Tribunal – CGT residency issues

A recent Tribunal decision concerned the issue of whether a UK taxpayer had been successful in his efforts to achieve non-residence status.

This case involved a businessman who worked his way up from being an electrician to become Managing Director of a business which manufactured concrete flooring back in 1982. The business was the subject of an MBO led by the taxpayer in 1985 and the taxpayer’s shares in the business were held by way of non-resident family trusts. The business was sold in 1988 and re-acquired by the taxpayer through the family trusts before being sold once again in 1997. The taxpayer ultimately had a capital gain for the 1998-99 tax year of over £30 million before penalties and interest!

The Tribunal case relates to a discovery assessment made by HMRC in January 2005 and the case is complicated by the fact that over 10 years had passed since the events under scrutiny had taken place with minimal supporting documentation available.

The taxpayer entered into a service agreement to work full-time for a related company in the Netherlands for 15 months seeking to become non-UK resident at the time the capital gain crystallised in March 1999. HMRC argued that the taxpayer had remained resident in the UK and therefore subject to UK capital gains tax on the large capital gain.

The case concentrated on what exactly the taxpayer was doing in the Netherlands and found that he did not appear to work full-time for the Dutch company and in fact continued working also in the UK. The Tribunal established this by way of a detailed breakdown of the taxpayer’s movements using evidence such as credit cards and travel information. The issue of the taxpayer’s working in the Netherlands was also compounded by the fact that the taxpayer took ill on a flight to Barbados and ended up spending almost 4 months there before returning to the UK, never again returning to the Netherlands to work. The Tribunal eventually accepted that the extended stay was on medical grounds.

Ultimately, however the taxpayer’s appeal was dismissed and it was determined that the taxpayer was resident and ordinarily resident in the UK for the tax year 1998-99. The large capital gain was therefore subject to UK tax of over £30 million. The Tribunal also commented that if the taxpayer had been dual-resident the issue would also have been resolved in favour of the UK. This case is another in a long-line looking at residency issues and highlights some of the difficulties involved in securing non-UK resident status.

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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.