way to characterise these payments, and there was no reason why they had to be so characterised simply because no formal allotment of shares had yet taken place.
However, the initial 149,998 shares were different. There was no prior course of dealing or any understanding with the accountant prior to the £110,000 being paid into the company.
In that situation, a loan to the company, particularly a loan which enabled it to purchase land, was by no means an impossible conclusion to draw from the facts.
Since there was only one issue of the 149,998 shares, this defect was enough to make the whole issue non-qualifying.
The Court of Appeal therefore reversed the High Court decision for the taxpayer, but only in respect of the first issue of 149,998 shares.
Of the six issues set out in the table that were originally contested by HMRC, therefore, only the first is now non-qualifying; HMRC having conceded 2, 3 and 4 after the Special Commissioner, and having lost 5 and 6 in the Court of Appeal.
