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Bielckus & Ors: Making an ‘ash’ of loss relief on trading company shares

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Background

This was a little case which caught our eye. A self-represented accountant taking on HMRC over a point of technical tax law. We love an underdog. However, our accountant (Mr Bielckus) found himself arguing the seemingly inarguable.

In summary, there were no facts in disputes in this case. Instead, it centred around a simple point of law. Even more puzzling is that that piece of tax law was completely unambiguous! As such, despite Mr B being found to be a “generally honest and straightforward person” his arguments were “less reliable”.

 

The facts

Our support cast of Mr A and Mr T worked in a travel agency called DWT. One of the senior partners of DWT decided to call it a day and retire. However, Mr A and Mr T along with a third person decided to continue the business. Their accountant, the star of the show Mr B, all decided to form a new company to facilitate this bold new venture.

Mr B and his friends were allotted number of ordinary shares in the new Company. The details of these ‘initial’ shares are irrelevant to this case. However, a couple of years down the line each of the shareholders also received further number of “cumulative redeemable preference shares”. These were issued for specific commercial reasons.

Unfortunately, the business soon began to struggle, making a small loss followed by a bigger loss, until following the intervention of Icelandic volcano, the company became insolvent and was struck off in 2012.

However every grey cloud (even those of the Icelandic volcanic ash cloud variety) may have a silver lining. Where one has subscribed for ordinary shares in an unquoted trading company it is possible to offset such a capital loss against income for the current and previous years. This, of course, is precisely what they tried to do…

 

The (undisputed) law

As stated above there was no dispute as to the relevant law.

Chapter 6 of the Income Tax Act 2007 (“ITA”) provides for “losses on disposal of shares”. ITA, s131 provides that an individual is eligible for relief if:

  • they incur an allowable loss of capital gains tax purposes on the disposal of any shares, and
  • the shares are qualifying shares.

Shares are qualifying shares if either (1) EIS relief is attributable to them or (2) if not, they’re shares in a qualifying trading company which have been subscribed for by the individual.

It is the repeated use of the term ‘shares’ and the definition thereof which was at the heart of this case. This, of course might have been understandable if the draughtsman had clocked off for the day without providing for a clear definition within the legislation. However, the legislation does provide a clear definition:

  • firstly, at ITA, s151(1), ‘shares’ includes stock “but does not include shares or stock Not forming part of the companies ordinary share capital”, and
  • at ITA, s989, “ordinary share capital… means all the companies issued share capital… Other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits

 

Applying the law

There was no debate over whether the shares qualified for EIS. Both were in agreement that they did not. As such, the dispute boiled down to the question as to whether the shares were ‘ordinary shares’ and therefore ‘qualifying shares’ for the purposes of the law.

Unfortunately, the evidence didn’t back up Mr B’s claims that these were ‘ordinary shares’. Such evidence included the notes to the accounts which described them as “preference shares.. [Attracting] a fixed right to dividends of 7.5% per annum” Hoisted by one’s own petard (or, err, one’s own Balance Sheet). Mr B’s assertion that that the notes did not properly reflect reality were not accepted by the Tribunal.

Indeed, the Tribunal’s view was that “the position is crystal clear: the shares are not ordinary shares“. Hard to disagree.

 

Summary

As stated at the beginning of this article, Mr B was unrepresented in this case. Perhaps if he had taken some independent advice on the merits of his case he may have saved himself, and everybody else, a great deal of time.

However, it does act as a useful reminder to ensure that one ensures that share capital qualifies as ordinary share caital if one wishes to make such a claim (and that a person taking preference shares in a Company may have restrictions on their access to the usual tax reliefs if things go ‘belly up’)

If you or your client’s have any queries on this or any other tax reliefs then please let us know.

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