New Limited company question

[K12AN]

Hello all

My mother is investing and supporting me starting a new limited company for my contracting. She is going to provide funding/financial support for the new limited company and will be 50% shareholder – I will be the only Director/Employee. She would be issued normal shares with voting rights etc. She will pay for all company startup/on-going costs etc until the company is self-sufficient. She will not be an employee or Director – this is purely an investment for her and a way to support me in my new enterprise.
I will be the only Director/employee of the limited company and will be the paid via PAYE.
The company will issue dividends to shareholders if there are funds available after costs, salary’s, expenses etc.

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.

[Clare@InTouch]

I wouldn't advise it. As much as your Mum may want to support you this isn't a commercial arrangement. If I lent you £10,000 to start your business would you give me half your company profits for the rest of the life of the business? Or would you repay the loan with interest at a commercial rate?

Does your Mum happen to be a lower rate taxpayer? Is the income going to help her, to lower your obligations to her or somehow find it's way back to you?

Have a search for Section 660a, the Settlements Legislation and Arctic Systems. Then make your own mind up as to whether you want to go ahead with it.

[K12AN]

Thanks Claire..these were his thoughts also. He suggested giving a smaller shareholding in order to reflect her input/value to the business...perhaps 20/25%.
Does that sound like a more acceptable solution?

[Clare@InTouch]

Thanks Claire..these were his thoughts also. He suggested giving a smaller shareholding in order to reflect her input/value to the business...perhaps 20/25%.
Does that sound like a more acceptable solution?

I wouldn't add in any shareholding at all for anyone who wasn't a fee earner or a spouse. There's no commercial reason to, and there's the chance HMRC could challenge it.

If your Mum has loaned the business money then it's just a case of repaying the loan with interest. If she's loaned money to you personally then that's nothing to do with the business at all and should be kept entirely separate.

If your Mum carries out bookkeeping and admin tasks for your company then you can always pay her a small wage to compensate.

[stek]

Some people never learn......

http://forums.contractoruk.com/hmrc-...ml#post1860047

[TheCyclingProgrammer]

There's nothing to say that what you propose as long as the shareholding seems reasonable given the amount of investment; 50% does seem like a large share for a small investment and could constitute a settlement (which doesn't necessarily have any consequences in itself). A smaller share would (25% seems fair to me but make your own mind up) might be more reasonable and a fair return for £10k investment in a business that is currently not worth very much.

Settlements legislation is completely out of the picture if the arrangement seems like a reasonable commercial, "at arms length" transaction. Even if you were giving the shares to your Mum for nothing it wouldn't necessarily be caught by the settlements legislation (it would be a settlement, but not taxable on you if you retained no interest in the shares or any of their derived income).

But giving her say 25% shares for £10k - I think HMRC would be hard pressed to even argue it constitutes a settlement in the first place (if they even queried it)! Where's the element of bounty in a £10k investment?

As we've been over a million times before, the settlements legislation is largely aimed at settlements (bounteous transactions) between spouses (unless the exemption applies) and their children, or trusts. It's not really aimed at catching arrangements between any other people although it could in theory apply to anybody. Since Arctic and the facts that case established around the spousal exemption, people have come to see the settlements legislation as something that catches everything *except* spouses, whereas that's quite simply wrong. In most situations non-spouses or children will not be caught, and spouses can still be caught.

[ASB]

I think Clares advice is entirely sound but.....

Back in 1983 when I incorporated MyCo I was boracic. I explained my situation to my dad and an uncle. Produced a business plan and projected cashflow.

As a result of this they both loaned the company some cash, interest free, and agreed to inject sufficient capital for first year costs of accounting etc.

They did that in exchange for a 1% shareholding each. There were also some rules about having at least 2 officers and IIRC 3 shareholders. Anyway the both became officers to ensure co house regs were complied with.

It so happens at this time there was a somewhat different landscape, there was a 15% investment income surcharge, Employers NI was capped (and there were a few wheezes to get round it with annual pay periods). So the company didn't pay any dividends for a few years until the climate changed a bit.

A few years after it had been paying dividends and finally repaid the loans the company bought and cancelled the shares held - agreed price was 1% of retained funds.

Was investigated etc with no problems.

The point of this? Well, you could do it in various ways. But it was a radically different landscape then. Try it now? Nope.

Come to the same arrangement with your Mum as you would with me. Anything else carries quite a lot of risk of irritating HMIT.

[TheCyclingProgrammer]

Some people never learn......

http://forums.contractoruk.com/hmrc-...ml#post1860047

I see the point you're making but it's not exactly in the same ballpark...vague, ambiguous hard to enforce legislation that HMRC have shown little interest in pursuing for years (settlements) vs EBT and avoidance schemes that HMRC are aggressively pursuing?

[stek]

I see the point you're making but it's not exactly in the same ballpark...vague, ambiguous hard to enforce legislation that HMRC have shown little interest in pursuing for years (settlements) vs EBT and avoidance schemes that HMRC are aggressively pursuing?

You'd think the OP would opt for squeaky clean this time though rather than walking another tightrope....

[TheCyclingProgrammer]

The point of this? Well, you could do it in various ways. But it was a radically different landscape then. Try it now? Nope.

Maybe a different landscape, but the settlements legislation has hardly changed in 80 years. It could have applied then as much as it could now. The only significant changes to the settlements legislation has been the introduction of the spousal exemption, which was necessary after the changes to how spouses were taxed in the late 80s.

Family businesses or family members investing in a family members business is not unusual.