how dodgy is this (tax advice)

how dodgy is this (tax advice)

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Hi

I'm just looking at some advice that a client has recieved from another firm of accountants.  the client is a small advisory business trading as a Limited Company that has two self-employed consultants (ignore any status issues) - the other firm acts for the self-employed consultants.

The client has accrued commissions payable in the 6 month management accounts of £200K which will be payable at £100K to each of the two self employed consultants.  It is possible that these figures have been reported to the FSA as part of the 6 monthly FSA reporting requirements.

The client now wishes to merge with the the self employed consultants resulting in each of the two consultants owning 1/3rd of the business along with the original sole shareholder - so the client will issue shares to the consultants in return for the transfer of goodwill.

now to the issue:

the accountants have suggested that the commissions payable to the consultants are reduced to circa £50K each in the accounts - and reported as such on their individual tax returns (ie below/around the 40% tax threshold).  The company acquires the two individual consultantcy businesses for an issue of shares (no cash) valued at £100K each - ie in their words to reflect the "undrawn comissions". The accounting entry will be debit goodwill, credit share capital/share premium account.  Clearly tax relief on the write off of goodwill will occur over a number of years.

Their suggestion also involves some alphabet shares.  They are also suggesting that the shareholders enter an agreement that the shares owned by the old sole traders should receive prior dividends totalling £100K each-voted on their share classes, before dividends paid to other shareholders - it isn't co-incidental that the amount will agree to the "foregone comission".

I have my reservations about the alphabet shares but my question is twofold:

1.   How close to tax evasion is the reversing of commissions earned by the self employed consultants and using this "value" as goodwill.  the reasoning is clear - to avoid a higher rate tax charge, and I believe one of the consultants is also getting divorced............Also realistically, what exposure would the accounting firm dealing with the paperwork have (ie if HMRC became interested).  

2.  The prior agreement to pay a dividend equating to the foregone commission/goodwill - this feels like it is straying into anti-avoidance territory.

Hmmm - what are your thoughts please, and thank you!

niccapotamus

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By User deleted
24th Sep 2013 22:31

Like the fart in the lift ...

... wrong on so many levels

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By cparker87
24th Sep 2013 23:46

Hope that all concerned do not get suckered into this. Unfortunately I don't think that anyone gives a s*** enough to take the poor adviser to task on it before the event. The only ones that could would be the misadvised after the event when they have suffered loss.

I've come across similar hair brained ideas and handled the clean up. In my experience neither ICAEW nor HMRC cared.

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Man of Kent
By Kent accountant
24th Sep 2013 23:56

Why is your client...

...getting advice like this from a cowboy?

Did they speak to you first?

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