Shares transfer costs accountant £600,000 in income tax

An appeal attempt by accountant Bostan Khan who was held liable to pay income tax of almost £600,000 in 2017 has been dismissed after appearing in Court in April 2021.

The high taxation was attributable to the illegal manoeuvre by Khan who paid into his bank account and then paid out again almost immediately £1.95m in respect of “connected share sale and buy-back transactions”.

From the mid-1990s, Khan managed the accounts of Computer Aided Design Ltd which also rented its premises from him.

In June 2013, when the company had distributable reserves of £1.95m but its profitability was in sharp decline, the three shareholders decided to “extract all available funds” from the company and then go their separate ways.

To that end, they reportedly entered into negotiations with Khan so that he might acquire the company.

The original plan was that the company would buy back 96 of its 99 issued shares from the shareholders for £1.8m, with Khan then buying the remaining three shares from them for an amount equivalent to the remaining net asset value agreed by the parties at £18,771.

Instead, Khan bought the entire issued share capital of 99 shares from the shareholders less than 40 minutes later. At the time of the transfer, Khan was neither a shareholder in the company nor a trustee of shares, rendering the move illegal.

As a result, on 5 July 2017, following a tax inquiry, HMRC increased his income tax due for the tax year 2013/14 by £594,814.57.

Lady Justice Andrews, said: “The vendor shareholders were entitled to a sum of £1.95m in respect of the sale of their shares to Mr Khan, not to the distribution in respect of the shares which the company bought from him.

“However one views these transactions, they cannot be re-characterised as a buyback arrangement made directly between the vendor shareholders and the company, ignoring the genuine role played by Mr Khan and disregarding his legal rights and obligations. For those reasons, the UT was right for the reasons that it gave. I would dismiss this appeal.”