Nursery school owner loses £196k tax dispute

Nursery school owner loses £196k tax dispute

Mar 21, 2024

The owner of several nursery schools has lost a case at the First Tier Tribunal over capital gains tax liability related to a claim for £196,902 in entrepreneurs’ relief

This appeal concerned a claim for entrepreneurs’ relief (ER) made by Frances Delaney in her tax return for the tax year ended 5 April 2016, which was refused by HMRC.

This related to the sale of Delaney’s business operating two nursery schools, St James and St Clements, to a close company called Miss Delaney’s Nursery Schools Limited (MDNSL) on 31 August 2015.

The nursery schools were valued at £1,105,000 on 12 January 2016 based on the accounts.

Much of the tribunal hearing focused on  the timings of the transaction, the lack of paperwork or contracts, including a business sale agreement and the terms of the purported agreement prior to 3 December 2014.

In oral evidence Ms Delaney admitted that she was focused on running the schools and ensuring continuing education provision, and had received advice from her accountant to ‘incorporate her business’.

The close company, MDNSL, was a dormant company and the accounts for year end August 2014 recorded assets of £60,000 cash and a loan of £59,900 from the appellant. At this time, there was ‘no contingent asset or liability associated with a purported right to buy and obligation to pay for the business’, the tribunal said. Subsequently MDNSL started trading on 1 September 2015.

Prior to 3 December 2014, a taxpayer who disposed of a business, including goodwill, to a limited company to which they were connected was entitled to claim entrepreneurs’ relief thereby reducing the rate of capital gains tax from 28% to 10%.

However, the rules changed and from 3 December 2014, entrepreneurs’ relief could not be claimed on connected company disposals as set out in section 169L Taxation of Chargeable Gains Act 1992 (TCGA).

Under section 28 TCGA the time at which a disposal is treated as made is the date on which the contract giving rise to the disposal was made.

In this appeal, Delaney argued that there was a contract for disposal prior to 3 December 2014.

However, she was unable to produce a written agreement between herself and MDNSL when HMRC asked for the document. This meant that HMRC determined that there was no effective contract for disposal prior to the time of actual disposal which was effective from 1 September 2015.

HMRC refused the appellant’s claim to entrepreneurs’ relief in a closure notice issued under s28A Taxes Management Act 1970 on 29 March 2021. This notice amended Delaney’s capital gains tax calculation increasing tax payable by her in the sum £196,902.

On the evidence and legal arguments presented the tribunal was persuaded that the appellant had failed to show that there was a contract for disposal prior to 3 December 2014.

Delaney’s barrister, Roaul Downey, who was a barrister but ‘appearing as partner of Ms Delaney’ argued that ‘the simple act of incorporating the company with the sole intention to effect the disposal such that MDNSL then operate the business was enough to manifest mutual assent of agreement to make the disposal’.

The tribunal was told that some time in 2011 the appellant was advised by Dick Watson from accountancy firm, Menzies, who was ‘her personal adviser for many years’ that ‘she should consider transferring her business to a limited company so as to protect her from personal liability arising from the business and with a view ultimately to selling the business in due course.’

Judge Amanda Brown KC noted: ‘We have no further details as to the advice provided. Ms Delaney had little understanding of the basis on which incorporation protected her.’

‘Her witness statement had, in our view, clearly been drafted for her and in parts amounted to impermissible submission which she was then ill equipped to address in cross examination.’

The Judge also said it would have been beneficial to have heard from a representative from Menzies, adding: ‘It is unfortunate that we did not have the benefit of evidence from Menzies, in particular Mr Dick Watson who had been an advisor to the appellant for many years’.

In conclusion, the judge determined that the appellant had ‘failed to meet the burden of proof to establish that any contract was made between the appellant and MDNSL for the disposal of the goodwill in the appellant’s business prior to 3 December 2014’.