UT-2023-000116 - [2025] UKUT 00183 (TCC)

We summarise the background to this appeal. References in our decision to FTT [**] are references to the Decision, unless otherwise specified.

The facts are fully set out by the FTT at FTT [11]-[12] and can be summarised as follows.

The Taxpayers are entrepreneurs who have made successive investments, both independently and together, over a period extending over 30 years with a view to realising capital gains: FTT [11(1)].

In accordance with the EIS, the Taxpayers invested in a company called Xercise Ltd. Their initial investments were made between February 1996 and May 1998: FTT [11(2)].

Xercise Ltd’s activities changed over time, but throughout the Taxpayers were careful to preserve their EIS relief CGT benefit. After various iterations of Xercise Ltd’s role, and after further investors had become shareholders, at the end of 2009 the members of Xercise Ltd comprised a disparate group of 17 investors with differing preferences as to the extent to which they wished to realise their investment: FTT [11(3)-(10)].

Of the shareholders of Xercise Ltd as at the end of 2009, it was only the Taxpayers who had the benefit of the ongoing EIS relief CGT benefit. Therefore, there was a commercial need to segregate the groups of shareholders (the groups being those who could benefit from EIS relief, and those who could not).

This was effected by a voluntary liquidation of Xercise Ltd following the interposition of Xercise2 Ltd as a new holding company owning the entire issued share capital of Xercise Ltd: FTT [11(11)]. Each shareholding in Xercise2 Ltd was subscribed for by the previous shareholders in Xercise Ltd on a share-for-share basis, and the CGT treatment applying to the Taxpayers’ shares in Xercise Ltd was accordingly transferred to their shares in Xercise2 Ltd: FTT [11(12)].

Towards the end of 2014 and at the start of 2015, the Taxpayers, particularly Mr Allen, were concerned that a change of Government could bring with it changes in the tax code that would remove their ability to benefit from EIS relief: FTT [55], [11(41(b))] and [12(3)]. 

Therefore, in order to preserve their EIS relief, the Taxpayers sought to enter into the Share Buybacks (“the Buybacks”) with Xercise2 Ltd. The board minutes of a meeting of the directors of Xercise2 Ltd in March 2015 record that the draft accounts for the year ending 31 December 2014 disclosed a credit balance on the profit and loss account of some £36,733,000 meaning that the company had sufficient funds in order to effect the Buybacks: FTT [12(5)] and [11(16)].

By written resolutions dated 12 and 13 March 2015 the ordinary shareholders of Xercise2 Ltd approved the terms of the Buyback contracts with the Taxpayers: FTT [11(15)] and [(17)].

As a result, and on 16 and 17 March 2015, the Taxpayers entered into the following Buybacks:

The Buybacks were disclosed on each Taxpayer’s self-assessment return for the year ending 5 April 2015. As the consideration was capital and benefited from EIS relief, those returns were made on the basis that no CGT was payable on the consideration: FTT [11(20)]. HMRC first opened enquiries into the returns in January 2017. Those enquiries were closed without amendment in September 2017: FTT [11(21)].

It was only after later correspondence that on 31 March 2021 HMRC issued the counteraction notices and assessments that are the subject of this appeal. Following a review, HMRC upheld their decision, and in November 2021 the Taxpayers appealed to the FTT: FTT [11(22)-(24)].

The FTT recorded the evidence of the Taxpayers as to their motives. In summary:

The FTT made findings of fact (at FTT [12]) as to the purpose for which the Buybacks were entered into:

“12.

From this evidence we make the following further findings of fact:

(1)

EIS disposal relief is a valuable asset which [the Taxpayers] wished to preserve.

(2)

They structured the transactions set out at [(2)-(14)] above in order to achieve this.

(3)

The reason that the share buyback was undertaken in March 2015 was because of the second appellant's concern that the EIS disposal relief might be withdrawn following a change of government.

(4)

A main purpose of the share buybacks in 2013 had been to enable [the Taxpayers] to crystallise or bank EIS disposal relief.

(5)

A main purpose of the share buybacks in 2015 was to enable [the Taxpayers] to crystallise or bank EIS disposal relief.

(6)

If [the Taxpayers] had been able to crystallise this relief without the necessity of undertaking a share buyback or some other transaction, they would have done so.

(7)

The extraction of value from the company was not a purpose of the share buyback.

(8)

At the date of the share buyback, [the Taxpayers] had known for many years that dividends from an EIS company would attract income tax.

(9)

At the date of the share buyback [the Taxpayers] had known for many years that any consideration for a share buyback which was greater than a return of capital would be treated as income and would be subject to income tax.

(10)

The consideration payable for the share buyback was calculated to ensure that it was an amount which was not greater than a return of capital. And [the Taxpayers] knew that it would be treated as capital and so there would be no amount which would be treated as income. Furthermore, [the Taxpayers] knew that there would be no CGT on the consideration due to EIS disposal relief.

(11)

[The Taxpayers] understood that the effect of the counteraction notices and the assessments was that HMRC were assessing them to income tax on the share buyback consideration as if it had been treated as an income distribution and not capital (and so subject to income tax rather than CGT from which they benefited from EIS disposal relief which they had claimed in their tax returns).” (FTT [12])

Finally, in relation to HMRC’s secondary argument (see below) the FTT held that obtaining an income tax advantage was “not a main purpose of entering into the share buyback. It was a consequence of doing so.[The Taxpayers’] main purpose was to crystalise [an] EIS disposal.” (FTT [54] and [55])