In George v HMRC, the First Tier Tribunal (FTT) decided that they could not apply the equitable principle that "equity looks on that as done which ought to be done" to impute voting rights to shares for the purpose of a shareholder being able to claim entrepreneurs' relief (ER). One of the conditions to claim ER is that the individual is able to exercise at least 5% of the votes in the relevant company "by virtue of" his or her shareholding in the company.

In the case in question, Mr George had been appointed as an executive director in a family-owned company (TLR) which was managed by one of the family members (Mr Thornton). A few years after joining the company, Mr George was allowed to acquire shares in the company. This was the first time that a non-family member had held any shares in TLR. The shares acquired by Mr George represented 6.9% by nominal value of the company's ordinary share capital but did not carry any voting rights. Following a failed attempt to sell TLR, at which time Mr George was advised that he did not qualify for ER because his shares did not carry any voting rights, Mr George and Mr Thornton agreed that Mr George's shares would be given voting rights. This agreement was not documented. In addition, Mr Thornton was concerned that giving voting rights to Mr George would result in a 'value shift' tax charge falling on the other shareholders. As a result of this, the rights were not formally granted to the shares held by Mr George.

On the subsequent sale of the company, Mr George claimed ER on the basis that the High Court would grant specific performance of his voting rights as an equitable matter, notwithstanding that the shares had not been formally enfranchised to give him any voting rights. The FTT held against Mr George and decided that it could not impute the voting rights into the shares because the equitable principle could not be used to take rights away from the other shareholders who had not personally agreed to the granting of the voting rights to Mr George and, in any event, even if a court did impute voting rights to Mr George his voting rights would not exist 'by virtue of' the holding of his shares. Rather, the voting rights would have existed by reason of equity requiring them to be imputed to Mr George.

This case shows how important it is that parties to agreements relating to share rights (or other rights) fully document the arrangements that they have agreed to enter into and ensure that the rights are embedded in the correct instrument to ensure that the relevant benefit, tax or otherwise, is obtained.