Summary

Whilst a share sale had been entered into for bona fide commercial reasons, it also had as a main object the procuring of a tax advantage with the result that an assessment to income tax under the Income and Corporation Taxes Act 1988 s.793 had been properly made.

Facts

The appellant taxpayers (S) appealed against assessments to income tax of £12,500 each issued by the respondent commissioners. S were the sole directors and shareholders of a private company. After taking advice from a tax specialist, they entered into a transaction to restructure the company which involved the transfer of shares to a new company in consideration for the issue of non-voting preference shares in the new company. They each also received a payment of £50,000 in cash. The transaction was entered into without the benefit of a clearance under the Income and Corporation Taxes Act 1988 s.703. The Revenue maintained that, by reason of the payment of the cash sum, S had obtained a tax advantage for the purposes of s.703. S disputed that the tax advantage was one of the main objects of the transaction as required by s.703(1). Rather, S maintained, the transaction had been entered into to facilitate the transfer of the business to their son so that they could retire but allow the business to continue.

Held

The sale of the shares by S was carried out for bona fide commercial reasons as part of an overall transaction aimed at securing the continued operation of a successful business after their retirement, while allowing them to take a financial reward for their work in that business. However, one of the objects of the transaction was to obtain a cash payment, which gave S a tax advantage, namely a tax saving of £12,500 each. A tax advantage that was ancillary to the main object of the transaction was not one of its main objects, but in the instant case the advantage gained was more than a trivial amount, both in absolute terms and relative to the aggregate consideration for the share sale, Inland Revenue Commissioners v Brebner (1967) 2 AC 18 HL applied. It was necessary to judge the transaction that actually occurred rather than the original motive for it; an object of a transaction did not cease to be a main object simply because there was a more important object. S had consciously chosen the highest figure that their advisers were recommending when making their decision to take the cash, and that specific intention was highly relevant when determining the importance of the object within the transaction.

Appeal dismissed