Director ‘still an employee’ after resignation

Posted: 15th October 2014

ResignAn entrepreneur who resigned as a director of a company he founded, in order to help it out of cash flow difficulties, nevertheless continued to be an employee and was entitled to tax relief on the profits he subsequently made by selling his shares in the venture.

The company had specialised in arranging corporate finance for IT and telecoms equipment. The businessman had stepped down as a director in order to control costs during a difficult trading period. He had also been distracted by events which were unconnected to the business but had nevertheless continued to be heavily involved in sourcing new customers for the company.

The company was ultimately sold and the businessman realised the value of his 13.5 per cent shareholding. He claimed entrepreneurs’ relief on the capital gain under Section 169 of the Taxation of Chargeable Gains Act 1992, but that was refused by HM Revenue and Customs.

Ruling on the businessman’s challenge to that decision, the First-tier Tribunal (FTT) rejected arguments that he had continued to perform the role of a ‘shadow director’ following his resignation. The influence he had wielded in respect of the company’s governance was limited to that of a significant shareholder.

However, in allowing the appeal, the FTT found that his employment relationship with the company had continued. He had carried on providing his skills and services to the company despite his resignation from the board and, although he had not been remunerated in cash, the company had provided him with a laptop and phone and met the costs of his home Internet contract.