If only “you had one job!”: no employment means no entrepreneurs’ relief

If only “you had one job!”: no employment means no entrepreneurs’ relief

Fri 09 Mar 2018

It’s often asserted that one of the easier entrepreneurs’ relief (ER) conditions to meet is that the owner of a qualifying shareholding must be an employee of the company throughout the year preceding the disposal of the shares or cessation of trading. But a shareholder can’t simply claim he was an employee throughout the relevant time: that employment must be genuine. In the First-tier Tribunal (FTT) case of Shannon v Revenue and Customs Commissioners the same point was relevant in relation to the predecessor of ER, business asset taper relief (BATR).

Shannon was a director/shareholder in a UK company, “Supercuts”, that was acquired by a US company, “Regis” in 1999. When avoidance schemes to reduce his CGT exposure proved ineffective he sought to claim he was employed by Regis and claim BATR. He met all the requirements for the relief except being an employee but he couldn’t produce any documentation to support his claim andRegis was unable to corroborate his version of events.

Shannon only began claiming to be an employee in 2011, i.e. 12 years after the sale and after it was clear that his CGT mitigation schemes would not work to eliminate his CGT charges. Perhaps this was not entirely surprising when he had not declared the sums received under the change of control arrangement as income (they were paid from the USA and not subject to PAYE). The one thing he could point to was that he received regular payments from Regis after the sale that he claimed amounted to salary, a salary for which he did not perform any duties.
The fact that he did not actually do any work for Regis would not have been fatal to his claim if he could have shown that he actually had a contract of employment buthe could not prove that and the payments were found to be traceable back to the contract for sale  of Supercuts.

The FTT concluded “. . . we find it difficult to see any substance in the purported contract of employment and conclude, on the balance of probabilities, that Mr Shannon was not employed by Regis and that the payments he received from Regis were . . . payments under the SPA and not employment income.”
There is a lesson in this case for any shareholder who wants to claim ER: “make sure that any employment contract is properly documented and factually supportable”.  The factual evidence supporting a claim for employment can be powerful evidence of employment, even in the absence of documentation.  Two examples of cases where individuals where held to be entitled to entrepreneurs’ relief despite not having formal contracts of employment or engagement as a director are:
Hirst v Revenue & Customs (2014), where an individual was held to be a director for entrepreneur’s relief purposes by virtue of his activity as a shadow director.
Susan Corbett v HMRC (2014), where Mrs. Corbett, who worked as a clerical assistant to her director husband, was removed from the payroll before the company was sold, but solely because the purchaser’s policy was not to employ spouses.  Her salary was rerouted to her husband and she continued her duties.  The FTT considered she met the entrepreneurs’ relief employment requirement notwithstanding these arrangements which did no more than camouflage the fact that her employment in reality had continued.

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