"Dividend Invalid"-Inland Revenue

"Dividend Invalid"-Inland Revenue

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'Dividend' to be returned to the company

Background:
A company director and secretary introduced two new shareholders to the company without any payment being made for the shares they received. The two new shareholders received a dividend of £20,000 each. The revenue is disallowing these two new share holders as the proper procedures were not followed in introducing them i.e no payment was made for the shares they received. The company register was updated. The revenue wants to place the dividend on the original holders of the shares. This is creating a substantial higher rate tax liability for the two original shareholders.

Possible Solution:
In order to mitigate this, If the company were reimbursed with the dividend that these two shareholders received 20K X 2, the higher rate tax liability could be reduced and the money withdrawn in leaner years thus avoiding paying higher rate tax in the year of distribution. The tax inspector is not prepared to accept this argument without facts, he does not have a counter argument to dismiss this either, besides mentioning that anti settlement legislation would not allow this. He has placed the onus on the client's advisers to produce evidence to support their argument.

Q1. What arguments and evidence (company law) could be presented to the inspector to convince him?

Q2 Are they any other ways in which this could be resolved so that the tax liability would be significantly less than paying £27K plus interest & penalties when the dividend is assessed on the two original shareholders each with 50% shareholding.

YUSUF DAAWIE

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By neileg
29th Jul 2002 12:07

Is the Inspector correct?
I can't comment on the tax position, I leave that to my learned coleagues.

How were these shares issued? I can think of three obvious possibilities:
1) they were issued Nil paid. The company would then be able to call on the unpaid capital at a later date.
2) They were issued fully paid, but the shareholders are now debtors of the company.
3) The director never gave it a thought.

All of these have problems.
1) Does the documentation support this?
2) There are porblems in a company providing financial support for the purchase of its own shares.
3) The inspector is right.

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