I've seen an interesting use of a limited company and was wondering if anyone could shed any light on it and any potential problems that could arise by someone who is already using this. The details are fairly vague but aweb users seem a bright bunch so might be able to help.
There is a partnership providing care services (it has remained a partnership because it was registered on sympathetic terms and these are not guaranteed if registered again by a ltd company), this obviously means less favourable tax arrangements for the individuals involved. Their accountants then advised them to set up a limited co and it appears that "management/consultancy" services have been charged by the limited co to the partnership but no money has been exchanged just the debtors are growing in the limited company. How owners of a business can charge for services provided to their business seems odd to me.
This was apparently legit when set up but is no longer available to people who wish to do it now but is ok to carry on with.
It seems a bit fishy to me so if anyone could shed any light on it it'd be most appreciated. I don't want them to potentially get stung further down the line for bad advice.
Nick
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Seems pretty normal to me
Surely this is simply a personal service company arrangement. I don't know why you think this is no longer available. HMRC will huff and puff and try and apply IR35, I'm sure, but that doesn't make it illegal.
Have I understood correctly?
It sounds like it is the partnership that invoices the end client, and they just raise an invoice from the ltd to the partnership to shift the taxable profits there, but the invoices never get paid?
That appears to be the case Shirley. I would imagine a payment would be made when dividends are taken to have the cash available.
Loans to participator
It seems to me that this is a trade debt due from partnership to limited company. Nothing particularly wrong with that and presumably company was happy to pay Corporation Tax on its profits. There would generally be an overall tax saving between CT rate (?20%) and IT rate (40% + NIC).
This could either have allowed the partnership to build up working capital at a lower tax rate or allowed the company to pay out as dividend (without NIC).
However, I think that this was always caught by s455 CTA 2010 (old s419, ICTA) and tax payable under the loans to participators rule. This clearly would not have a let out under s456(2) as although a trade debt outstanding beyond both six months and credit normally given to customers.
I believe some might disagree with me historically, but it is certainly caught by the new s455(c), which specifically refers to LLPs and partnership in which a participator is a partner. Technically the new rules only apply to advances after 20 April 2013, but I might not want to push this issue given my previous view on the original legislation.
As an aside I would be interested to know what evidence there was of the contractual relationship between partnership and company and what the individuals were undertaking as partners and what as employees/directors of the limited company.
Putting the accounts hat on, I assume that the Related Party note in the company accounts disclosed this properly.
Isn't this the sort of thing that is going to be caught by GAAR?
There is no reason for this type of set up other than tax reduction. I wouldn't be happy with this set up, but then I am not the most knowledgeable person on AWeb.
Maybe someone else will give an opinion.
Also : Benefits rules
HMRC may also have an argument that a benefit is chargeable on a beneficial loan following the logic on the granting of credit in the Grant v Watton (HMIT) case back in 1999.
This structure has made perfect sense if the profits subject to CT have been paid out as dividends or rolled up as cash/investment in the company, but I think is somewhat risky when left outstanding from the partnership which seems to be the case here. If intention had been to build up working capital for the partnership it would have made more sense (historically) for company to be a partner itself. Of course this will cause problems if the proposals in the current 'partnerships consultation' are confirmed.
How...
...can the company charge the partnership for management consultancy services if it doesn't employ or contract with some management consultants to do the work those services require?
If the company employs or contracts with the partners in the partnership to do this work the salaries/fees it pays to them will just send the fees the company charges to the the partnership round in a circle.
Precisely
...can the company charge the partnership for management consultancy services if it doesn't employ or contract with some management consultants to do the work those services require?
If the company employs or contracts with the partners in the partnership to do this work the salaries/fees it pays to them will just send the fees the company charges to the the partnership round in a circle.
The idea being that it is a more tax efficient circle by virtue profits are liable to (usually) lower Corporation Tax rates rather than Income Tax. As has been alluded to this sort of practice has been pretty much quashed by the revisions to s455.
I won't cover old ground but you may also wish to consider if your client's structure is VAT compliant. Is the Company registered for VAT? If so, then you may have a problem with Input VAT claims made by the partnership where the debt outstanding is greater than 6 months from the payment date (reason being that this Input VAT is repayable at that point).
Previously, this sort of thing was undeniably convoluted, but legitimate. The lesson to learn really is that if you're going to play these sort of games, just don't take your eye off the ball!
VAT
Quite possible that the 'care services' business is not VAT registered due to providing exempt services, so VAT possiby not recoverable at all, irrespective of the 6-month rule!
That as well
Quite possible that the 'care services' business is not VAT registered due to providing exempt services, so VAT possiby not recoverable at all, irrespective of the 6-month rule!
that as well.
Debtors growing?
How will they resolve this? Ultimately the invoices will have to be paid or else w/off as bad debts? Similarly with the p'ship as creditors will be growing.
yep standard [***] up
How will they resolve this? Ultimately the invoices will have to be paid or else w/off as bad debts? Similarly with the p'ship as creditors will be growing.
yep standard [***] up
Where there's blame there's a claim!
Interesting use of Limited Company
I am confused, if the invoices are not paid by partnership to company then:- how does the company pays for its corporation tax liability? ...
Sounds like a scam to me.
To me it sounds like a scam. Only two events can happen;
1. the company invoices and gets paid. It incurs a management fee which is never paid so the company builds up a large cash base
- If the partners take the money its a loan to participators with all that implies
- if the partners do not take any money how do they live?
- do they declare the management fee charged?
- if they do declare the management fee how are they saving tax as the management fee is taxable income?
- if they do not take the money and declare the "fees" how do the pay their SA tax?
2. The partners invoice and the money goes to them but is recorded as a company transaction.
That is fraud.
- If they invoice using the companies invoice system but the money goes direct to them its theft.
You cannot reconcile the two events.
Unless I have missed something, and I may have, its a scam.
don't tell HMRC
To me it sounds like a scam. Only two events can happen;
1. the company invoices and gets paid. It incurs a management fee which is never paid so the company builds up a large cash base
- If the partners take the money its a loan to participators with all that implies
- if the partners do not take any money how do they live?
- do they declare the management fee charged?
- if they do declare the management fee how are they saving tax as the management fee is taxable income?
- if they do not take the money and declare the "fees" how do the pay their SA tax?
2. The partners invoice and the money goes to them but is recorded as a company transaction.
That is fraud.
- If they invoice using the companies invoice system but the money goes direct to them its theft.
You cannot reconcile the two events.
Unless I have missed something, and I may have, its a scam.
don't tell HMRC it will upset their statistics that show most tax payers are honest and pay their taxes.
it's a good job no one takes any notice so you can do what you like these days.