Director fails to get tax relief due to timing of resignation

A director has failed to get Entrepreneurs’ Relief on the sale of his shares because of the timing of his resignation and the date of his company’s shareholder meeting.

The director was one of the founding shareholders of his company. In 2008, he decided to leave the business and in February 2009, it was agreed that the company would purchase most of his shares.

The general meeting where it was formally resolved that the company would purchase shares didn’t take place until 29 May 2009. On the same day, the director signed a compromise agreement for the termination of his employment.

However, Companies House papers stated that the effective date of his resignation as a director was 28 February 2009.

The director declared the share sale in his self-assessment tax return and claimed Entrepreneurs’ Relief under the Taxation of Chargeable Gains Act 1992.

HMRC refused relief on the grounds that he had not been an officer or employee of the company throughout the period of one year ending with the disposal of his shareholding.

The issue was whether there had been an unconditional contract for the disposal of the shares by 28 February 2009 when the director had effectively stopped working.

The First Tier Tribunal ruled in favour of HMRC. It held that under the law, the company was incapable of entering into a valid contract to purchase the shares until a formal resolution had been passed.

Irrespective of the terms that might have been agreed between the directors in February 2009, the company lacked the authority for that agreement to constitute a contract for purchase until the move was ratified at the shareholders’ meeting on 29 May.

The director ceased work on 28 February. Consequently, he was not a director or employee throughout the year leading up to the disposal of his shares on 29 May 2009 and therefore did not meet the statutory condition for Entrepreneurs’ Relief.

Please contact Simon Porter if you would like more information about the issues raised in this article or any aspect of company law.