Taylor & Anor v The Commissioners for Revenue & Customs [2009] UKFTT 336 (TC)

FTT-Tax
Taylor & Anor v The Commissioners for Revenue & Customs
[2009] UKFTT 336 (TC) · 2009-11-25
[1]Mr N R J Taylor and Mr N Haimendorf, (“the Appellants”), appeal against HMRC’s refusal to allow enterprise investments scheme (“EIS”) relief in respect of amounts subscribed by them for eligible shares in Wrapit Plc in 2003-2005. The grounds for the refusal are that both Appellants were connected with Wrapit during the period prescribed by section 291(1) ICTA 1998. (All statutory references are to ICTA 1998.)[2]The circumstances in which the Appellants came to subscribe for eligible shares are not in dispute. It is, moreover, common ground that the EIS relief is properly excluded if the person subscribing for the shares is found to have been connected with the issuing company at any time in the period beginning two years before the issue of the shares and ending immediately before the termination date relating to those shares. The termination date in relation to any eligible shares issued by a company is the third anniversary of the date on which the shares were issued or, where it is later, the third anniversary of the date on which the company using the money raised by the share issue began to carry on the trade for which it was raised. The Appellants’ subscriptions for, and holdings of, the eligible shares fall in all respects within the relevant period.[3]It is also common ground that the Appellants are not otherwise connected with Wrapit, apart from the operation of section 291B.[4]HMRC’s refusal of relief is based on their contention that, at a time within the period prescribed by section 291(1), both Appellants were connected with Wrapit because they held more than 30% of the loan capital and issued share capital of Wrapit. HMRC rely on the definition of “connected” in section 291B.[5]The only issue between the Appellants and HMRC is whether the Appellants became “connected” with Wrapit by virtue of certain loans made by them in 2004 and 2005. The parties agree that the outcome depends on the proper construction of section 291B(1)(b).[6]The starting point is section 291(1). This provides that “an individual qualifies for relief in respect of eligible shares in a company (referred to … as the “issuing company”)” if he “subscribes for the shares on his own behalf”. So far, the Appellants satisfy the tests for relief. Section 291(1)(b) introduces the critical words of exclusion. Relief is withdrawn if the individual claimant is “at any time in the period beginning two years before the issue of the shares, and ending immediately before the termination date relating to those shares, connected with the company …” Section 291(2) provides that an individual will be connected with the issuing company if, among other instances that are not relevant here, “he … is so connected by virtue of section 291B.”[7]Section 291B(1) reads as follows:
“(1) An individual is connected with the issuing company if he directly or indirectly possesses or is entitled to acquire more than 30% of – (a) the issued ordinary share capital of the company or any subsidiary, (b) the loan capital and issued share capital of the company or any subsidiary, or (c) the voting power in the company or any subsidiary.”
[8]Mr Ben Staveley for the Appellants contends that section 291B(1)(b) imposes a test with two limbs, not a single test. In other words, a person is connected with a company by virtue of section 291B(1)(b) only if he holds both(a) more than 30% of the loan capital of the company and(b) more than 30% of the issued share capital of the company. HMRC, through Mr Williams, contend that the proper construction of section 291B(1)(b) is that a person is connected with a company if he has or is entitled to acquire more than 30% of the company’s loan capital and issued share capital combined.[9]We agree with the construction advanced for the Appellants. The words of exclusion in section 291(1) operate to deny relief to individuals who are connected with the issuing company on one or other of the grounds set out in section 291B. The tests in section 291B(1)(a) and (b) are directed at the individual’s possession or entitlement to acquisition of assets being shares or loan capital. The individual is excluded from relief by paragraph (a) if he possesses more than 30% of the issued ordinary share capital of the company; he is excluded from relief by paragraph (b) if he possesses more than 30% of the “loan capital and issued share capital of the company”.[10]For the present purposes we can proceed on the basis that, at the relevant times, both Appellants possessed more than 30% of the loan capital of Wrapit, but, in each case, their holdings of issued share capital fell well below that percentage. On that basis neither Appellant was covered by the words of exclusion. They were not connected because they “failed” to satisfy the test for exclusion, namely that of possessing (or being entitled to acquire) more than 30% of the issued share capital of Wrapit.[11]That, we think, follows from the clear wording of section 291B(1)(b). Had Parliament meant to exclude a person from relief by making him “connected” with the issuing company if he possessed more than 30% of the company’s loan capital and issued share capital combined, it would have said so. “Loan capital” and “issued share capital” are not just legally different concepts; different criteria apply when evaluating their respective interests in the company and its assets. Parliament would have given specific instructions as to how those two quite different ingredients were to be combined, so as to determine whether the particular individual’s combined holdings of loan capital and issued share capital exceeded 30%.[12]That disposes of the matter in favour of the Appellants. We mention two further arguments advanced for them.[13]The first of these further arguments is that the term “issued share capital” in section 291B(1)(b) should be interpreted so as to refer to the whole amount contributed by a subscriber for his shares, not merely the nominal capital. (Here, it should be mentioned, most of the shares in Wrapit had been subscribed for at premiums of differing amounts.) The effect of this, if correct, would be to increase the pool of share capital so that the Appellants’ holdings no longer represented 30% of the whole. We do not accept this argument for the Appellants. The only safe approach to the determination of the amount of an individual’s issued share capital must, we think, be to take the nominal share capital. It will be recalled that the term “issued share capital”, in the context of the provisions allowing for stamp duty relief on intra-group transfers, was explained by Megarry J in Canada Safeway Ltd v IRC [1972] 1 All ER 666 as meaning the nominal share capital. The reasoning in that case is, we think, equally applicable here.[14]The second alternative argument advanced for the Appellants is that the term “loan capital” should be interpreted to include amounts committed to by lenders where the level of commitment is such that, in accounting terms, the amounts could properly be reflected as an asset in the company’s balance sheet. HMRC contends that this is a test that is not present in the statute and one that would introduce great complexity, requiring a consideration not only of accounting principles but also of the level of commitment on the part of the lender. The purpose of the contention advanced for the Appellants is to enable a loan made by an independent third party as having been made at a date earlier than the documentation was finalised, so as to increase the total loan capital of Wrapit, once again bringing the Appellants’ percentages below 30%.[15]Whether a loan has been made must, we think, be a question of fact. The evidence shows that there had been neither a payment to Wrapit of the amount eventually lent by the independent third party by the relevant date nor had there been (by the relevant date) any final agreement as to the terms and documentation on which the loan was to be made. Our conclusion, therefore, is that there was no borrowing from the third party and therefore no “loan capital” attributable to that third party. We are therefore against the Appellants on their second alternative argument.[16]For the reasons given above we allow the appeals. SIR STEPHEN OLIVER QC TRIBUNAL JUDGE RELEASE DATE: 25 November 2009