Share Purchase – A Case Law
TC07052: Bostan Khan – First Tier Tribunal March 2019
Scenario:
CAD Ltd was in the business of an employment bureau for consultants. Mr Khan was an accountant in practice and prepared the management accounts for CAD Ltd. There were a number of disputes between the shareholders of the company over the years. Therefore, in 2009 they decided to look for a buyer of the business. In June 2013 the shareholders approached Mr Khan to see his interest in buying the company.
Mr Khan agreed and purchased the entire issued share capital (99 shares) for a cash consideration of £1.95m plus the net asset value. The company then immediately bought back 98 of the shares for £1.95m (buy back of shares).
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Taxpayer Argument:
Mr Khan argued that the purchase and sale of the shares was a trading transaction. And that it was intended from the outset to make money from the shares by winding-up the company within two years. He also contended that as the shares were trading stock, the trading profits rules took precedence over the provisions related to savings and investment income.
HMRC Argument:
HMRC argued that it was a distribution out of assets of the company and constituted dividend income. Therefore, relief for the purchase of own shares by unquoted trading companies did not apply as the taxpayer did not meet the minimum ownership period. Furthermore, the taxpayer’s activities in relation to the shares did not demonstrate that he was engaged in commercial trade and there was clearly a purchase of 99 shares followed by a sale to the company of 98 shares.
Tribunal Decision:
The Tribunal concluded that the taxpayer’s acquisition and disposal of the shares was not an adventure in the nature of trade. The taxpayer was not a securities trader, instead, he had seen an opportunity to acquire the company as an investment using the company’s own reserves and borrowings.
The Tribunal then concluded that this was an investment rather than a share trading transaction.
Hence, the appeal was dismissed.
