HMRC refuses relief for £400k ‘negligible loss claim’

The Tribunal examined an appeal from a taxpayer against HRMC’s refusal to allow a negligible loss relief claim of almost £400,000 in respect of his shareholding in a company when it failed.

HMRC argued that the shares had not ‘become of negligible value’ as they already had no value when the taxpayer originally acquired them.

The taxpayer was a farmer and property developer who had identified what became an ill-fated opportunity to purchase a ship which was permanently moored on the River Thames. The ship was purchased in early 2001 from a charity. It was to be used as an entertainment venue for corporate hospitality. The acquisition was made by a company incorporated for the purpose of purchasing and exploiting the ship.

An initial issue of 1,000 £1 shares was made. Of these 1000 shares, 610 were allotted to the taxpayer. The ship along with goodwill and some minor assets was acquired for £980,000. In addition to the purchase price the purchaser was obliged to make a donation to the charity, take on 3 members of the charity’s staff, settle other liabilities and carry out extensive refurbishments to the ship in dry dock.

The company had significant problems almost from the start including disputes with the Port of London concerning taking the ship to dry dock, water ingress and the inability to obtain additional loan finance.

The taxpayer injected further monies totally almost £400,000 in respect of which further shares were issued (with an equivalent nominal value) in June 2002 and December 2003. An enforced sale by the lenders a year later for £850,000, which would have covered the full indebtedness, did not ultimately proceed. The company was eventually compelled to enter administration in June 2004 after which the ship, goodwill and assets were sold for £250,000 in April 2006. The company then went into liquidation with a net deficiency even for the secured creditors.

The taxpayer conceded that the company had substantial debts and that its net asset value at June 2002 and December 2003 was less than the gross value of the ship and the business. However, the taxpayer argued that the value of his shares at June 2002 and December 2003 was positive and far in excess of their nominal value of £1 each. Expert witnesses were unable to agree as to the valuations in question.

The Tribunal Judge said that there was “no reliable evidence from which we could properly conclude that the company had a positive value, reflected in its shares, at either of those dates, still less evidence from which we might come to a conclusion about what that value might have been”.

The Tribunal ultimately concluded that the shares did not become of negligible value as the taxpayer contended but rather were always of negligible value on the dates for which loss relief was claimed. The Tribunal in this case wholeheartedly agreed with HMRC and the appeal was dismissed. The taxpayer was ultimately allowed loss relief of just £610 despite having invested and lost almost £400,000 as regards his shareholding.


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The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

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Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.