Khan v Revenue & Customs (Rev 1)

For liability under section 385(1)(b) of the Income Tax (Trading and Other Income) Act 2005, either actual receipt of a company distribution or entitlement to it is sufficient. Entitlement means that the distribution belongs to the person. Neither receipt nor entitlement contains an additional requirement of practical control over the money or beneficial enjoyment in the group-relief sense.

The Ramsay approach remains dependent upon the purpose of the statutory provision. Where the provision focuses on receipt or entitlement when a particular distribution is made, related transactions, the funding of the share acquisition, and the later use of the money do not alter the identity of the liable person.

The appellant bought all the shares in a company from its former shareholders. Less than 40 minutes later, the company bought back 98 of those shares from him. The company’s payment of £1.95 million was effected by set-off against a loan which had enabled the appellant to buy the shares from the former shareholders.

HMRC treated the buy-back payment as a taxable distribution. The First-tier Tribunal dismissed the appellant’s appeal against a closure notice. The Upper Tribunal set aside and remade that decision but again rejected the appeal: [2020] UKUT 0168 (TCC).

The central issue was whether, under section 385(1)(b) of the Income Tax (Trading and Other Income) Act 2005, the appellant was the person receiving or entitled to the distribution, notwithstanding the connected share-sale arrangements and his lack of practical control over the cash transfer.

1. Appeal dismissed. The Upper Tribunal was right to hold that the appellant was liable for income tax on the distribution arising from the company’s purchase of 98 shares from him.

2. Section 385(1)(b) of the Income Tax (Trading and Other Income) Act 2005 identifies the person actually receiving the distribution and, if different, the person to whom it belongs. Either receipt or entitlement suffices. Entitlement means the right to the taxable income; it does not require practical control over the money or beneficial enjoyment of the kind considered in group-relief legislation.

3. The purposive approach in WT Ramsay v Inland Revenue Commissioners, [1982] AC 300, as explained in UBS and others v Commissioners for HMRC, [2016] 1 WLR 1005, did not require the sale and buy-back to be treated as a single distribution to the former shareholders. Whether commercially linked steps are considered as a whole depends on the statutory provision. Section 385(1) focuses on actual receipt or entitlement at the time the distribution is made.

4. At that time the appellant was the sole legal and beneficial owner of the shares and the contractual seller under the buy-back agreement. The former shareholders had sold their shares to him and had rights only to the price payable under that separate sale agreement. They had no right to the distribution.

5. Set-off of the distribution against the appellant’s obligation to repay the company loan constituted receipt and conferred a real benefit by discharging that obligation. A contractual commitment to use money in a particular way after receipt does not displace the recipient’s entitlement. The genuine legal steps could not be recharacterised as a direct company buy-back from the former shareholders.

• Court of Appeal (Civil Division) Dismissed the appellant’s appeal and upheld the Upper Tribunal’s conclusion that he was liable under section 385(1)(b) of the Income Tax (Trading and Other Income) Act 2005: [2021] EWCA Civ 624.
• Upper Tribunal (Tax and Chancery Chamber) Set aside and remade the First-tier Tribunal’s decision after identifying an error of law in its construction of section 385(1)(b), but dismissed the appellant’s appeal against the closure notice: [2020] UKUT 0168 (TCC).
• First-tier Tribunal Dismissed the appellant’s appeal against HMRC’s closure notice. No citation was stated in the judgment.