[2010] UKFTT 566

TC00817

Appeal numbers: TC/2010/2570

                                                                                                                      TC/2010/3634

CAPITAL LOSS — relief — shares becoming of negligible value — ICTA s 574 — whether shares subscribed for or purchased from third party — purchased — relief against income not available — appeal dismissed

FIRST-TIER tribunal

tax  chamber

                                                       STEPHEN JOYCE

                                                  ANDREW WINGFIELD                                Appellants

                                                                 - and –

                            THE COMMISSIONERS FOR HER MAJESTY’S

                                                 REVENUE & CUSTOMS                            Respondents

                            Tribunal:          Judge Colin Bishopp

Sitting in public in North Shields on 18 October 2010

The Appellants in person (with the assistance of Mr R J Low, accountant)

Mr A Boal, Appeals and Review Unit, for the Respondents

                                            © CROWN COPYRIGHT 2010

DECISION

1.           The single issue in these joined appeals is whether the appellant taxpayers acquired shares in a company by way of subscription, as they contend, or by way of purchase, as the Crown contends. It is undisputed that the company failed shortly after the taxpayers acquired their holdings and that the shares thereupon became of negligible value within the meaning of s 24 of the Taxation of Chargeable Gains Act 1992 (“TCGA”). The disagreement between the parties arises from the difference in treatment of shares acquired in the two different ways.

2.           If the shares were acquired by subscription, the subscriber’s loss may be set off against his income for the year of loss or the preceding year, in accordance with s 574(1) of the Income and Corporation Taxes Act 1988 (since replaced in similar terms by the Income Tax Act 2007), whereas if they were acquired by way of purchase, relief for the loss may be obtained only by offsetting it against current year and future chargeable gains (see s 2 of TCGA). The taxpayers do not have other, or at least sufficient, gains to afford them relief in that way and therefore wish to bring themselves within s 574(1). The section imposes a number of other conditions which must be satisfied if relief is to be available, but the Crown accepts that they are met in both cases, and I am left to decide no more than the single issue I have described.

3.           The taxpayers duly submitted their self-assessment returns for the year in which the shares became of negligible value, that is 2005-06, and each claimed relief for the loss he had sustained, by offsetting it against his income. The Crown opened an enquiry into each return, and although there were initially some other doubts about the factual background to the claims, these had all been resolved by the time of the hearing. I heard some oral evidence from each of the taxpayers, who represented themselves with assistance from their accountant, Mr R J Low, which expanded on the information contained in the documents with which I was provided. The Crown was represented by Mr A Boal, of their appeals and review unit.

4.           In late 2004, the first appellant, Mr Stephen Joyce, was the managing director and the second appellant, Mr Andrew Wingfield, the finance director of Vickers Pressings Limited (“Vickers”), then a wholly-owned subsidiary of Rolls-Royce plc. Rolls-Royce wished to divest itself of what it perceived as a peripheral enterprise, and decided in about 2000 to develop Vickers in order that it could be disposed of. The process took some time. There were unsuccessful negotiations, with the eventual buyers, in 2003. However, a revival of those negotiations, with the intervention and participation of venture capitalists, led to a disposal in early 2005.

5.           On 28 January 2005 each of the taxpayers signed an undertaking  addressed to Tolwood Limited (hereafter “Tolwood”, but identified in the undertaking as “the Company”) that, on the receipt by him of a sufficient bonus from Rolls-Royce, he would “purchase from Sandco 881 Limited (currently changing its name to Tolwood Employee Benefit Trustee Limited [‘TEBTL’]) the number of Ordinary Shares of £1 each in the Company set out below”. The numbers set out below were, for Mr Joyce, 46,875 and for Mr Wingfield 28,125, and the prices to be paid were £60,000 and £36,000 respectively.

6.           The undertaking was only one document of many relating to the disposal by Rolls-Royce of Vickers, the reorganisation of investments in Tolwood by venture capitalists, and the increase in their investments. The intention was that on completion of the acquisition by Tolwood of Vickers (or the creation of a new vehicle for the merged business), Mr Joyce and Mr Wingfield would cease to be employed by Rolls-Royce or any of its subsidiaries, and would instead become respectively managing and commercial directors of the merged business. Mr Joyce was in addition to become chairman when the current incumbent retired. On about 15 February 2005 Tolwood changed its name to VPTA Limited (VPTA being the acronym of Vickers Pressing Tolwood Automotive); it may be that the disposal of Vickers took place on the same day, though there was no evidence available to me that that was so.

7.           I was told that Rolls-Royce was required to pay the taxpayers’ bonuses on successful completion of the disposal of Vickers. It was clear that at some time in early 2005 the disposal was in fact successfully completed, the bonuses were paid and in or soon after May 2005 the taxpayers honoured their undertakings, acquiring the shares which are the subject of the current dispute. The Crown’s case, in essence, is that the undertaking reflects what happened: the taxpayers bought shares which were already in existence from their then owner, TEBTL, and did not subscribe for new shares issued by Tolwood.

8.           The taxpayers’ case was that Vickers’ business was, in effect, merged with that of Tolwood—with which Vickers had previously traded—and, they believed, they were acquiring (and were required to acquire) shares in an entirely new company. When they received their respective bonuses from Rolls-Royce they paid for their shares by cheque. Mr Joyce produced a copy of his cleared cheque, drawn in favour of VPTA, and not TEBTL, and without endorsement by VPTA in favour of TEBTL. Mr Wingfield did not produce his cleared cheque, but I saw a copy of his bank statement showing that a cheque for £20,000 was cleared on 25 July 2005, and his evidence that this cheque represented the payment for his shares and that it, too, was in favour of VPTA was unchallenged.

9.           I add for completeness that the taxpayers did join the company, as intended, but discovered within a very short time that there were serious deficiencies in its accounting records, in that the value of its stock was overstated by a very large sum. The former finance director, who was to blame for the mis-statement, was dismissed; it was he who had dealt with the taxpayers’ share acquisitions and they had been unable to obtain any assistance from him in securing evidence of what exactly had happened. The accounting mis-statement led to the withdrawal of banking facilities and the collapse of the company, which went into administration and subsequently liquidation. The taxpayers’ shares thereupon became valueless. I was told that they had also encountered difficulty in obtaining information from the administrator and liquidator.

10.        Within the documents produced at the hearing was a copy of VPTA’s draft annual accounts for the year to 31 July 2005, the last before the company collapsed. The accounts record the taxpayers’ appointments to the Board, in each case on 7 February 2005—whether that date coincides with the disposal of Vickers, or their appointment was made in anticipation of it is unclear—and that at the balance sheet date they were the registered holders of shares in the company. What the accounts also show is that this was not a new company; they record that it was formerly known as Tolwood Limited, they set out comparative figures for the preceding year, and record that several of the directors held office throughout the year and, accordingly, before the disposal of Vickers took place. The draft accounts show that during the year—the date is not stated—40,909 ordinary shares were issued at £1.44 per share. However, the number does not match the number acquired by the taxpayers, and the price is different: the taxpayers paid £1.28 per share.

11.        What the taxpayers must demonstrate, if they are to secure relief as they wish to do, is set out in s 574 (1) and (3) of ICTA. It is plain from sub-s (1), as the taxpayers accept, that relief against income is available only to a subscriber. What that means is explained by sub-s (3):

“For the purposes of this section—

(a)      an individual subscribes for shares if they are issued to him by the company in consideration of money or money’s worth …”

12.        I recognise that I have seen only draft accounts, and that the remaining evidence, too, is not entirely satisfactory, since it does not provide a complete picture. However, the burden is on a taxpayer seeking relief to demonstrate that he is entitled to it. It does not seem to me that a taxpayer’s belief, however genuine, coupled with the identity of the payee of a cheque is sufficient to displace the remaining evidence that the taxpayers in this case agreed to acquire, and did acquire, existing shares. I cannot be satisfied on the evidence that they subscribed for shares; the contrary seems much more likely. Though I have considerable sympathy with the taxpayers, the requirements of s 574 are strict and I must accordingly dismiss their appeals.

13.        These are full reasons for the conclusions I have reached. Any party dissatisfied by those conclusions may apply for permission to appeal to the Upper Tribunal. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.

Colin Bishopp

Tribunal Judge

Release date: 12 November 2010