Summary

In the circumstances an issue of shares to a director by a company did not qualify for Enterprise Investment Scheme relief because the issue of shares was caught by the value received rules in the Taxation of Chargeable Gains Act 1992 Sch.5B para.13 as a result of the director not subscribing wholly in cash for the shares. However, two subsequent issues of shares qualified for Enterprise Investment Scheme relief.

Facts

The appellant Commissioners appealed against a decision ((2008) EWHC 266 (Ch), (2008) STC 842) that the respondents were entitled to avail themselves of relief under the Enterprise Investment Scheme in respect of certain share issues. The second respondent (B) had unsuccessfully sought the relief from the Commissioners for payments that he made in respect of six share issues to him by the first respondent company (X) of which he was a director and shareholder. In three of the share issues money was paid by B to X before any formal application or share allotment was made, whilst in the remaining share issues X resolved to allot shares before any payment was made by B. In each issue B was given a share for every pound that he injected into X. The Special Commissioner found that whenever B paid money to X there was a generalised intention on the part of B that money which he put into X would be in respect of shares but he further found that where there was no application, resolution or agreement it could not be said that B was informally applying for shares. The Special Commissioner concluded that the payment of money in such circumstances had to have amounted to the making of a loan, and that any subsequent allotment of shares could not attract relief, as shares had been issued to repay a debt to B, and that constituted a return of value prohibited under the Taxation of Chargeable Gains Act 1992 Sch.5B para.13. The Special Commissioner found that the remaining issues did attract the relief sought by B. The court found that the all payments by B should have been characterised as a contribution to the capital of X and not as loans, so that all the payments made by B attracted the relief sought. The Commissioners contended that no relief was payable in respect of those share issues where payment was made before the allotment of shares as, with respect to those share issues, the shares were, in effect, being allocated to B in redemption of loans, and therefore that B did not subscribe wholly in cash for the shares as required by Sch.5B para.13 of the Act, and relief was further precluded by Sch.5B para.13(2) of the Act since the shares were issued to repay a debt.

Held

The respondents were entitled to avail themselves of relief under the Enterprise Investment Scheme in respect of two share issues but not in respect of a share issue that formed the initial share issue in the entire series of issues. The initial share issue did not attract the relief as, on the evidence, it could not be said that the payment by B was conditional on his being allotted the appropriate number of shares to the sum that he paid, so that B did not subscribe wholly in cash for the shares as required by Sch.5B para.13. The later share issues had been made against the background of a consistent previous course of dealing between the respondents in which B was issued with shares by X in return for payments of money. It was clear that the sums were paid by B and accepted by X on the clear mutual understanding that B was agreeing to take shares and X was agreeing to allocate him shares, Governments Stock and Other Securities Investment Co v Christopher (No2) (1956) 1 WLR 237 Ch D applied. B had made payments on condition that he receive shares, and as a matter of commercial reality and of ordinary English law he subscribed wholly in cash for those shares and the money paid was at no time a debt between X and him. Accordingly, relief was not precluded by Sch.5B para.13(2) of the Act in respect of the later share issues.

Appeal allowed in part