Factual and Procedural Background
The Appellant appealed against a decision by the Respondents disallowing entrepreneurs relief (ER) in respect of a capital gain on a disposal of shares in the tax year 2009-10. The appeal was submitted late but was admitted out of time with no objection from the Respondents.
The Appellant's self-assessment return recorded a disposal of shares in Company A on 7 July 2009, including a claim for ER. The Respondents issued a closure notice effectively disallowing ER on the basis that the Appellant was not, throughout the one-year period ending with the disposal, either an officer or employee of Company A, as required by the relevant tax legislation. This decision was upheld on internal review, and the Appellant appealed to the Tribunal.
The Appellant had been joint managing director of Company A until resigning in December 2007 due to financial difficulties. After resignation, the Appellant continued involvement in sourcing new business and was intended to receive commissions, although ultimately received dividends instead. The business was sold in July 2009, with the Appellant holding approximately 13.5% of the shares.
Oral evidence was given by the Appellant and a former director and shareholder of Company A. The former director confirmed the Appellant's ongoing involvement in business dealings and strategic input, though the Appellant was not formally reinstated as director after resignation.
Legal Issues Presented
- Whether the Appellant was an officer or employee of Company A throughout the one-year period ending on the date of disposal of shares, as required for entrepreneurs relief under TCGA 1992, section 169I(6)(b).
- Whether the Appellant qualified as a de facto director of Company A during the relevant period.
- Whether the Appellant was an employee of Company A during the relevant period despite absence of formal remuneration.
Arguments of the Parties
Appellant's Arguments
- The Appellant contended he was both an employee and a director of Company A in the twelve months before the share disposal.
- Regarding employment, the Appellant relied on three irreducible conditions: personal obligation to provide work, mutuality of obligation, and subjection to employer's control, citing relevant case law including Express & Echo v Tanton, Clark v Oxfordshire Health Authority, and Ready Mixed Concrete Ltd v Minister of Pensions.
- The Appellant argued that although he did not demand commission payments, the Company had an obligation to pay commissions and provided valuable consideration such as a laptop, phone, and internet access.
- Regarding directorship, the Appellant relied on the definition of de facto director from Gemma Ltd v Davies and other authorities, asserting he undertook functions that only a director could discharge, exercised real influence in corporate governance, and was recognized by third parties as a decision-maker for the Company.
- The Appellant pointed to internal communications from the Respondents suggesting they considered his de facto directorship plausible.
Respondents' Arguments
- The Respondents accepted all statutory conditions for ER except the requirement that the Appellant was an officer or employee throughout the relevant one-year period, contending he ceased to be so in December 2007.
- On directorship, the Respondents relied on the distinction between de facto and shadow directors as explained in Holland v HMRC and other authorities, arguing the Appellant did not assume the status or functions of a director but was rather a significant shareholder whose influence did not equate to directorship.
- They emphasized that important tasks performed by the Appellant could have been done by any trusted person empowered by the board and that the Appellant was under the control of the directors without authority to unilaterally bind the Company.
- On employment, the Respondents argued the Appellant lacked remuneration required for a contract of service under Ready Mixed Concrete, noting no evidence of payments or employer obligations such as insurance, and that use of a personal email address was inconsistent with employment.
- The Respondents maintained the onus was on the Appellant to prove he was an officer or employee during the relevant period, which they contended he failed to do.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Express & Echo v Tanton [1999] IRLR 367 |
Personal obligation to provide work in an employment contract. |
Used to support the requirement that the Appellant personally provided work to Company A. |
| Clark v Oxfordshire Health Authority [1998] IRLR 125 |
Mutuality of obligation between employer and employee. |
Applied to argue the existence of mutual obligations despite lack of formal remuneration. |
| Ready Mixed Concrete (South East) Ltd v Minister of Pensions [1968] 1 All ER 433 |
Tests for existence of a contract of employment including remuneration and control. |
Framework used to assess whether the Appellant was an employee despite receiving dividends instead of commission. |
| Gemma Ltd v Davies [2008] EWHC 546 (Ch) |
Definition and characteristics of a de facto director. |
Considered by the Appellant to establish de facto directorship; court analyzed and found criteria not met. |
| Holland v HMRC [2010] UKSC 51 |
Definition and distinction between de facto and shadow directors; corporate governance concept. |
Key authority for defining director status; court applied its principles to reject de facto and shadow directorship claims. |
| Smithton Ltd & Naggar v Townsley & others [2014] EWCA Civ 939 |
Clarification of de facto and shadow director definitions; focus on actual assumption of director status and functions. |
Guided the court’s approach in determining that the Appellant was not a de facto or shadow director. |
| Corbett v HMRC [2014] UKFTT 298 (TC) |
ER available to a taxpayer receiving no remuneration. |
Supported the Appellant’s argument that remuneration need not be monetary to establish employment. |
| Secretary of State for BIS v Knight (UKEAT/0073/13/RN) |
Employment contract may exist without remuneration if other consideration is present. |
Used to argue that non-monetary consideration such as provision of equipment sufficed for employment. |
| Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 |
Functions that can only be discharged by a director are necessary to establish de facto directorship. |
Referenced in assessing whether the Appellant’s activities amounted to de facto directorship. |
| Re Kaytech International plc [1999] 2 BCLC 351 |
Requirement of ‘real influence’ in corporate governance for de facto director status. |
Applied to evaluate the Appellant’s influence on Company A’s governance. |
| Re Richborough Furniture Ltd [1996] 1 BCLC 507 |
Benefit of doubt to person alleged to be de facto director; caution not to strain facts. |
Considered but court found evidence insufficient to conclude de facto directorship. |
| Secretary of State v Deverell [2001] Ch 340 |
Role of de facto or shadow director need not cover whole company activities. |
Supported the view that partial involvement is relevant but insufficient here for de facto directorship. |
Court's Reasoning and Analysis
The court first identified the statutory requirements under TCGA 1992 for entrepreneurs relief, focusing on whether the Appellant was an officer or employee during the qualifying one-year period prior to disposal of shares.
Regarding directorship, the court adopted the definitions and tests from recent authorities, including the Court of Appeal’s decision in Smithton Ltd and the Supreme Court’s decision in Holland v HMRC. It distinguished between de jure, de facto, and shadow directors, emphasizing that a de facto director must have assumed the status and functions of a director and exercised real influence in corporate governance.
The evidence showed the Appellant had resigned as director in December 2007 and was not reappointed. While he maintained significant influence as a major shareholder and was consulted on strategic matters, the court found that he did not act on an equal footing with directors nor assume the responsibilities of a director. The Appellant’s involvement was insufficient to constitute de facto directorship, and he was not a shadow director because he did not direct or instruct the board and was not held out as a director by the Company.
Regarding employment, the court applied the three-part test from Ready Mixed Concrete, considering whether the Appellant provided work personally, whether there was mutuality of obligation, and whether he was subject to the Company’s control. The court found the Appellant’s ongoing work sourcing business, the agreement to receive commissions (even if not demanded), and the provision of equipment and internet access constituted valuable consideration. The Company exercised control over his activities, especially regarding sensitive broker-to-broker transactions.
Despite the absence of formal remuneration, the court accepted authorities that employment contracts may exist without monetary payment if other consideration is provided. The evidence did not contradict the existence of an employment relationship.
On balance, the court concluded that the Appellant was not an officer (director) but was an employee of the Company throughout the relevant period, fulfilling the statutory condition for entrepreneurs relief.
Holding and Implications
The appeal is ALLOWED.
The court held that the Appellant qualified as an employee of Company A throughout the one-year period ending with the disposal of shares, satisfying the statutory requirement under TCGA 1992 section 169I(6)(b) for entrepreneurs relief. However, the Appellant was not a de facto or shadow director during that period.
The direct effect of this decision is that the Appellant is entitled to entrepreneurs relief on the capital gain from the share disposal. The decision does not establish new precedent but clarifies the application of existing principles regarding employment status and de facto directorship in the context of entrepreneurs relief claims.