Reply to: New Limited company question

[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.

[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....

[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.

[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.

[cojak]

This is a Professional Forum.

Posts to simply insult the OP are frowned upon.

[DirtyDog]

At least get started, get a war chest and make sure you can make it work.

Given the OP's previous business model, I suspect that any war chest may be emptying pretty quickly.

[DirtyDog]

Just noticed that it was Clare that brought up the £10k figure, not the OP.

£10k seems a high estimate of setup and on-going costs until the company is self-sufficient, to me.

Particularly since the OP already mas / recently had another company operating through an EBT - what initial costs can there be in an IT one-man-band consultancy to warrant giving half the company away?

[Clare@InTouch]

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.

I think your situation was different though. It was clearly a commercial arrangement and you needed the funds to get started - a Dragon's Den type investment.

If you're an IT Contractor (or similar) what funds do you need? £2k to buy a laptop and maybe £500 to cover expenses in the first month? That hardly justifies the need for a capital investment and the return of 50% of the future profits of the business.

If you have family that are giving you money so that you can take the leap into contracting that's a personal investment into your career, not an investment into the company.

In my view it's risky. Do it if you really want to, but personally I wouldn't.

[Kanye]

The lengths some people will go to to avoid paying any tax amazes me. (Considering OPs history in the dodgy loan scheme before this one.)

You can keep it down to around 25% as a contractor, so just operate above board and put your efforts into billing a bit more or a bit higher.

[northernladuk]

Walk away from it. All the accountants say no. TCP is the one lone voice still banging that you can do it but by his own admittance it is mainly based on the facts that you might not get caught and it might be defendable. Both elements of risk I don't think we should be advising to new contractors personally but as ever, new wide eyed contractors will come on looking for the answer they want to hear and TCP is the lone voice they invariably want to hear.

At least get started, get a war chest and make sure you can make it work. If you really want to take risks at least wait until you have a good base rather than doing it from the off. Understand how everything works so you can then understand the risks before taking them.

[TheCyclingProgrammer]

Quite true. Their practitioners guide can be found here,

http://webarchive.nationalarchives.g.../guide_sba.pdf

you have probably seen it and this is an archive anyway since it has disappeared from the website.

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.

Page 8, 4.1.2 final para. They'll have a pop at it under that.

Possibly, but its a very similar angle of attack to the Arctic case, in which they lost. They'd have to show that there is retained interest by virtue of OP being the main earner, but that didn't work out so well for them in the Arctic case.

Page 11, 4.8.1 another angle of attack.

This one has some legs, which is why its important that if OP does proceed, he issues a reasonable number of shares proportionate the investment. If he does this, then as I said before its unlikely to be a settlement full stop (but even if it were deemed a settlement, HMRC would still have to find some way of showing the OP retained an interest).

Will the challenge be successful? I don't know, that will need a hearing. But HMIT is the one with the power. He makes the determination, the taxpayer challenges it.

I think going to the generals would be entirely fruitless, they'd use the "it looks like a duck" approach. Specials may be more sympathetic to the legal arguments.

Another issue though is that the legislation uses the word property. This has a very wide definition in the legal sense. There could be interesting debate about just what was the property settled (if any).

There are loads of possible scenarios that could potentially be challenged and taken to tribunal. It would certainly be interesting to see what the outcomes are. But I think it's important to note that the number of challenges under the settlements legislation were relatively small before Arctic...since HMRC got a bloody nose and failed to get the Family Business Tax introduced, they've been less keen.

[ASB]

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.

Quite true. Their practitioners guide can be found here,

http://webarchive.nationalarchives.g.../guide_sba.pdf

you have probably seen it and this is an archive anyway since it has disappeared from the website.

Page 8, 4.1.2 final para. They'll have a pop at it under that.

Page 11, 4.8.1 another angle of attack.

Will the challenge be successful? I don't know, that will need a hearing. But HMIT is the one with the power. He makes the determination, the taxpayer challenges it.

I think going to the generals would be entirely fruitless, they'd use the "it looks like a duck" approach. Specials may be more sympathetic to the legal arguments.

Another issue though is that the legislation uses the word property. This has a very wide definition in the legal sense. There could be interesting debate about just what was the property settled (if any).

[TheCyclingProgrammer]

Just noticed that it was Clare that brought up the £10k figure, not the OP.

OP: if you are going to do this, you should keep very accurate records about how much your mother has invested in the company and when, to show that it was a genuine commercial arrangement.

I still don't think there is much risk of it being challenged even if there was no consideration for the shares unless you retain an interest in the shares/income BUT, that said, if you can show it isn't even a settlement in the first place you'll be on much safer ground.

[TheCyclingProgrammer]

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

Perhaps. Without any prior knowledge of OP, I chose to give advice based on the facts provided. We don't know what his intentions are. If its all a big ruse to divert income through to his mother and then back to him, then let him take that risk...if its a genuine arrangement as he describes it, then I see nothing wrong with it and don't think HMRC would be able to successfully challenge it.

Basically what I'm saying is if the EBT stuff is a tightrope, then his proposal is more like solid plank that he's very unlikely to fall off unless his does something silly. How's that for a stretched analogy?

[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.