Gel P Grogan v Revenue & Customs Commissioners (TC00187) (2009)


An appeal against a notice to counteract a tax advantage obtained on the sale of shares to a qualifying employee share ownership trust was dismissed because the appellant failed to show that tax saving was not the main object of that sale.


The appellant businessman (G) appealed against a notice issued by the respondent commissioners under the Income Tax Act 2007 s.698 to counteract a tax advantage obtained on the sale of shares in his company to the trustees of an employee share ownership trust. G was the sole director and majority shareholder in the company. He claimed that his auditors (H) had presented proposals for the trust after he had asked them to advise on suitable incentive arrangements for the company's employees. H's advice emphasised the tax saving of a disposal of shares to the trust in contrast to dividend income. They stipulated that their fees would be based on 30 per cent of the tax saving achieved. That was to be calculated by deducting from the hypothetical tax payable on dividend income the actual tax payable as a result of the share disposal, which would be capital gains tax or income tax under the Income and Corporation Taxes Act 1988 s.703. G claimed that he had never instructed H on a personal basis to achieve personal tax saving and any savings that may have arisen were purely a by-product of the work they did for the company in establishing the trust. The agreement for the sale by G to the trust company was executed for a consideration of £630,000 for 20 per cent of his shareholding, at a time when he was negotiating the possible sale of part of the business. By the time the counteraction notice was issued, s.698 of the 2007 Act had replaced s.703 of the 1988 Act for income tax purposes. The commissioners submitted that the real reason for establishing the trust and for the sale of G's shares to it was to obtain favourable income tax treatment rather than to provide incentives. They further submitted that even if G did not have a tax advantage as his main object, he did not come within the exception in s.685 of the 2007 Act, for cases where no tax avoidance object was shown, if that was H's main object. G submitted that comparison between a simple dividend and the actual receipt was not valid because it ignored the existence of the trust which had acquired the shares; the commissioners were not comparing like with like. G also argued that if his intention had been solely to draw funds from the company a dividend would have been financially more beneficial than selling shares to the trust.


It was irrelevant that G received the money from the trustee company rather than from the company, Inland Revenue Commissioners v Wiggins (1979) 1 WLR 325 Ch D followed. A contrast of like with like was not required when deciding whether a tax advantage was obtained, Inland Revenue Commissioners v Cleary (1968) AC 766 HL applied. However, that did not mean that the similarity or otherwise of the actual and possible receipts was irrelevant when applying the exception in s.685. The question whether one of the main objects was to obtain a tax advantage was subjective, Inland Revenue Commissioners v Brebner (1967) 2 AC 18 HL applied. G's intention had to be considered but it was not necessary to examine the intentions of H separately from those of G. His evidence as to his intentions had to be considered in the light of the facts, which included what he was told by H, Addy v Inland Revenue Commissioners (1975) STC 601 DC considered. Evidence as to his commitment to employee incentives and his indifference to the personal tax implications was not convincing. If he had no interest in his own tax position, it was extraordinary that he did not query H basing their fees on his tax saving. Furthermore, the formula for calculating the tax saving on which H's fees were based actually referred to s.703, so H were clearly aware of the risk of a notice of cancellation of a tax advantage under that section, and it could only be assumed that they had pointed it out to G. It was also surprising that the trust had been set up at a time when G had been negotiating for a possible sale of part of the company's business. The overall effect on his financial position was the strongest piece of evidence in support of his claim that he was motivated by a wish to incentivise employees. If the trust had not been set up but G had been paid a dividend of £630,000, his overall financial position, taking account of the value of his retained holding in the company, would have been better. That evidence was clearly relevant but the question to decide was what weight to attach to it. It seemed that when considering the transactions, G did not really consider the net effect on his overall position, which was not set out in H's letters. If the net effect on his overall position had been an important factor in the transactions, it was very surprising that it was not mentioned in correspondence. What was inescapable was the fact that the saving in tax of a share sale to the trust as compared to the tax on a dividend was set out by H coupled with the tax relief on the trust contribution. G had not shown that, on the balance of probabilities, the exception in s.685 applied.

Appeal dismissed