Cautionary Tale Illustrates the Necessity of Professional Tax Advice

A Court of Appeal case concerning a businessman who was on the receiving end of an unexpected six-figure tax demand served as a cautionary tale that graphically illustrated the importance of seeking specialist advice before entering into commercial deals that might have adverse tax consequences.

The man wished to acquire control of a company, and its shareholders – the vendors – wished to exit the business with its cash reserves. To achieve those objectives, they entered into a series of linked share sale and buyback transactions. The complex deal was structured in such a way that £1.95 million of the company's money was paid into the man's bank account, where it remained for only a few minutes before being transmitted onwards to the vendors.

He proceeded on the assumption that the consequences of him having to pay out the money almost as soon as he received it would be that the vendors would be liable to pay Income Tax on that sum instead of him. HM Revenue and Customs, however, took the opposite view and issued him with a tax demand for almost £600,000. His challenge to the bill was subsequently rejected by the First-tier and Upper Tribunals.

Appealing against that outcome, he asserted that he had acted as a mere conduit for the money and that his intermediate role in the dealings should be ignored. Urging the Court to consider the true substance of the closely connected transactions, he argued that, viewed realistically, it was the vendors who had received and were entitled to the money.

Rejecting his appeal, however, the Court ruled that he received a taxable distribution from the company, within the meaning of the Income Tax (Trading and Other Income) Act 2005. On a true reading of Section 385(1)(b) of the Act, his receipt of the money sufficed to create a tax liability, whether or not he was entitled to it and however brief the period in which he was in possession of it.

The Court expressed sympathy for the man and described the case as a cautionary tale that underlined the need for professional tax advice in such situations. The transactions could not, however, be characterised as a buyback arrangement made directly between the vendors and the company, ignoring the genuine role that he had played and disregarding his legal rights and obligations.