Kavanagh and Entrepreneurs’ Relief: size matters…

…and so too does attention to detail.  That’s why the best tax advisers blend commercial awareness with a respect for precision that can seem to verge on pedantry.

In Kavanagh v HMRC [2022] UKFTT 173 (TC) one company (‘Holdings’) had acquired another (‘Egham’), paying for the purchase by an issue of its own shares: a completely routine kind of transaction.

The deal negotiated was that the shareholders in Egham would get 10% of the enlarged equity.  Mr Kavanagh held 50% of Egham so would end up with 5% of Holdings.

However, the numbers weren’t nice convenient round figures.  Before the deal, Holdings had 33,158 shares in issue.  To get to a holding of precisely 10% for the new shareholders would have required Holdings to issue 3,6842/9 new shares of which Mr Kavanagh would have had precisely 1,8421/9.

It being somewhat inconvenient to issue 3,6842/9 shares, the parties settled for issuing 3,684, of which Mr Kavanagh got 1,842.

You can see what’s coming, can’t you?

Some years later, Mr Kavanagh sold his shares in Holdings for quite a lot of money. And in calculating the charge to Capital Gains Tax, he claimed what was then called Entrepreneurs’ Relief (now renamed Business Asset Disposal Relief: but names in this case matter rather less than does size).

One of the conditions for the relief is that the vendor holds at least 5% of the ordinary shares in the company being sold.  1,842 out of 36,842 is 4.9997286% (roughly).  That’s very nearly 5%: but not quite.  HMRC denied Mr Kavanagh the relief.

Mr Kavanagh and his advisers had a very creditable stab at trying to persuade the Tribunal that he really held a full 5%, arguing that some of the other shareholders must be regarded as holding part of their interest in their shareholding as bare trustees for him.  Good try, but ultimately hopeless for lack of any real evidence.  In fact, it seems pretty clear (and was so found by the Tribunal) that the tiny shortfall below 5% in the number of shares registered in Mr Kavanagh’s name was ‘not addressed or even relevant to the shareholders until the opening of the tax enquiry’.  It seems it simply never occurred to anyone that there was a problem until someone at HMRC did the sums.

The galling thing is that the problem could easily have been solved had it been recognised.  For example, subscribing for 7 shares for cash, a 2 for one bonus issue (or share split) and issuing 3,685 shares to Mr Kavanagh would have done the trick.

Sometimes a bit of precision is worth its weight in gold.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

Anthony Newgrosh

Partner, Head of Business Tax

T +44 (0)20 8922 9144
E anthony.newgrosh@bkl.co.uk

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