A recent tax case has highlighted the importance of fully disclosing facts to HMRC – to avoid falling foul of the rules.

In Wroe, Rimmer and Timms v HMRC, the First-tier Tribunal (FTT) dismissed the taxpayers’ appeals and upheld the tax body’s counteraction notices and assessments.

The case was heard by the FTT’s Tax Chamber after the taxpayers (Mr Wroe, Mr Rimmer and Mr Timms) appealed against HMRC’s income tax assessments issued under ‘transactions in securities’ legislation.

The appeals centred on whether the main purpose of the appellants’ reorganisation of their company and repurchasing of preference shares was to obtain an income tax advantage.

Background to the case

Mr Wroe, Mr Rimmer and Mr Timms were directors and shareholders of Proline Engineering Ltd.

In 2013, they sought advice from their tax advisers, CLB Coopers Chartered Accountants, in relation to a potential restructuring of Proline to allow the shareholdings to be equalised with a fourth shareholder, Mr Jones.

Company reorganisation

In August 2013, a new company, Jenbest Ltd, was established as a holding company of Proline.

The issued share capital of Proline was acquired by Jenbest. In return, Mr Wroe, Mr Rimmer and Mr Timms exchanged their Proline shares for 25% of the ordinary share capital in Jenbest and £600,000 of preference shares in Jenbest. The fourth shareholder (Mr Jones) was issued with 25% of the ordinary shares in Jenbest.

Ahead of the transaction, the appellants applied for a statutory clearance and HMRC subsequently gave a clearance. But the clearance application didn’t mention the possibility of the preference shares being repurchased.

Repurchase of preference shares

In the period 2014-2016 (the tax years ended 5 April 2015 and 5 April 2016), Jenbest repurchased all the preference shares for their nominal value, with each appellant therefore receiving £600,000.

Mr Wroe, Mr Rimmer and Mr Timms each returned the disposal of the preference shares on their self-assessment tax returns. The appellants treated this disposal as a capital gains tax (CGT) transaction at a 10% rate (applying entrepreneurs’ relief).

HMRC said the clearance they gave in 2013 was void because the taxpayers didn’t give the full facts of the proposed transactions (in particular, the potential repurchase of the preference shares).

HMRC issued counteraction notices and assessments to Mr Wroe, Mr Rimmer and Mr Timms. The tax body sought to tax the appellants as if the proceeds on the repurchase of their preference shares were taxable as income rather than capital gain.

The taxpayers disputed HMRC’s view and launched appeals.

The decision

The tribunal judge ruled a main purpose of Mr Wroe, Mr Rimmer and Mr Timms being involved in the reorganisation and the repurchase of the preference shares was to obtain an income tax advantage.

He said the appellants wanted to extract £1.8 million from Jenbest/Proline to help fund their retirements, but on the basis the cash was received as capital rather than income.

Judge Guy Brannan said the statement in the clearance application that “no director currently has any plans to retire from the company” didn’t tell the whole truth and was misleading.

He said: “The clearance letter omitted any mention of the appellants’ plan to extract £1.8 million from Jenbest/Proline, noting only that the preference shares were irredeemable.”

The judge also drew attention to a letter to Mr Wroe (dated 25 June 2013) in which CLB pointed out that receiving “cash consideration” instead of preference shares would mean paying income tax as a deemed dividend at the rate of 30.5%.

Judge Brannan said HMRC were entitled to treat the clearance as void because the information given to HMRC about the transactions didn’t fully and accurately disclose all facts and considerations which were “material”.

He concluded the appellants, via their advisers, “did not put their cards face up on the table but kept them close to their chests”.

Our thoughts

Applying for HMRC clearances is a key part of most corporate transactions. However, a clearance is worthless unless the facts are fully disclosed.

People are often tempted to tell half a story or apply for clearance and later significantly change the terms of a transaction. But in both these instances, the taxpayer would effectively invalidate the clearance, so it isn’t worth the paper it’s written on.

It’s important when preparing clearances to reflect the full facts if the taxpayer wants to be able to rely on them, as we’ve seen in the Wroe, Rimmer and Timms v HMRC case.

It’s important to be upfront and open.

Specialist tax advice for intermediaries

The team at Churchill Taxation provide specialist tax advice for a variety of intermediaries, from accountants and lawyers to independent financial advisers (IFAs).

Our expertise includes share-for-share exchanges and obtaining tax clearances. We also offer an expert witness service.

To get our support or find out more, call our experienced tax consultants on 07813 434195 or email: stephanie.churchill@churchilltaxation.co.uk
Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation