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The Upper Tax Tribunal has recently confirmed the decision made by the First-tier Tribunal (FTT) in the case of McEnroe and Newman vs HMRC. The case highlights the need for careful drafting of Sale of Purchase agreements where the intention of all parties, and the economic reality of the consideration being paid, must be taken into account.
Michelle McEnroe and Miranda Newman were sole shareholders in Kingly Care Partnership Limited, holding one ordinary share each. In October 2013 Ms McEnroe and Ms Newman sold their company to Active Assistance Finance Limited, the agreed “headline” price for the purchase being £8m. The company had a debt of £1.1m which it owed to its bank, and the agreement was that this would be repaid at the time of the sale. At the time of completion the sellers received £6.9 million for their shares; the buyer also discharged (directly to the bank) the debt which the company owed of £1.1 million.
The contract for sale specifically stated that the sale price of the company was £8 million (being the sum of the £6.9 million and £1.1 million). In their capital gains tax (CGT) computation, Ms McEnroe and Ms Newman based the gain on the proceeds they had received of £6.9 million. HMRC queried this and assessed them for the gain of £8 million – the proceeds explicitly stated in the contract of sale, and the amount that the buyer had paid out to buy the company.
The case was brought to the FTT where the sellers argued that CGT should be calculated based on the £6.9 million they received for the shares and also arguing that the sale agreement should be rectified to reflect the intention of the parties.
The FTT accepted HMRC’s view that the sellers had in effect discharged the bank debt and received £8 million gross. HMRC’s view was that the agreement was unambiguous – the consideration was £8m.
The case has recently been heard by the Upper Tribunal, where the judges rejected the appellants’ argument that the FTT had erred in law in failing to consider the debt repayment when construing the terms of the sale agreement. The sellers now have an additional CGT liability of potentially £308,000 on proceeds they did not receive.
It is clear that the economic effect of the transaction was that the shareholders received £6.9m for their shares; the buyers bought a company that was encumbered with £1.1m of debt .
The case highlights the need to ensure that the documentation reflects the intention of the parties and the economic reality.
For further information on this case, or to discuss any other tax issues affecting you or your business, please get in touch with Fiona Phillips by emailing firstname.lastname@example.org or by calling (01482) 325242