Gabelle Tax Analysis: The dangers of mixing corporate and personal funds
The case of Mirror Image Contracting Limited (‘MIC’) (TC02350, published on 19 November 2012) is a salutary reminder of the dangers of dealing with personal funds and those of a family company as if they were interchangeable.
In what was described as a ‘sad story’, the First-tier Tribunal (FTT) found that s.419 tax (now s.455 CTA 2009) was payable in relation to amounts withdrawn from a company by the shareholder and that no tax relief was available to the company on the subsequent write off of the amounts withdrawn.
MIC was a company established by Naomi Jordan and her domestic partner Paul Sweeny, a professional snooker player. MIC undertook building contracting work with Ms Jordan’s father, an experienced builder whose own business had become insolvent, managing the work as an employee. The business was successful and built up cash balances.
In practice, Mr Sweeny was solely responsible for management of the company’s finances, and the FTT recorded that:
- Mr Sweeny withdrew cash from the business which he deposited in his own personal savings account.
- Between 28 March and 24 April 2008, Mr Sweeney withdrew just over £110,900 from MIC’s accounts and deposited these sums in a joint offset mortgage account held with Ms Jordan.
- In October 2008, Mr Sweeny sold a company van and used the proceeds to purchase a car in his own name.
- On 26 October 2008, Mr Sweeny moved out of the home he shared with Ms Jordan and earlier the same day transferred £100,000 from the joint offset mortgage into an account in his own name.
The case for MIC was that the funds withdrawn by Mr Sweeny were held by him “on trust” for the company; however, this interpretation was rejected by the FTT. It found that:
If the funds had been held on trust, they would have been kept in a separate account, and not intermingled with Mr Sweeny’s and Ms Jordan’s personal accounts. The legal effect of depositing funds into Mr Sweeny’s and Ms Jordan’s offset mortgage account is to discharge a loan owed by them. This would have been an egregious breach of any trust (had the funds truly been held on trust by them for MIC). We find that the amounts withdrawn by Mr Sweeny and deposited either into his personal account or into the joint offset mortgage account were lent by MIC as shareholder loans, and were never held on trust for MIC.
On this basis, the FTT found that the ‘loans to participators’ rules were in point and that a ‘s.419 charge’ therefore arose.
To the extent that some monies were repaid to the MIC, this charge could be refunded; however, not all the monies were repaid. MIC wrote-off the outstanding amounts as bad debts and sought a deduction for this as a trading expense.
The FTT refused this deduction too, finding that the loans had been made outside the course of MIC’s trade. Finally, in relation to the sale of the company van by Mr Sweeny, the FTT found that this was a capital transaction such that, again, no trading deduction could be claimed (- and the FTT noted that the disposal had, in any event, been correctly included in a capital allowance computation).
This case illustrates the mess that can be created when proper financial controls are not put in place and when company and personal monies are treated as the same. It is, of course, possible for a company’s money to be held ‘on trust’ by someone else and likewise a company can itself holds funds on trust for someone else. In both cases, however, the relationship should be properly documented by some form of declaration of trust or other agreement between the parties. Where funds are simply ‘transferred’ it will always be open to a tribunal to determine that (as here) a loan (or in another case perhaps) a ‘distribution’ has been made – and both can trigger adverse tax charges.