This is a very sad tale for the person involved.  The Court of Appeal (CoA) described it as a ‘cautionary tale’.  A taxpayer now has a liability of almost £600k to HMRC with probably not the means to pay it.  Bankruptcy and financial ruin are highly likely outcomes.

The taxpayer, an accountant, had provided services to an employment agency business run by associates who also happened to rent space from him.  The business had been a profitable one but was in decline.  The initial owners of the business (the Vendors) wanted out and it was agreed that the company would buy back most of the shares from the Vendors and then the taxpayer would buy the net assets of the business for just under £20k, represented by a small number of shares that remained of the company after the buyback.  At the last minute the structure of the transaction changed, so that the taxpayer purchased all the shares from the Vendors and the company would buy the shares back from the taxpayer.

It possible that the arrangements were changed so that the Vendors wouldn’t suffer income tax on the share buyback but would be liable to capital gains tax instead, at the substantially lower rates where the Vendors sold the shares.  Where certain conditions are met it is possible for a company to buy shares and capital gains tax applies instead of income tax but it was expected that the Vendors wouldn’t have met these conditions so could have been liable to income tax.

Their accountant, the taxpayer, agreed to the new structure where he purchased the shares from the Vendors and then the company bought back the shares from the taxpayer.  This buyback of shares transaction was a taxable transaction, the taxpayer certainly couldn’t meet the condition for capital gains treatment as he only held the shares for a matter of minutes and the capital gains treatment requires a holding of at least five years.

When HMRC reviewed the transactions, the taxpayer was adamant that he was only helping out some business associates so they could retire and that they were due to pay the tax and not him, the transactions needed to be viewed in the round, a composite view was necessary.  HMRC thought this was ill-founded and sadly so did all the tribunals and finally the CoA.  The CoA found that he was beneficially entitled to the £1.95m share-buyback distribution and this distribution was used to pay back the loan the company had provided to him to enable his purchase of shares from the Vendors.

The CoA found that the Vendors would pay tax, albeit capital gains tax at substantially lower rates than they would have if the original structure had been executed.  There was no double taxation as the taxpayer had to receive income to be able to afford to buy the shares from the Vendors.

The decision can be found at: Khan v Revenue & Customs (Rev 1) – Find case law (nationalarchives.gov.uk)

This case clearly highlights the importance to receiving professional tax advice when acquiring or disposing of businesses.  Under the initial structure, whereby the company purchased shares from the Vendors there would have been no tax liability for the taxpayer, the Vendors may have had to pay income tax as opposed to capital gains tax.  The taxpayer accountant may have just wanted to help his clients out, but this has cost him almost £600k.

Please contact if you are considering buying or selling a business.  The above case shows how easy one can incur life changing liabilities from poorly structured transactions.