The recent Upper Tribunal decision in McEnroe and Newman v HMRC demonstrates the importance of drafting the consideration clause in a sale and purchase agreement correctly.
In the case, the consideration was expressed to be a fixed sum and no reference was made in the definition of the consideration to the bank debt that was to be discharged at completion.
HMRC opened an enquiry into the sellers' tax returns and concluded that capital gains tax was calculable on the full amount of the consideration as set out in the agreement, without any reduction for the amount withheld from the consideration and paid directly by the buyers' solicitors to the bank in satisfaction of the bank debt owed by the target on completion.
The First Tier Tribunal agreed with HMRC's conclusion and the Upper Tribunal dismissed the taxpayers' appeal. There were some valiant but ultimately fruitless arguments made by the taxpayers, although perhaps crucially no argument was made (and the taxpayer was denied permission to add a late submission) that the agreement should be capable of being rectified to correct the drafting.
The case is a useful reminder that the wording of the consideration clause matters, on the facts of this case, one might say it matters more than the economic reality. If debt is to be discharged on completion, it should be clear in the definition of the price paid for the shares that the price is reduced by the amount of that debt and then there should be a clear mechanism in the agreement explaining how that debt is to be discharged on completion. Without that clarity, the decision of both tribunals and HMRC is clear: if an agreement says the price is £X then £X is the basis for the capital gains tax computation, regardless of how much is in fact received by the sellers.