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Longmark Tax Conferences
Speakers quoted:
- Michael Sherry
- Richard Bramwell QC
- Tim Brown
- Alun James
(All barristers at Temple Tax Chambers)
Founder shares
Michael Sherry began by discussing the issue of whether 'founder shares' arise by reason of an individual's employment. The critical wording in the ITEPA 2003, s 421B(1) definition of employment-related security is:
'securities, or an interest in securities, acquired by a person where the right or opportunity to acquire the securities or interest is available by reason of an employment of that person or any other person.'
Section 421B(2) goes on to say that 'for the purpose of subsection (1) … (b) “employment” includes a former or prospective employment'. And s 421B(3) says that 'a right or opportunity to acquire securities or an interest in securities made available by a person's employer, or by a person connected with a person's employer, is to be regarded for the purpose of subsection (1) as available by reason of an employment of that person'.
HMRC often seem to take this subsection (3) presumption as their starting point, including as regards founder shares. Michael says that this is not necessarily a correct approach in all cases.
Where shares are allotted to individuals by a company of which the individual is or is going to become a director then, so the argument runs, the opportunity to acquire the shares will have been made available by the company deciding to approve the transfer or make the allotment. So because the company is or is about to become the individual's employer, the argument runs that the shares are employment-related securities.
Michael makes three observations.
1. Different considerations apply to shares acquired when a company is formed by the subscribers to the memorandum. The opportunity to acquire such shares cannot be said to be provided by the company itself.
2. If the articles permit share transfer without the director's approval, then the acquisition of shares from formation agents is not by virtue of an opportunity made available by the company itself. So long as the acquisition is not in fact by reason of employment, such an acquisition cannot be deemed to be so.
3. Although s 421B(2)(b) provides that for the purpose of s 421B(1) 'employment' includes a 'former or prospective employment', that deeming provision clearly does not apply to s 421B(3) which deems opportunities made available by the acquirer's employer to have been by reason of employment. So if at the time of the acquisition this individual has not taken up office or employment with the company, the deeming provision does not apply.
Buy-out transactions
Richard Bramwell QC reminded us that HMRC circulated for comment a draft Tax Bulletin article on TA 1988, s 703 and takeover or management buy-out transactions. Richard said that although never published, the article is representative of HMRC's current practice (in general).
In the article, HMRC say that problems can arise under s 703 where the vendor has an interest in the Newco (or will, as part of the consideration to acquire Newco shares). Such transactions are often among the relatively few cases where HMRC refuse TA 1988, s 707 clearance each year.
However, Richard thinks that HMRC's view as stated in the article is untenable in many of the cases where they are in practice refusing clearance. He refers to the Cleary (44 TC 399) and also the Brebner and Wiggins cases ([1979] STC 244 and 43 TC 705) as amongst his authorities for saying so.
Richard then turned to the HMRC manuals as regards unascertainable consideration and the case of Marren v Ingles [1980] STC 500. He says that the HMRC manuals state that if there is a maximum consideration, but a range of possible considerations below that maximum, then this is unascertainable consideration to which Marren v Ingles principles potentially apply. However, Richard says that in those circumstances TCGA 1992, s 48 would be likely to apply — precluding Marren v Ingles principles.
VAT
Tim Brown set out his top five VAT points to think about when advising on corporate transactions. In descending order they are:
5. Are you going to make the holding company active or passive?
4. If you are intending to transfer a business as a going concern, are the transfer of a business as a going concern (TOCG) conditions met?
3. 'As trivial as it may sound', if you are going to register a new company for VAT, do not forget to fill in the registration form.
2. If you are trying to meet the conditions for an exemption, continually review to ensure that the conditions are met.
1. If you are trying for VAT grouping treatment, be careful to ensure that the conditions are met.
Demergers
Alun James reminded us that where A and B (two individuals) own one group of companies and A and B also separately own a different group of companies, if A and B wish to go their separate ways — A taking one of the existing groups and B taking the other — any attempt to put the two groups together followed by a demerger is likely to involve HMRC refusing the necessary clearances.
However, in some circumstances, it is possible to carry out the split in a tax-efficient way with the necessary clearances being secured. For example, if there is a genuine commercial reason for grouping the two groups, this sometimes secures the clearance. Alternatively, it is sometimes possible to do a separate partition for each of the two groups so as to achieve A & B's intentions — also getting the clearances.
John Hiddleston MA (Cantab), CTA is tax director at Vantis Tax Ltd, tel: 020 7549 8057, e-mail: john.hiddleston@vantisplc.com.
