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Voting rights and entrepeneurs’ relief

In George v HMRC, the First Tier Tribunal (FTT) decided that they could not impute voting rights to shares for the purpose of a shareholder being able to claim entrepreneurs’ relief (ER). One of the conditions to claim ER is that the individual is able to exercise at least 5% of the votes in the relevant company “by virtue of” their shareholding in the company.

VAT| HMRC | Case StudyIn this case, Mr George had been appointed a director in a family-owned company, Thornton & Ross Limited (TLR) which was thereafter managed by one of the family members (Mr Jonathan Thornton) and Mr George. A few years after joining the company, Mr George was allowed to acquire shares in the company. The shares acquired by Mr George represented 6.9% of the nominal value of the company’s ordinary share capital but did not carry any voting rights. Following a failed attempt to sell TLR, at which time Mr George was advised that he did not qualify for ER because his shares did not carry any voting rights, Mr George and Mr Thornton agreed that shares would be given voting rights, so as to secure ER. This agreement was not documented immediately. In addition, the company’s accountants were concerned that giving voting rights to Mr George would result in a ‘value shift’ tax charge falling on the other shareholders. As a result of this, despite the agreement, the rights were not formally granted to the shares held by Mr George until almost 12 months later.

On the subsequent sale of the company only 7 months after the rights had been formally granted (less than the 12 months qualifying period for ER to apply), Mr George claimed ER on the disposal. The argument put forward was that the Court would grant specific performance of his voting rights from the date of the agreement of Mr George and Mr Thornton, as an equitable matter, notwithstanding that the shares had not been formally enfranchised until much later. The FTT held against Mr George and decided that it could not impute the voting rights into the shares from the earlier date because the equitable principle could not be used to take rights away from the other shareholders who had not personally agreed to the granting of the voting rights to Mr George at that earlier time and, in any event, even if a court did impute voting rights to Mr George his voting rights would not exist ‘by virtue of’ the holding of his shares. Rather, the voting rights would have existed by reason of equity requiring them to be imputed to Mr George.

This case shows how important it is that parties to agreements relating to share rights (or other rights) fully document the arrangements that they have agreed to enter into at the time to ensure that the relevant benefit, tax or otherwise, is obtained.

You can read the full decision in D George v HMRC [2018] UKFTT 509 here.

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