Kevin Read reviews a recent case dealing with three distinct areas of tax.
The owner of Hull City FC, who is perhaps best known for his unsuccessful attempts to change the club’s name to Hull Tigers FC, has recently been the appellant in Assem Allam v Revenue and Customs [2020] UKFTT 0026 (TC).
That case involved three different issues, namely entrepreneurs’ relief (ER), the ‘transactions in securities’ (TIS) anti-avoidance rules (FA 2010, Sch 12) and business investment relief (BIR) (ITA 2007,s 809VA), the latter of which allows non-UK domiciled remittance basis users to remit income or gains to the UK without it being regarded as a taxable remittance.
Allam Marine Ltd (AML), an engineering company, was owned by Allamhouse Ltd, a company owned by Dr and Mrs Allam. Allam Development Ltd (ADL), a property development company, was owned by Dr Allam. In July 2011, Dr Allam transferred shares in ADL to AML for £4.95 million.
Entrepreneurs’ relief
Dr Allam claimed ER of £524,000. HMRC rejected the claim arguing, in accordance with its guidance, that the company’s activities included ‘to a substantial extent, activities other than trading activities’. Under HMRC’s guidance 'substantial' meant more than 20%. Dr Allam argued that this percentage should be at least 50%.
The First-Tier tribunal (FTT) confirmed that non-trading activities did not need to predominate. ‘To a substantial’ extent should be given its ‘ordinary and natural meaning’ in the context of the company's overall activities. ADL’s rental income and related asset base showed that its property investment and rental activities were, indeed, substantial, so ER was denied.
Transactions in securities
HMRC issued a ‘counteraction notice’ under the TIS rules, assessing income tax of £1.3 million. The TIS rules give HMRC the power to counteract an income tax or corporation tax advantage resulting from transactions made between close companies and their owners, where the main (or one of the main) purposes for undertaking a share-based transaction is tax avoidance.
HMRC accepted there was a commercial objective to the transaction (i.e. bringing the companies under common ownership) and that Dr Allam wanted to raise cash, both for his retirement and to make investments in Egypt. However, as the transaction could have been undertaken as a share exchange followed by a dividend, they argued he must have had as one of his main purposes the obtaining of an income tax advantage.
The FTT held that the reasons for the transaction were either commercial or personal but were notfor the purpose of obtaining an income tax advantage. The transaction could have been structured to include a dividend, but this did not imply that tax avoidance was one of the main motives. His appeal was allowed.
Business investment relief
Dr Allam was resident but not domiciled in the UK and thus entitled to use the remittance basis. Heloaned nearly £7 million, generated from income and gains made abroad, to Allamhouse Ltd, claiming BIR. This relief is available if remitted funds are used to make a qualifying investment in a UK company.
Subsequently, Allamhouse Ltd made payments totalling £2.9 million to Dr Allam. HMRC argued that these were loan repayments, which would cause a withdrawal of the BIR on those amounts and treat them as income or gains remitted to the UK. They sought additional income tax of £1.3 million. The FTT confirmed that the payments made by Allamhouse to Dr Allam resulted in the withdrawal of BIR. However, Dr Allam was entitled to double tax relief in respect of Egyptian tax paid on the amountsnow treated as having been remitted from abroad.
Practical tip
The remittance basis rules are complex – the detail is best left to experts in this area!
