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April 30, 2014

Entrepreneurs' Relief - Employee Not on Payroll

A key criteria for the application of Entrepreneurs' Relief for the sale of shares in a trading company, is that the vendor must be an officer or employee of that company for the whole year prior to sale.

In the recent first tier tribunal case of Susan Corbett v HMRC, Mrs Corbett had sold a > 5% holding of ordinary shares in a trading company on 7 October 2009.  However, she had been taken off the payroll of that company at the end of February 2009.  Therefore HMRC determined that she could not have been an employee for the period of a whole year prior to the date of sale and Entrepreneurs' Relief was not available to her.

What Happened

Mrs Corbett had been working for the company as an administrative assistant to her husband who was the sale director.

It became evident that the potential purchasers of the company did not like spouses working together in their businesses.  Therefore a decision was made that whilst Mrs Corbett would still continue to carry out duties for the company she would no longer be shown on the payroll, after the company's year-end which was February.

To compensate the Corbetts for this, Mr Corbett would receive a pay rise from the company, which would effectively include Mrs Corbett's remuneration.

Tribunal's Finding of Facts

The tribunal were influenced, as to how they found the facts, by a letter from the Financial Controller of the company at the time that Mrs Corbett was removed from the payroll.

He was seen to be a good independent witness to the case because it did not matter to him or his employer, whether Mrs Corbett's claim for Entrepreneurs' Relief was successful.

In his letter he confirmed that Mrs Corbett's salary had effectively been transferred to Mr Corbett and that Mrs Corbett had continued to carry on duties up to the sale.  He also confirmed the reasoning why Mrs Corbett was taken from the payroll.

Hence the Tribunal found that Mrs Corbett remained as an employee right up to the date of sale because she continued to carry out her duties for which the Corbetts were remunerated.

It would have been interesting to find out what the Tribunal would have decided if there are been no evidence of remuneration for her duties.  Relevant HMRC guidance at CG64110 was quoted during the case, but the Tribunal didn't have to pondered over its application -  "There are no specific requirements regarding either working hours or the level of remuneration.   The condition is simply that the individual should be an officer or employee."

See our December 2014 Tax Update for more recent cases.


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