HMRC lose another ‘settlements’ case.

HMRC have recently lost another tribunal case involving small company dividends received by one spouse under an alleged settlement arrangement. The arguments involved being similar to those in the famous Arctic Systems (Jones v Garnett) case.

The facts in Patmore vs HMRC however were unusual due, in part to the share structure and the financial arrangements related to the initial acquisiation of the shares. However, the fact that HMRC took the case shows that losing Arctic Systems has not stopped them from challenging cases where they believe that dividends received by one spouse should be taxed on the higher earning spouse.

The case revolved again around the ‘settlements’ legislation under what was s660a ICTA 1988. The disputed tax assessments in this case covered the four years 1999/00-2002/03. The tax at stake was less than £20,000 although the decision may have affected the tax position in more recent years as well.

In the late 1990s Mr and Mrs P agreed to pay £320,000 to buy the small manufacturing company for which Mr P worked. The first instalment of £100,000 was funded by a second mortgage the couple took out on their house. Mr P took 83 shares giving him, together with his existing 15 shares, a 98% shareholding. Mrs P received 2 shares giving her a 2% shareholding. Mr P became the sole director and Mrs P became company secretary. Two months later the existing 100 shares were re-named A shares. 100 new non-voting £1 shares were created and called B shares. 10 were allotted to Mrs P. At this stage Mr P owned 97% of the nominal value of the shares.

Dividends were paid on the B shares between 1999 and 2003. 40% of these being due to Mrs P although all dividends were immediately credited to Mr P’s loan account to set against the outstanding purchase payments for the company. HMRC argued that under this arrangement, all of the dividends should be taxed on Mr P as a settlor.

In HMRC’s view Mr P owned the company and used his control of it to declare significant dividends. His wife’s dividends were subject to less tax than if Mr P had received them directly. However Mrs P never received the dividends as they were always retained by Mr P to repay the outstanding debt.

The judge noted that the settlements legislation does not contain a motive test so it was irrelevant that tax efficiency was part the underlying philosophy for the company structure. She also determined that the approach used to acquire the shares did not create a settlement under s660, but “a constructive trust in Mrs P’s favour”.


Case Studies

The Tax Man

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Business Valuation in Distress

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FD in The Cupboard

Our innovative ideas are here to improve your business performance and secure appropriate and cost effective funding

The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

Business Valuation in Distress

Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.