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.