In John Lewis v HMRC [2016] UKFTT 0254 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal for share loss relief pursuant to section 131, Income Tax Act 2007 (ITA 2007).


iFind Media Limited (iFind) was formed in 2009. Its business was developing and selling software. The directors and shareholders of iFind were the taxpayer's son, Dominic Lewis (DL), and Mrs Donaldson (the directors). The directors each owned 50 shares of £1 each in iFind.

The taxpayer agreed with the directors that he would lend money to iFind over time as and when required up to a maximum of £100,000 on an "equity equivalent basis", in that it would be interest free and would be converted into equity when iFind was ready to move to the next phase of equity raising. The conversion rate was not set at the outset but was to be carried out based on a valuation of iFind as at the time of conversion.

The taxpayer paid the loan monies to DL, who then paid them on to iFind. The reason the taxpayer used such a circuitous route was because he did not want to make all of the money available at the outset since it was not needed by the company and he was concerned that if it was all made available immediately it might be spent too quickly. The taxpayer was of the view that DL was close to the company on a day to day basis and knew what funds would be required. The monies could not be on-lent to iFind without the consent of Mrs Donaldson. There was no written agreement evidencing this complex arrangement.

The directors wished to raise equity capital. Since the loan would be presented as a debt in iFind's accounts, the directors decided to convert it into equity in order to attract investors. Board minutes dated 1 March 2011, detailed the issue of shares to the taxpayer. The loan of over £100,000 outstanding on 1 March 2011 was converted into 99,900 shares of £1 each on that date.

Around this time, Mr Harding, a potential investor in iFind, expressed an interest in investing in the company. He sought a 51% controlling interest in the company in return for investing £75,000. Ultimately, Mr Harding decided not to invest and due to inadequate working capital iFind ceased trading on 3 May 2011.

The taxpayer claimed share loss relief of £99,900, pursuant to section 131, ITA 2007, in respect of his shares in iFind.

HMRC rejected the taxpayer's claim and issued a closure notice. The taxpayer appealed.

FTT's decision

The taxpayer argued that the shares were 'qualifying shares' for the purposes of section 131(1), ITA 2007, specifically relying on section 131(2)(b) (if EIS relief is not attributable to them, they are shares in a trading company subscribed for by an individual). He further relied on section 131(3)(d), that the disposal of the shares was a deemed disposal under section 24(2), Taxation of Chargeable Gains Act 1992 (TCGA 1992) (a claim that the value of the asset has become negligible).

The taxpayer contended that Condition A in section 24(1B), TCGA 1992, applied as the asset (his shares in iFind) had become of negligible value while in his ownership.

Although HMRC and the taxpayer agreed that by 3 May 2011 the shares in iFind were of negligible value, HMRC argued that the shares were of negligible value at the time of issue on 1 March 2011. Therefore, the shares had not become of negligible value while they were owned by the taxpayer, as required by section 24(1B) and were not qualifying shares for the purposes of section 131, ITA 2007.

With regard to the issue of whether the shares in iFind had any value when they were issued to the taxpayer, before becoming of negligible value, the FTT concluded that they did. In reaching this conclusion, the FTT was influenced by the fact that Mr Harding, an experienced investor, was seriously considering making an investment of £75,000 in iFind at or around the time that the shares were issued to the taxpayer and he clearly attributed value to the company at that time. This was indicative that the shares in iFind had value at that time.

After careful consideration of all the available evidence, the FTT decided that:

  1. the shares were issued to the taxpayer and that he had subscribed for the shares, as required by section 131(2)(b), ITA 2007;
  2. the shares were not of negligible value when the taxpayer acquired them on 1 March 2011, but they became of negligible value during his period of ownership, as required by section 24(1B) TCGA 1992; and
  3. in accordance with section 17(1), TCGA 1992, the shares fell to be treated as having been acquired for their market value at the time of their acquisition, which was determined to be £60,000.

Accordingly, the appeal was allowed and the relief was reduced from £99,900 to £60,000.


The FTT commented that it was 'extremely unfortunate' that there was no written documentation of the complex loan arrangement between the taxpayer and the directors. Fortunately, for the taxpayer, the FTT accepted that the shares were subscribed for by the taxpayer and that the loan to iFind was converted into shares in order to prepare the company for an injection of equity funds from Mr Harding, who gave evidence at the appeal hearing on behalf of the taxpayer. This case highlights not only the importance of keeping accurate written records but also that appeals before the FTT are often won or lost on the evidence adduced by the parties.