Taxpayer Allowed Entrepreneur’s Relief by FTT – Cooke v HMRC

In the case of Cooke v HMRC [2024] UKFTT 272 (TC), the First-tier Tribunal (FTT) ruled in favour of the taxpayer, Jonathan Cooke, granting him entrepreneurs’ relief on the disposal of his shares despite holding just under the 5% shareholding threshold. This case sets an important precedent, demonstrating the FTT’s capacity to provide taxpayers with relief through rectification, echoing the principles established in Lobler [2015] UKUT 152 (TCC).

Jonathan Cooke v HMRC

In 2017, Jonathan Cooke acquired shares in ISG Holdings Ltd (ISG) from the company’s two founders for £500,000. He aimed to maintain exactly 5% of the company’s shares to qualify for entrepreneurs’ relief (ER), now known as business asset disposal relief. To protect his stake, an anti-dilution clause was incorporated into the shareholders’ agreement.

By 2019, Mr. Cooke sold his shares in ISG, realising a gain of approximately £600,000, and claimed ER on this disposal. However, HMRC denied his claim, pointing out that due to a spreadsheet rounding error, his shareholding was marginally below the 5% requirement, precisely 4.99998%. Mr. Cooke subsequently appealed this decision to the FTT.

FTT’s Entrepreneurs’ Relief Decision

The tribunal ruled in favour of Mr. Cooke and against HMRC. Mr Cooke contended that the High Court would rectify the relevant documents to reflect his intended 5% shareholding.

The FTT agreed, concluding that:

• Mr. Cooke’s request for the anti-dilution clause, reflected in the shareholders’ agreement, evidenced his intent.
• The founders of ISG acknowledged the agreement to transfer exactly 5% of the shares.
• The Heads of Terms supported this agreement.
• The common intention to transfer 5% of the shares persisted throughout, and all parties were surprised to learn later that the full 5% was not transferred due to a rounding error.
• Both parties recognised the mistake caused by the spreadsheet error.

The FTT also affirmed its jurisdiction to consider what the High Court would likely do if asked to order rectification. The tribunal believed that the High Court would have corrected the share documents to reflect a 5% shareholding. Thus, the ER conditions were met, and the appeal was allowed.

Download the Judgment Here

Implications of the Decision

Following the Lobler v HMRC [2015] UKUT 0152 precedent, this case exemplifies the tax tribunals’ willingness to consider potential High Court actions in rectification cases, enabling them to decide appeals as though rectification had already been ordered by the High Court.

Understanding Rectification

Rectification is an equitable remedy that modifies a document to accurately reflect the true intentions of the parties at the time it was created. This remedy does not alter the agreed terms but ensures the document aligns with the original agreement.

Typically, rectification claims are pursued through the High Court, guided by principles from cases such as Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560. To succeed in a rectification claim, a party must demonstrate:

1. A mutual and continuing intention regarding a specific matter in the document.
2. An outward expression of this common intention.
3. The intention persisted at the time the document was executed.
4. The document did not reflect this intention due to a mistake.

Key Principles of Rectification

Rectification claims require proof on the balance of probabilities. Importantly, rectification is generally not granted if its sole purpose is to secure a fiscal or tax benefit, as established in Racal Group Services [1995] STC 1151.

Should Taxpayers Seek Rectification Separately or Rely on FTT Powers?

For taxpayers like Mr. Cooke facing unexpected tax consequences due to document errors, deciding whether to seek rectification through the High Court or rely on the FTT’s powers is crucial.

Consolidating the issue into a single tax appeal might seem attractive due to lower litigation costs. However, it demands overwhelming evidence of the parties’ intentions. The FTT must be certain that the High Court would grant rectification, setting a higher threshold than an actual High Court claim. Moreover, obtaining rectification from the High Court could resolve the tax dispute without further tribunal proceedings.

Specialist Tax Dispute Advice

Navigating the complexities of tax disputes and rectification claims necessitates expert legal guidance. Our firm specialises in tax law, with a proven track record in handling tribunal appeals and tax relief cases. We offer comprehensive support, from evaluating the viability of your rectification claim to representing you in both the High Court and the FTT.

Contact us today to ensure your tax matters are managed with the highest level of expertise and precision. By leveraging the principles of rectification and understanding cases like Cooke v HMRC, we help clients achieve favourable outcomes in their tax disputes. Let our experienced team assist you in securing the tax relief you deserve.

Expert London Tax Lawyers

If you need HMRC Tax Disputes advice, we are available to aid you at every stage of the HMRC appeals process. Members of our legal team have first-hand experience and working knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations, throughout the HMRC internal review process and in front of the Tax Tribunal. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect including developing a strategy.

We are experts in adeptly presenting evidence and employing bespoke arguments combining the facts of your case, previous cases and current legislation to ensure your appeal is a successful one. We provide urgent advice and representation to clients from our unique expert team of established tax and duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].