New Limited company question

[GazCol]

Is this just a front to justify your mother taking an unusually large amount of money out of the company despite playing no part in the administration of the company?

Wouldn't it just be easier to forgoe this silly rigmarole with false startup costs and just employ her on a part time basis on a tax efficient salary and have her perform some task that warrants this salary (payroll, account filing, vat returns, etc, etc)

You might be several hundred pound a year worse off but at least you'll be able to sleep at night.

[Contreras]

It's an interesting document, written I assume before the Arctic case was eventually lost by HMRC. Interesting, because HMRC were clearly of the view that gifts of shares to a spouse in a company from the sole fee earner to a non fee earner (so in other words, pretty much all "personal service company" arrangements) should be caught and that the spousal exemption should not apply as it's not an outright gift (on the basis that the fee earner "retains an interest" because he/she is the sole fee earner!).

And it's that viewpoint that was eventually shot down in the Arctic case, having essentially decided that a transfer of ordinary shares did constitute an outright gift and that there was no "retained interest" purely because Mr Jones was the main fee earner, therefore the spouse exemption applied.

Eventually, yes.

Would the Jones' have structured their affairs differently had they foreseen the long hard battle ahead?

Sometimes simply being right isn't enough. Particularly as HMRC can just dictate the default position and it's then for the tax payer to mount a legal challenge. What I expect from a seasoned accountant is to go further than purely legal technicalities and give pragmatic advice.

It is undoubtedly a good thing for us armchair lawyers to challenge the consensus view occasionally. Even between professional accountants there is often disagreement, although not it seems in this case.

[Wanderer]

Does this sound acceptable? Sounds OK to me, but one of the accountants I went to see seemed to think that this may look suspicious to the HMRC.

Q1. Would you enter into this arrangement with a stranger?

If not, then it's not an "arms length" business deal and it's going to raise suspicions.

Q2. Would the money from your mother be used for legitimate business startup expenses or would it be spent by you personally?

If it's a genuine business expense then it may be OK, if it's to pay your day to day living expenses then it's not.

Q3: What is your projected company turnover and profit for the year?

If your profit is going to be < £10,000 for the first year then maybe it's going to be legitimate.

Q4: What happens a few years down the line when your company is profitable? Do you realise that the shares will belong to the other shareholder and there is no way for you to force them to return them if they don't want to? If you have an agreement that the shares will be gifted back to you after a period of time then that is going to be problematic too.

Maybe you can see now that you are stepping into a minefield....

[TheCyclingProgrammer]

If you have an agreement that the shares will be gifted back to you after a period of time then that is going to be problematic too.

As a rule, any arrangement like this would mean that any settlement would be 100% caught by the settlements legislation because the settlor has clearly retained an interest.

The only way you could avoid being caught under this kind of arrangement is by demonstrating that the original transaction was a commercial one and therefore not even a settlement in the first place, in which case the whole thing is outside the scope of settlements legislation and retained interest doesn't matter anyway.

I only mention this because it is quite possible to have a commercial arrangement whereby an investor invests £x for y% with an agreement to return a proportion of their shareholding if a business meets certain targets. The settlements legislation is specifically not designed to catch genuine commercial agreements like this.