Article

The strange case of Mr B’s clearance

Key points

• HMRC approved a clearance application for the company’s purchase of the taxpayer’s shares but then opened an enquiry, focusing on the purchase in isolation of the circumstances.
• HMRC found that the clearance was void because ‘the price paid for the shares was considerably more than their market value’ and thus was for the benefit of the taxpayer.
• The First-tier Tribunal found in favour of the taxpayer, basing its judgment on the company’s motive in buying the shares and the wider circumstances of the sale rather than on the price paid.
• The likely point of law in this case is whether the purchase must be looked at in isolation, rather than in the wider context.
• Having worked on corporate transactions for over 30 years, I have some experience in applying to HMRC for statutory clearances for a range of transactions, such as share exchanges, schemes of reconstruction and company purchases of own shares. Indeed, as an Inland Revenue tax inspector, I also had a role on the other side of the desk, considering applications for clearances for exempt distribution demergers (before the formation of the ‘one-stop shop’ clearance unit). In all that time, I have never seen a transaction queried by HMRC after clearance has been granted and the transaction has been carried out.
• It was therefore both surprising and intriguing to read about Mr Boulting’s case, where HMRC declared a clearance to be invalid and charged him to income tax on the bulk of the proceeds from a company purchase of its own shares.
• There are two judicial decisions to look at: an application for judicial review in the High Court in 2020 (R (on the application of J Boulting and another) v CRC [2020] STC 2253), and the decision of the of the First-tier Tribunal (FTT) on the substantive issue, published in October 2025 (J Boulting (TC9673)).
• Company purchase of own shares
• By way of a refresher, if an unquoted trading company, or the unquoted holding company of a trading group, buys back its shares from a shareholder, the extent to which the consideration exceeds the amount subscribed for the shares (nominal value plus any share premium) is treated as a distribution for tax purposes (CTA 2010, s 1000(1)B(a)), and charged to income tax at the dividend rate. However, under certain circumstances the consideration can be treated as capital and subject to capital gains tax (CTA 2010, ss 1033 et seq). This treatment is subject to a number of detailed conditions, one of which is that the buyback of the shares must be for the benefit of the trade of the company or group (CTA 2010, s 1033(2)(a)). That requirement was the focus of this case.
• There is a facility to obtain a pre-transaction clearance from HMRC that the conditions are (or are not) satisfied (CTA 2010, s 1044). It was of some relevance to the case that, while HMRC’s guidance (Statement of Practice 2 of 1982) requires the clearance application to state the purchase price of the shares, it does not require a valuation of the company.
• Background
• John Boulting owned 50 shares in PSC, the holding company of a trading subsidiary that provided training services. His son Mark owned 25 shares, his son Andrew had a share, his late wife’s estate had four shares and the other 20 shares were owned by a Mr Rowlands and his wife Julia. The shares were a mixture of A and B shares, although this is not relevant to the case. In 2013, it was agreed that John would step down and allow Mark to take over. This was prompted by internal disputes as to the future of the group and Mark’s inability to run the group as he felt appropriate, given his father’s majority control.
• Mark carried out a valuation of the company and came up with a figure of around £34m. The amount that could be paid out to John was limited by the cash reserves of around £5m, and it was agreed that the company would buy back shares worth this amount, and that John would then give the rest of his shares to Mark. A clearance application was submitted to HMRC and approved in March 2014.
• Subsequently, partly as the result of interest in the company from external buyers, there were further negotiations as to the value of the company, and a revised valuation of £60m was agreed. Given the limitation as to the amount the company could pay out to John for purchasing his shares, it was agreed that John would sell eight shares back to the company at £600,000 each (totalling £4.8m) and give Mark 38 shares. John retained four shares that were gifted to his grandchildren in 2016.
• Another clearance application was submitted to HMRC and approved in October 2014. The transaction completed in January 2015.
• The dispute
• The case concerned the eight shares that were bought back by the company.
• In October 2016, HMRC opened an enquiry into John’s tax return and eventually issued a closure notice charging the majority of the £4.8m to income tax as a distribution (presumably excluding the nominal value). Its conclusion was that ‘the clearance was void on the basis that the share value used by the company was materially greater than the market value and, as this had not been disclosed in the clearance application, HMRC were not bound by the clearance’. (NB: All quotes are from the FTT decision unless stated otherwise.)
• HMRC‘s case, as reported in the High Court, was that the shares were each worth £66,900 and not £600,000 (para 2 of the High Court decision). HMRC’s view was that ‘as the price paid for the shares was considerably more than their market value it cannot be for the benefit of the company’s trade but rather for the benefit of Mr Boulting’. As this was a material fact that had not been disclosed in the clearance applications, the clearance was rescinded and the conditions for capital treatment were not satisfied.
• It is not clear from either case report what prompted HMRC’s enquiry, but I assume that the figure of £66,900 per share came from a valuation exercise carried out by HMRC. Their valuation implied that the company was only worth £6,690,000, which is much lower than the initial valuation of £34m for the company considered during the negotiations, let alone the £60m on which the actual deal was based. This is particularly out of line, given that the valuation agreed for the buyback was partly based on a third-party offer.
• High Court
• John’s first port of call was the High Court, where both he and the company applied for judicial review of HMRC’s decision to void the statutory clearance. (While voiding the clearance did not affect the company from a tax perspective, it was party to the proceedings because it had applied for the clearances for the transaction.) HMRC justified the voiding of the clearance on the basis ‘that it was made without full or accurate disclosure of facts or circumstances, namely that the shares in question were each worth £66,900 and not £600,000 which was the valuation which the claimants relied upon in applying for the clearance’. John’s response was that neither the legislation nor HMRC’s guidance required a valuation of the shares, only details of the price paid. Furthermore, the parties to the transaction agreed on the price at the time of the transaction and there was no reason to think that ‘HMRC would later take a different view of valuation, which in any event was irrelevant to the clearance procedure. The company could not disclose what it did not then know.’
• In short, Jarman J refused the application for judicial review, as there was a suitable alternative remedy, given that John had already lodged an appeal with the FTT. This followed the reasoning of the decisions in R (oao Glencore Energy) v HMRC [2017] EWHC 1476 (Admin) and [2017] EWCA Civ 1716. In the Court of Appeal, Sales LJ said that:
• ‘… the principle is based on the fact that judicial review in the High Court is ordinarily a remedy of last resort, to ensure that the rule of law is respected where no other procedure is suitable to achieve that objective … If parliament has made it clear by its legislation that a particular sort of procedure or remedy is in its view appropriate to deal with a standard case, the court should be slow to conclude in its discretion that the public interest is so pressing that it ought to intervene to exercise its judicial review function along with or instead of that statutory procedure.’
• In John’s case, the particular procedure or remedy was the FTT. While the FTT cannot decide matters of public policy, Jarman J agreed with HMRC that ‘if Mr Boulting satisfies the FTT that his tax assessment in relation to the purchase price of the shares should be on the basis of CGT rather than IT, as indicated in the clearance, then he will succeed in achieving the same remedy as in these proceedings’. So the case proceeded to the FTT although, for reasons that are not reported, it took four years to get there (and another year for the decision to be handed down, due to the ill health of one of the judges).
• First-tier Tribunal
• The FTT considered the following points before making a decision.
• Was there a trade benefit?
• HMRC’s first argument was that the trade was profitable and growing, so the share buyback was not necessary to benefit the trade, and there was no evidence that John had to be bought out to resolve deadlock or unlock investment. To my mind, this is an unusual approach. I’ve worked on a great many transactions, and I’ve never seen HMRC contend that a share buyback was not necessary to benefit a trade because the trade was already successful. Usually, we carry out the buyback to ensure that incipient problems did not get to the point of adversely impacting the trade, on the basis that prevention is better than cure.
• Equally odd is the fact that HMRC accepted that ‘tension was hindering the Group’s progress … leading to the resignation of … a director of STG … and the threatened resignation … of a senior manager’. HMRC’s position seems, frankly, self-contradictory. Certainly, the FTT had no hesitation in preferring Mark’s evidence of the need to buy his father out so that Mark could take control of the group and make the investments that he considered necessary for the future of the trade.
• Having disposed of that particular point and having found that John’s exit was to benefit the trade, the FTT then had to consider the purpose of the purchase of shares by the company.
• Was it remuneration?
• The other argument from HMRC, adumbrated at the High Court hearing, was that the sale price of John’s shares was so far in excess of market value that ‘it could not be regarded as a payment whose whole or main purpose was to benefit PSC’s trade’ and that the excess was ‘to remunerate John Boulting for his historic investment and risk in the business’ (or in the FTT’s words, ‘to placate Mr Boulting’s ego and vanity’). John’s reply was that the payment ‘was wholly or mainly for the purposes of benefitting the trade, as it removed a majority shareholder who had been blocking investment and who would not relinquish key decision-making responsibility’, and that the price was not excessive.
• HMRC quoted from its Statement of Practice 2 (1982), which states that ‘if the company is not buying all the vendor’s shares save for the small number held back for sentimental reasons, it would seem unlikely that the transaction could benefit the company trade’. However, the FTT pointed out that this selective quote omitted the fact that the guidance assumed that the unsold shares would be retained by the shareholder, which is very different from the instant situation where John had given the rest of his shares to Mark (apart from the shares for his grandchildren). The FTT also noted that a statement of practice is not the law, it is simply HMRC’s view of the law, which view may not be shared by the judiciary.
• Overall, the FTT disagreed with HMRC‘s position and said that the legislation meant ‘that the only person whose purpose is relevant in this situation is that of the company’. In other words, did the company buy back John’s shares to benefit its trade? The motives of a seller ‘are not necessarily going to be concerned with benefiting the trade of the company that they are leaving’, and are not relevant in determining the purpose of the purchase of the shares by the company.
• The FTT accepted that the company had taken John‘s views into consideration, as would be the case in any negotiation, where it is important to be aware of the motivations of the vendor when making an offer. But they explicitly found that John’s ‘motivations were not a purpose of the purchase even on a subconscious level on the part of the directors’.
• Their conclusion was that ‘the purpose of the purchase for the company was neither to remunerate him for his historic investment nor to bolster his sense of pride. At most, these were factors that the company was aware that Mr Boulting considered important and so took into account as part of the process to achieve the object of the arrangements but we find that they were not an object of the arrangements.’
• Consideration of all the circumstances
• HMRC contended that the purchase of John’s shares by the company must be considered in isolation, without regard to the contemporaneous gift of shares to Mark. Put another way, HMRC’s position was that ‘what the legislation is focusing on is the payment by the company, so it’s that payment of £4.8m for only eight shares in relation to which the tribunal has to make its decision’.
• The FTT disagreed. It noted that the legislation ‘requires that the purchase of the shares is made wholly or mainly for the purpose of benefiting PSC’s trade’ (condition A in CTA 2010, s 1033(2)(a)), so the focus is on the purpose of the purchase, not just on the price paid, and it was necessary to look at all the circumstances of the purchase. Furthermore, the FTT took the view that there is nothing in the legislation that ‘precludes the trade benefit purpose from being achieved by the purchase of the shares in conjunction with one or more other actions’, such as the gift of shares to Mark at the same time.
• From the evidence given at the hearing, the FTT found ‘that the company’s purpose in undertaking the share purchase was to secure Mr Boulting’s exit from the business in order to benefit the trade by resolving management level disputes and enabling investments to be made.’
• This was sufficient for their decision in John’s favour.
• Valuation issues
• There were two expert valuation witnesses, who came up with values of £47m-£58m and £46m-£62m, respectively. Both of these valuations are lower than the original starting price for negotiations of £73m, but both are considerably higher than HMRC‘s starting point, reported in the High Court decision, of £6.69m. The main point made by the FTT here is that, while both expert valuation witnesses came up with a figure lower than the £73m, that did not mean that the higher valuation indicated a non-trade benefit.
• In any case, although it was not explicitly mentioned in the judgment, John sold his shares back at £600,000 each, implying a value of £60m, which is not out of line with either of the expert valuations given in evidence. In my view this rather undermines HMRC’s original case.
• The other valuation question that was considered briefly was whether there should be any discount for the fact that John was selling a minority holding. The experts disagreed on this but one of them pointed out that a founder shareholder departing in the circumstances would expect to be paid the full undiscounted value for their shares. The FTT agreed, noting that this would be the same as if the company were being sold to a third party. In any case, it said ‘that the evidence shows that the price was arrived at following negotiations and that the board believed that this was the price required to obtain Mr Boulting‘s agreement to sell his shares’. In other words, the FTT accepted that the price paid was agreed between the parties operating on arm’s length terms.
• This does, however, raise an issue that I have often wondered about. The legislation requires that the market value is ‘the price which those assets might reasonably be expected to fetch on a sale in the open market’ (TCGA 1992, s 272(1)). But if that was the case, then every company purchase of own shares, or other similar transactions, would have to be heavily discounted where the shares being sold do not constitute a majority of the share capital, which would lead to wholly uncommercial results. In a typical case, an 8% holding, such as John sold, would be discounted by around 75% to the prorated value, which would clearly not be an acceptable price to most shareholders in John’s position.
• Decision
• As already noted, the FTT found for John. It dismissed HMRC’s arguments that the trade was already successful, so no benefit was needed, that the payment was to satisfy John’s ego and that the legislative test should be construed narrowly to focus only on the share purchase itself. The FTT considered that the focus should be on the company’s motives in buying back the shares and that all the relevant circumstances should be taken into account.
• Discussion
• One feature of this case is the importance of the evidence given by the parties. For example, while HMRC suggested that the passage of time – the substantive case was heard in 2020 and the events occurred in 2013 to 2014 – meant that ‘the witness evidence should be approached with some caution’, it also accepted that Mark’s evidence ‘was clear and consistent with the documents’. Where HMRC suggested that the business was successful and the share buyback was not necessary to benefit the trade, the tribunal explicitly stated that ‘we prefer the evidence of MB [Mark]’.
• Given that the case started from the premise that HMRC and the company were worlds apart on the evaluation of the shares, it is interesting how little importance was given to the actual value of the company or the shares in the judgment. Instead, the tribunal focused on why the company bought the shares back and considered that this was to benefit its trade, regardless of the price actually paid. There is also a huge disparity between HMRC‘s contentions in the High Court, that the shares were only worth £61,690 each, and the lowest figure from the valuation experts, which suggested an undiscounted price of £460,000 per share (I am assuming that one of the expert valuations was prepared on behalf of HMRC). It’s rather odd that there is no mention of the disparity between the figures given to the FTT and those reported in the High Court.
• HMRC‘s suggestion that the purchase of shares should be looked at in isolation, rather than in the context of the wider circumstances, seems to be an argument born out of desperation. It’s hard to see how any test of a benefit to a trade, or even the wider commercial purpose test in other parts of the tax code, can ever be considered by looking at one factor divorced from everything else. After all, the real benefit to the trade was John’s resignation as a director, so that Mark could run the company in the way he thought appropriate. So it is helpful that the tribunal agreed that a wider view was necessary, to take into account John’s divestment of his entire holding.
• More importantly, although this decision does not set a binding precedent, it will still be persuasive if HMRC tries to run similar arguments in the future.
• There are parallels between this case and projects that we have worked on, as it is not unusual for parents selling a company to their children to suggest an upper bound to the amount of cash they want, which is less than the market value of their shares. In these cases, it’s common for us to carry out a management buy-out in combination with a gift of shares to the children, so that the parents sell a smaller number of shares for market value, being the sum they wanted to achieve. It’s difficult to see any conceptual difference between that approach and John’s case, as John was happy to take £5m, even though his 50% shareholding was clearly worth materially more than that, and gift the rest to Mark. The only difference is that John used a company purchase of own shares instead of a buy-out. While a buy-out only requires a general commercial purpose, rather than a specific benefit to the trade, it’s difficult to see any conceptual difference between the two approaches.
• I understand that HMRC is not appealing this decision. Indeed, I suspect that it would have struggled to do so, because of the clear findings of fact by the FTT, linked specifically to the evidence given. The only point of law, I think, was whether the purchase must be looked at in isolation, rather than in the wider context, and I would have been surprised if HMRC had appealed on that point alone. 

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