How An Employment Contract Could Save A Fortune In Tax is a post where we are treated to one such an answer from that which can be learned in the case of Kennedy v Revenue & Customs (CAPITAL GAINS TAX – entrepreneurs’ relief) [2021] UKFTT 3 (“Kennedy v HMRC“).
The Brass Tacks: How An Employment Contract Could Save You A Fortune In Tax
The key point in terms of how an employment contract could save a fortune in tax concerns the matter of being conceivably challenged by HMRC on the status of your employment with a company. Having a written contract of employment that you can show was entered into and signed on the date it commenced, may be invaluable for the purposes of safeguarding your claim to Entrepreneurs’ Relief. You need to prove that you were an employee within one year of the date you disposed of your interest in a limited company. That is one of a number of tests.
How Could A Members Voluntary Liquidation Save You Tax?
What on earth has a Members Voluntary Liquidation got to do with the title of this post I hear you say.
A Members Voluntary Liquidation can be a tax efficient procedure for a company that has been successful, left with a pile of cash in its bank account, just waiting for its members to get a hold of.
The route commonly adopted is for the company to be liquidated and a Liquidator appointed. Provided the shareholders can satisfy the tests laid down by legislation, then the taxpayer (shareholder) is in for a potential treat. They can be taxed at 10% on the capital gain compared to much higher rates of tax if you cannot satisfy the requirements. Worthy of some consideration? Well, let’s see how things might take an unwelcome course for the taxpayer if that employment contract is unavailable.
What Happened To Bglobal Plc?
Let’s have a look at the company Bglobal Plc (“the Company”) which was at the heart of Kennedy v HMRC. Mr Kennedy was CEO and then later Non-Executive Chairman. The Company went into Members Voluntary Liquidation (“MVL”) on 17 August 2015. Its Statutory Declaration of Solvency had a sumptuous figure declared for cash at bank of £2,994,842.
An essential ingredient of a claim for Entrepreneurs’ Relief (now called Business Asset Disposal Relief), where a company shareholding is concerned, is that within one year of the relevant disposal of your interest, the relevant shareholder seeking the tax relief, was an employee or officer of a relevant trading company (“the Employee or Officer Test”). This is set out in Section 169H Taxation of Chargeable Gains Act 1992.
In the case of Kennedy v HMRC, Mr Kennedy’s appeal was against HMRC’s refusal to accept the claim for Entrepreneurs’ Relief on his personal tax return. He was not held to have met the Employee or Officer Test.
What Happened To Mr Kennedy?
In 2014-15 he made a disposal of shares in Bglobal realising a taxable gain of £2,555,589. In 2015-16 he made a second disposal of shares in Bglobal realising a taxable gain of £449,397. Mr Kennedy claimed entrepreneurs’ relief in relation to both disposals in his tax returns for the relevant years. HMRC opened enquiries into those returns in January 2017 and on 24 July 2018 closure notices were issued denying the relief claimed by Mr Kennedy.
Peter Kennedy (“PK”) said that he was an employee. Indeed his Counsel, Michael Ripley made the follow key points on this front on his behalf:
- PK had a written service contract.
- A service agreement was never properly terminated.
- As a matter of fact and law PK was an employee at the date of the disposals.
When PK ceased to be CEO of the Company in 2009 and then became Non-Executive Chairman it seems that his services were provided through a personal services company. It seems that on advice for tax efficient purposes he structured matters in this way.
How The Employment Contract Issue Developed
It was suggested by PK that his contractual arrangements with the Company were split between the Directorship and consultancy.
However, it was interesting to note that there appears to have been some confusion about PK’s employment contract with the company after 2009. The judgment had this to say:
Mr Kennedy’s evidence was that he also entered into a new service agreement with Bglobal in 2009. There was no copy of any such agreement in evidence but Mr Kennedy relies upon certain “draft master executive agreements” from 2009 and 2010.
The evidence included an unsigned service agreement dated 1 November 2009 on the cover page. The cover page and signature page identified this as a service agreement between Mr Kennedy and Bglobal. However, the body of the agreement identified Nicholas Kennedy as the employee being appointed to serve as chief financial officer.
Mr Ripley explained on instructions that during HMRC’s enquiry, the November 2009 document had been produced to HMRC. It had been edited by Mr Kennedy to show his name on the cover page and signature page prior to being provided to HMRC. Apparently, this was done to show the form of Mr Kennedy’s service agreement with Bglobal. Whatever the circumstances, this was an extremely unwise course of conduct. We were provided with a copy of the unedited version.
The Amended Tax Return About The Employment Contract
An amended tax return was submitted as follows:
Cowgill Holloway were Mr Kennedy’s accountants and they submitted Mr Kennedy’s tax return for 2013-14 on 10 June 2014. It showed a gross salary from employment with Bglobal of £6,000 and no income from PBK Consulting Limited. An amended return for 2013-14 was submitted on 20 January 2015. This showed gross income from employment with Bglobal of £2,253 and also the following narrative in the “white space” on the form:
“Bglobal PLC employment – additional information My employment was terminated on 15 August 2013”
Mr Kennedy’s tax return for 2014-15 was submitted on 30 January 2016 and showed employment income of £5,745 received from PBK Consulting Limited. His tax return for 2015-16 was submitted on 2 January 2017. These returns included the relevant disposals of shares in Bglobal and claims to entrepreneurs’ relief. Mr Kennedy identified in the white space that he was a director of various companies but that he did not receive payments or benefits from those companies. He did not identify any employment with Bglobal from which he did not receive any payments or benefits.
The key point was that in order for PK to succeed from the Court’s point of view of Entrpreneurs’ Relief, he would need to show he was employed at 15 August 2013 and for a period thereafter.
It seems that the amended tax return was powerful evidence as to what had happened:
On 20 January 2015 when Mr Kennedy’s amended tax return was submitted it seems clear that Mr Kennedy considered that his employment with Bglobal had terminated on 15 August 2013. In our view that was a correct interpretation of events. His position as a director had ceased on that date when he was removed by the shareholders. There was no other employment at that time. In so far as Mr Kennedy’s position as a director might be considered an employment for the purposes of section 169I TCGA 1992, we find that it was terminated when he ceased to be a director. No other formalities were required.
Conclusions: How An Employment Contract Could Save You A Fortune In Tax
We can see from this case that the main issue on this appeal was whether or not PK was an employee of the Company from 15 August 2013. The First Tier Tax Tribunal held he was not.
If a shareholder of a limited company is disposing of a greater than 5% interest then they will need to show that they were an officer or employee to qualify for Entrepreneurs’ Relief.
It is difficult to imagine a clearer and more persuasive way to demonstrate that a person qualifies as an employee other than production of a signed and dated contract of employment.
In the case of Entrepreneurs’ Relief the loss of a tax saving by virtue of the absence of cogent evidence of an employment contract could mean a fortune in tax savings potentially going down the drain.
What Next? Expert Advice At Your Fingertips
If you are in need of advice on a Members Voluntary Liquidation and how Entrepreneurs’ Relief could help you, our CEO Elliot Green will be able to help you. Do not hesitate to Contact Us via email at contact@oliverelliot.co.uk or by calling 020 3925 3613.
Disclaimer: The comments in this post ‘How An Employment Contract Could Save A Fortune In Tax’ is not legal advice and ought not be relied upon as such. No liability is accepted by the author for any reliance placed upon this post ‘How An Employment Contract Could Save A Fortune In Tax’. You should seek independent legal advice to consider the discrete facts of your scenario.
