Peter Vaines looks at the Budget 2018 amendments to Entrepreneurs' Relief and warns all is not necessarily what it seems. And a Tribunal case where HMRC wanted to hide its evidence from the taxpayer.
The changes proposed to Entrepreneurs’ Relief announced in the Budget in October sounded benign, but on further investigation of the Finance Bill 2019 they are not benign at all. However, there is a really helpful late amendment.
It may be remembered that there are two major changes – a new 5% economic interest test to restrict the 5% test to a much narrower class of shareholder, and an increase in the qualifying shareholding period from 12 months to 24 months.
Where the company has issued anything other than ordinary shares, there is likely to be a problem. The existence of any kind of preference share, deferred share, alphabet share or almost anything else is likely to interfere with the entitlement to entrepreneurs’ relief for a small shareholder because all other classes of shares (apart from those carrying a fixed right to dividend) will affect the 5% shareholder’s interest. And if you think you know what is meant by a fixed right to dividend – you should read McQuillan v HMRC  UKUT 344.
Those investing in start-up businesses will often do so through preference shares and the existence of such shares can completely wreck the percentages of the small shareholders – particularly those in the management who will have contributed substantially to the company’s success. A start-up business will be very unlikely to provide their management with 5% under this new test and that may have a rather greater effect than Mr Hammond may have imagined.
The second change is to extend the holding period of the shares from 12 months to 24 months. That sounds fair enough – except that there is no grandfathering to protect anybody caught by this retrospective change. So, if you acquired your shares in April 2018 expecting to qualify for entrepreneurs’ relief by holding them until April 2019 – bad luck. Just before your 12 month period is reached, the rules will change, and you now have to hold them for 24 months.
Who is to say that having achieved the new 2 year qualifying period, they won’t change the period yet again, so that you will always be chasing the qualifying period – and never reaching it. We shall see.
Now for the good news. There has been a really helpful development in the last few days – a government amendment to the Finance Bill which includes an alternative test based on the shareholder’s entitlement to the proceeds in the event of a sale of the whole company. This new test can be used instead of the tests based on profits available for distribution and assets on a winding up and is intended to help those who are not able to meet the original test for commercial reasons. That is seriously welcome; somebody has obviously been listening.
Disclosure in Tax Appeals
The recent case of Addo v HMRC  UKFTT 530 (TC) provides some welcome relief to taxpayers who seek disclosure of documents which are to be relied on by HMRC in an appeal hearing before the Tribunal.
HMRC had various documents on which they were obviously intending to rely (at least indirectly) at the appeal hearing, being part of the witness evidence, but they said that the taxpayer should not be permitted to see them. They did not claim privilege but just said that they contained confidential and sensitive material.
The taxpayer could hardly be in a position to challenge the witness evidence if they were unable to see, or have access to, the documents on which the witness based their evidence.
Given that the Tribunal is charged with the responsibility under the Tribunal Rules “to deal with cases fairly and justly” and that both parties are under a duty to assist the Tribunal in meeting this obligation, it is difficult to see how the stance of HMRC could be justified. The Tribunal ordered disclosure.
HMRC claimed that they did not rely on the documents – which is a difficult argument if they are relying on the evidence of a witness who is relying on those documents.
They also claimed that the documents were not relevant to the appeal. If so, why was the witness giving evidence about them in the first place?
Further, HMRC said that the appellant had not explained how the documents were relevant. (Well, no – that would be a tad difficult under the circumstances.)
It can hardly be fair for HMRC to pursue a case for the charging of tax, without having to disclose their evidence to the taxpayer. This resonates with the approach in some other jurisdictions who only pretend (or do not even bother to pretend) to respect the rule of law. The very suggestion should be repugnant.
Naturally, one can understand that the disclosure of some documentation in the possession of HMRC may be relevant to other taxpayers and may prejudice the position of HMRC in other cases. However, there is always a risk with evidence in any proceedings – not only in tax cases. If the evidence or documentation they wish to adduce is too sensitive, then they might have to get along without it – just like the taxpayer would have to do, if he had documents which were commercially sensitive.
The Tribunal said that sensitivity should not be a reason for non-disclosure because it might easily become a cloak to disguise an unwillingness to disclose documents that are unhelpful to a party’s case. However, they were sympathetic to the possibility that genuinely confidential information may be contained within the documentation and allowed such confidential information to be redacted.
This case does provide an unfortunate reminder of the case of Qureshi v HMRC  UKFTT 0115 (TC) where HMRC were claiming that they did not have to produce evidence because “HMRC has an understanding with the Courts and Tribunals”. That argument was condemned in the strongest terms and although the approach in Addo is not quite the same, it is clearly of the same regrettable character.
Let us hope in the light of the recent House of Lords Report on Treating Taxpayers Fairly
, that HMRC do not conclude that this irritating problem should be solved by giving them new powers to pursue taxpayers through the courts without having to bother with the inconvenience of having to provide evidence or otherwise abide by the law.