Tax Cases

Business expansion scheme pitfall

A case recently before the High Court concerned the withdrawal of business expansion scheme relief on account of value received by the investors. The Revenue's Inspector's Manual highlights the trap at paragraph 6935, with an example involving two companies under separate but similar ownership, Organic Parsnips Ltd and Just Carrots Ltd.

The appellants incorporated six companies between 1989 and 1993 and these were involved in the letting of property. They applied for relief under the business expansion scheme and the relevant certificates were given by the Revenue.

The taxpayers also owned a family building company, not within the business expansion scheme; this undertook work for the business expansion scheme companies, although this factor was not strictly relevant to the tax problem before the Court.

Under section 300, Taxes Act 1988 business expansion scheme relief was to be withdrawn to the extent that an investor received value back from the company in the scheme within a certain period. Return of value is identified under eight headings which are widely drawn and appear to have some overlap. In the present case, the return of value represented the remuneration paid to the investors by the family building company. As this company was controlled by the same persons as controlled the business expansion scheme company, the two companies were connected persons and section 301(6)(b) states that any reference to a company in the legislation includes a person connected with the company, in this case the family trading company. The legislation as it then stood allowed for remuneration to be paid to investors for freelance work performed for the company but it did not permit remuneration to be paid as a director of the company. The Revenue therefore raised assessments withdrawing the relief given to the extent that it was matched by the remuneration received.

The taxpayers appealed on the grounds that the remuneration could be described as falling under section 300(2)(f) as being a 'benefit or facility for the individual', and in that case there is no withdrawal of relief if full consideration is given for the benefit. In the present case, services as directors or employees of the family trading company had been supplied. Unfortunately, this contention did not succeed in the High Court on the basis that it is necessary to decide which is the most natural category of the eight 'value received' rules which applies in any particular case; here it was the last one which forbids 'any other payment' with certain exceptions not relevant here.

The taxpayers had also applied for judicial review of the Revenue's action on the basis that it had known of the existence of the family building company for many years but still issued the certificates granting business expansion scheme relief. In the High Court it was held that there was no basis for this challenge.

The same trap can arise under the current enterprise investment scheme provisions, although they have been modified. In particular, remuneration as a director is now permitted if the investor subscribes for the shares when not connected with the issuing company and there are also provisions for 'value received' to be returned to prevent loss of relief.

(Fletcher v Thompson, High Court Chancery Division, 17 July 2002.)

Issue: 3867 / Categories: