Reply to: How Do you have your Ltd Co. Setup?

[tim123]

Nope, nothing to do with that - it's all about risk and reward. Even more specifically,
- HMRC say that in cases where a spouse has a share in a company where the principal fee-earner is the partner, then the share is nothing more than a right to receive a dividend (and as such, qualifies as a "settlement" under the Settlement's act)
- We say, a share in a company has all sorts of other rights and duties (e.g. right to vote at AGM's, risk of loss of investment capital etc), so it isn't a settlement at all.

The Court of Appeal decided that We (by which I really mean the PCG) were right, and that HMRC were wrong.

The court of appeal may have decided that it wasn't a settlement. But that wasn't the reason why (nor was it even the reason argued by the barrister)

tim

[XLMonkey]

Nope, nothing to do with that - it's all about risk and reward. Even more specifically,
- HMRC say that in cases where a spouse has a share in a company where the principal fee-earner is the partner, then the share is nothing more than a right to receive a dividend (and as such, qualifies as a "settlement" under the Settlement's act)
- We say, a share in a company has all sorts of other rights and duties (e.g. right to vote at AGM's, risk of loss of investment capital etc), so it isn't a settlement at all.

The Court of Appeal decided that We (by which I really mean the PCG) were right, and that HMRC were wrong.

So, to defend your position against HMRC, it doesn't really matter how many shares your spouse has, it only matters that they are the same type of share as the ones that you have.

[Bigbird]

No offense taken at all, I'm always happy to be contradicted if I'm wrong.

My understanding was that if the wife had a different class of share (or even a different number) she would still receive a return on her investment in the company but the revenue would see it as being more in line with her contribution if it was substantially different to a 50/50 split. I could be over-simplifying it though.

*goes off to read the pcg website in detail, always comes here 1st though cos you lot seem to know mmore and explain better*

[XLMonkey]

I'm sure Alan can explain it better than me but I believe if you & your wife have a different class of share it might help, and you can certainly pay her a salary or a directors emoulement but be prepared to have to prove that she earned it.

Argh, no, don't do this (different class of share). The centrepiece of the S660A defence rests on the argument of shared risk and reward (i.e. that just because one person is earning all of the fees, the reality is that both partners are sharing in the risk of the business failing, so they should be entitled to share in the rewards of its success). If you create a separate class of share (e.g. one entitled solely to receive dividends), then you risk breaking this argument.

There is copious guidance on S660A on the pcg website and you would be well advised to join up and read it - it's far more comprehensive and correct than you'll get from a message board (no offense meant, BB)

[tim123]

CGT = Capital Gains Tax

PPR = Private Propery Rental (might be not 100 sure on that) could also be Private Persons Residence (i.e. a house not a factory)

Principle Private Residence. It's the property that a person nominates as their CGT excempt property (subject to the rule that you can only nominate a property that you actually live in).

tim

[Bigbird]

I'm sure Alan can explain it better than me but I believe if you & your wife have a different class of share it might help, and you can certainly pay her a salary or a directors emoulement but be prepared to have to prove that she earned it.

[Bluebird]

For the time being then, am I ok having my wife as Director / Secretary & Shareholder - just don't pay dividend to them ?

[Bigbird]

Oh and just for reference, for the year in question (99/2000, that's how long this has been dragging on for) the figures were as follows:

Mr Jones as principal earner & director paid a salary of approx £6500
Mrs Jones as Co Sec and admin paid £3600 (which the revenue agreed was "fair" for the work she did )
Dividends of approx £60k split 50/50, putting both of them just on the edge of the higher rate bracket for that year.

The revenue argued that Mrs J paid her standard rate on her divi whilst if it had been paid to Mr J it would have been subject to higher rate hence classing it as avoidance.

BB
Anorak

[Nixon Williams]

There are no "allowances" for working late at night.

Subsistence can only be paid if you are staying away from your home at night.

Some items you can get paid from the company such as mobile phones, pensions etc. Others such as books, postage etc are in reality probably going to be paid personally and reclaimed on an expense form.

The Artctic issue revolves around the aim of the Revenue to have the spouses income from the company included with the director(worker) and so this may take you into the higher rate bracket.

Alan

[Bigbird]

Both myslef and my wife are taxed at the same LOW rate - so would the ruling not apply even if HMRC won ?

No, because if your wife's income was added to yours it would surely push you into the higher-rate bracket?

Here's what the ACCA advise:

Arctic Systems came to the attention of the tax authorities because of the low salary paid to Geoff Jones for his services as an IT consultant. They have imposed the anti-avoidance legislation to tax dividends paid to his wife, Diana, effectively ignoring her contribution as administrative assistant and Company Secretary.

The Inland Revenue is imposing legislation contained in Section 660A Income and Corporation Taxes Act 1988, which is wide ranging and applies to trusts and other situations involving individuals, companies and partnerships. It deems a source of income to be "a settlement".

The Inland Revenue issued their views in Tax Bulletin 64, in April 2003 and further guidance in February 2004. They set out the following:

settlement includes any disposition, trust, covenant, arrangement or transfer of assets. Settlement may include a series of transactions which taken together are regarded as an arrangement. The courts have limited the scope of a settlement to where there is some element of bounty, see "CIR v Plummer [1979] STC 793: 54 TC 1"
Situations which would invite the Inland Revenue's attention include:

a main earner drawing a low salary leading to enhanced profits from which dividends can be paid to shareholders who are friends or other family members
- disproportionately large returns on capital investments
- differing classes of shares enabling dividends to be paid only to shareholders paying lower rates of tax
- dividends being waived so that higher dividends can be paid to shareholders paying lower rates of tax
- income being transferred from the person making most of the profits of the business to a friend or family member who pays tax at the lowest rates

There are some important statutory exemptions from the legislation:

Section 660A(6) exempts situations where the property passed to a spouse is an outright gift, unless:
- the gift does not carry the right to the whole of the income arising, or
- the property given is wholly or substantially a right to income.

In the light of this case, shareholders in family companies would be well-advised to ensure that all 'working directors' are paid a realistic salary.

The report of the case - Jones v Garnett - can be found at the address below:
http://www.lawreports.co.uk/chanaprf0.3.htm.

The full Arctic Systems Case Report can be viewed here.

Until Arctic is settled in its entirety having a second shareholder who is a spouse or family member could put you on very dodgy ground. Incidentally though, I have never found any reference to whether S660 would apply if the secons share belonged to someone who was NOT a family member, ie a friend, a business colleague, even an unmarried partner.......

[Bluebird]

I understood that you can claim for things like "late working" - on the project I'm on about once a week I end up staying in the office til about 9pm - I get a chinese or curry on the way home and claim this.

[Maxamus]

I thought subsistance can only be claimed if you were staying away from home...?
But if you were coming home every night then this could not be claimed

[Bluebird]

Thanks Both...

"I presume you mean expenses that the client reimburses you for? Your company invoices for these, they are paid to your company and you then claim from your company"

No I don't get any expenses from the client.

I get travel & subsitance - which I [ as an employee pay for and then my company reimburses me for ]
I also buy stuffl which my company pays for.

Which of these two ways works out better - if I buy say a book should I buy as an employee and get my company to pay me back or just pay straight out of the company bank account ?

With the shares thing it's already done, so I can'y change it.
The bit about Artic I looked as was as follows :

"The Joneses brought their case to an HMRC tribunal last year and lost and had their appeal to the High Court also rejected in April of this year. Both ruled that income from a non- or low-earning spouse who co-owns a business should be taxed at the same rate as the main earner."

Both myslef and my wife are taxed at the same LOW rate - so would the ruling not apply even if HMRC won ?

[Nixon Williams]

1. I'm fairly new to this so excuse me if I get the wrong end of the stick.

2. As far as Artic Systems are concerned - didn't they get the ruling overturned ? - am I ok to pay myself a salary out of the business and dividends to both myself and wife as we each own 50% of the company shares ?

3. I'm getting a bit confused about expenses - There are two types 1.Expenses you incur as an employee of the company, which the company then re-imburses you for. 2. Expenses that you pay out of the Co Bank which then helps with taxes - is there any one which is better than the other [ i.e. if I buy some software to do my job should I pay cash and claim as employee or pay through the Co?

4. ALL reciepts need to be kept !

5. What sort of things can I pay through the Co bank a/c ? My mobile ? [ providing it's in the company name even though it's mostly personal calls ? ] [ a weekend away in a hotel for me and my wife as part of a "team building exercise" for company shareholders !]

Cheers

The Revenue have taken the Arctic case to the House of Lords and this will be in June - so until that is decided I would recommend that you own 100% of the shares and transfer to your wife if the case goes against the Revenue.

I presume you mean expenses that the client reimburses you for? Your company invoices for these, they are paid to your company and you then claim from your company.

Remember to obtain receipts in the company name whenever possible and submit an expense claim to your company or you may pay direct from the company.

Mobile costs are fine provided that the account is in the name of your company, if it is your personal name you can only claim for business calls.

Weekends away are asking for trouble, you can claim for an annual event (usually at Christmas) and the limit is £150 per head, a penny over and the whole amount is taxable.

I hope this helps.

Alan

[Ardesco]

You can put the mobile through the company, but if it is mainly personal calls you will probably be expected to reimburse your company or it will be a BIK.

You can only claim a hotel if you incurred the cost due to business reasons. So if the company director and the company secretary went away one weekend for business purposes (to promote your company by holding a stall at an EXPO. Required for a meeting to set a contract up between your co and another co, etc) that is fine.

But if you just want a dirty weekend, nope you can't do that. You can also have a board meeting at a restaurant of your choice if you so desire, just don't forget to write up the minutes of the meeting and keep them safe and sound as proof.