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Close company benefits to participators

Valuation

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Company created an asset some time ago, at a cost of say £1,000 (its then value). Its current value is £20k. The asset has not been used or depreciated, and is transferred to a shareholder (not an employee or director) for nothing. CTM60550 directs one to the old SE Manual SE21640, which says that the value to be used for s1064 purposes is the second-hand value, which I assume would be £20k in this case. But what if the asset had actually been used prior to transfer (but without being provided as a benefit to anyone)? EIM21655 (and its SE predecessor) suggests that a value higher than MV when first acquired is only used when the benefit is chargeable under s62. It is not so chargeable in this case, so if the asset were to have been used prior to transfer, is the s1064 value then only £1k?

EDIT - thanks for the interesting discussion below! What I can confirm is that the transferee is not a shadow director. But she is a direct shareholder, so it looks like section 1020 trumps section 1064 in this case.

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By Ruddles
05th Jul 2017 13:29

I'd like to help, but I've been reading EIM21655 and found it very hard to follow. In particular, the "special rule" which says that the amount chargeable is the lesser of the expense incurred and the market value at date of transfer seems to have no legislative basis.

What is also confusing is that you're talking about the transfer of an asset to a participator - the value is to be determined by reference to employment income principles but it seems to me as though the value would depend on whether the benefit is chargeable under ITEPA 2003 s62 or as "by reason of the employment". But if you're looking at a non-employee, neither would apply!

Good luck.

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By Ruddles
05th Jul 2017 13:57

And looking at EIM21646:

If a person transfers an asset to a director or employee or a member of his family or household by reason of his employment before the asset has depreciated or been used the amount chargeable is:

the greater of

the expense incurred by that person in connection with the provision of the asset less any amount made good (see EIM21120) or

the second-hand value of the asset in the hands of the employee if it is chargeable under Section 62 ITEPA 2003 (see EIM00540) less the amount the employee has to pay for it

What is that supposed to mean? If the value is NOT chargeable under s62, what happens to the "or"?

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Replying to Ruddles:
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By Portia Nina Levin
05th Jul 2017 14:17

For an employee, you calculate (1) what would be taxable as a benefit and (2) what would be taxable as earnings.

If (1) exceeds (2) you tax (1) as a benefit and nothing as earnings.

If (2) exceeds (1), you tax (1) as a benefit and the difference between (2) and (1) as earnings.

ITEPA 2003, s 64. Ooh look! It's actually the other way around!

None of this is relevant though.

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Replying to Portia Nina Levin:
By Ruddles
05th Jul 2017 14:23

My point was, though, what happens if the second-hand value is not chargable under s62 (eg because it is not money's worth)? That takes the second bullet-point out, so what are we left with after the "or"?

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Replying to Ruddles:
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By Portia Nina Levin
05th Jul 2017 14:25

Oh you're troubling yourself with (what's essentially) flowchart syntax?

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Replying to Portia Nina Levin:
By Ruddles
05th Jul 2017 14:44

Yes. If the amount is not chargeable under s62, so that the second bullet point no longer exists, the chargeable amount is the greater of the cost and what?

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By Portia Nina Levin
05th Jul 2017 14:03

EIM21655 reflects my understanding of the interaction between the benefits code and s 62.

As you say, the s 62 charge cannot apply for the purpose of calculating a s 1064 charge.

However, s 1064 does not apply. There has been a de facto distribution of assets of the company to a member of the company. It is established company law that the amount of the distribution is the value of the assets distributed.

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Replying to Portia Nina Levin:
By Ruddles
05th Jul 2017 14:36

Hmmm - if that were the case, why would, for example, CTM60550 refer to assets transferred to a participator or associate in the context of s1064? Perhaps because you think HMRC are wrong?

And company law is not always neatly aligned with tax law. Tax law sets out how the value of an asset transferred to a participator of a close company is to be established for tax purposes.

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Replying to Ruddles:
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By Portia Nina Levin
05th Jul 2017 14:48

Yes, I think HMRC are wrong to refer to the need to value the transfer of an asset to a participator for the purposes of s 1064, because such a transfer falls outwith s 1064.

The transfer of an asset is a distribution of the company's assets, and thus a distribution (by virtue of s 1000 and/or s 1020), such that it cannot also be "other benefits or facilities of any kind".

S 1020 deals with any apparent anomoly (which there is none) between company law and tax law.

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Replying to Portia Nina Levin:
By Ruddles
05th Jul 2017 15:12

As I thought :)

Would your answer be any different if the asset were to be transferred to an associate of a participator? (Tolleys mentions that s1000 (and s1020) refers to distributions to members (as distinct from participators), which are defined as those persons appearing in the register of members.

Not that this may be at all relevant to the OP.

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Replying to Ruddles:
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By Portia Nina Levin
05th Jul 2017 15:44

If an asset has left the company, the first question, in terms of who a distribution may have been made to, is why did it leave the company, rather than whose hands the asset ended up in.

I think one can broadly say that participators = members + loan creditors. I'd have said that the same question was relevant to determining the tax treatment where an asset is transferred to a loan creditor to be honest.

That same question is probably also key to my other "shadow directorship" point.

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Replying to Portia Nina Levin:
By Ruddles
05th Jul 2017 15:59

Possibly, but in absence of pertinent information, we're only theorising.

But I'd say that, broadly, participators = members + associates of members + loan creditors. All members are likely to be participators but not all participators are members. So presumably s1064 - in theory - can be relevant where s1000/s1020 (re MEMBERS) doesn't bite.

Let's say that hubbie has 100% of the shares in, and is sole director of, his company. Company transfers valuable asset to his brother, who has no involvement whatsoever in the company. Brother is not a member so s1000/s1020 shouldn't apply. Brother is not a member of family or household, so BIK should not arise. Which leaves us with s1064?

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Replying to Ruddles:
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By Portia Nina Levin
05th Jul 2017 16:16

Aren't associates of members associates of participators, rather than participators, in the first instance? With associates of participators only being treated as participators by s 1069 for the purposes of 1064.

So we have an asset being transferred to an associate (brother) of a participator (hubbie).

If the reason for that transfer is hubbie's shareholding, then I think that is a distribution (of assets) in respect of member's (hubbie's) shares, or a distribution of an asset to a member (hubbie) which they have then assigned.

If the reason for the transfer is hubbie's directorship, then there;s a benefit in kind for hubbie.

Perhaps there was some other reason, that somebody who is not a member (but is a participator for the purposes of s 1064) received the asset though. Bu88ered if I can see what it might be though.

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Replying to Portia Nina Levin:
By Ruddles
05th Jul 2017 16:33

"Aren't associates of members associates of participators, rather than participators, in the first instance?"

Perhaps, but that doesn't make them members - which is what s1000/s1020 refers to. Nowhere (that I can see) is there a reference to members including associates of members.

As for the possible reasons, there are many. But where is the statutory authority that says that there would be a benefit in kind for H if the reason for the transfer was his directorship (assuming that the transfer was made directly to brother)?

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Replying to Ruddles:
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By Portia Nina Levin
05th Jul 2017 17:17

I was going to say s 201(2)(b), but I see from s 721(4) that a brother isn't family (unless they are a dependant).

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By Portia Nina Levin
05th Jul 2017 14:30

Are we sure, by the way, that a shareholder who has managed to have an asset of the company transferred to them isn't a director?

ITEPA 2003, s 67(2) refers.

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By Montrose
05th Jul 2017 20:56

The tax consequences of a transfer to a particpator which - had it been to an employee would have been a taxable benefit -
are twofold
1] The participator is deemed to have received a distribution equal to the value of what would have been the benefit and
2] The same figure is added to the taxable profits of the company, on the grounds that a distribution is not an allowable expense for tax purposes

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Replying to Montrose:
By Ruddles
05th Jul 2017 21:15

1) The question is though- just what is that value in the case of the transfer of an asset? And - as Portia indicates (with my agreement) is s1064 actually in point where the asset is transferred to a member of the company?

2) That is nonsense.

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Replying to Montrose:
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By Portia Nina Levin
11th Jul 2017 10:25

Quote:

2] The same figure is added to the taxable profits of the company, on the grounds that a distribution is not an allowable expense for tax purposes

That's b0llox. The costs of providing any benefit would be disallowable to the extent that they had been expensed through P&L

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By Ruddles
06th Jul 2017 08:30

I think the OP has been over-thinking it.

1) - if the asset has been transferred to a member then I'm inclined to agree with Portia that s1020 should apply (although I'm not 100% convinced, as there is nothing that I can find that says which of s1020 and s1064 takes priority in the case of a close company).

2) - if the asset has been transferred to a non-member participator (such that, IMO, s1064 applies) the valuation rules are quite simple - you look at ITEPA 2003 s204 or s206.

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Replying to Ruddles:
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By Portia Nina Levin
06th Jul 2017 10:41

I'm not convinced that there is any order of priority.

S 1064 can only apply if there has been some benefit within the scope of s 1064(1).

If the asset has been passed out of the company as a taxable distribution, then, in my view, there are no "other benefits or facilities of any kind".

Incidentally, I don't think it is taxable under s 1020. I think it is taxable under s 1000, on general principles.; s 1020 simply being there to catch it if it falls.

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Replying to Portia Nina Levin:
By Ruddles
06th Jul 2017 11:06

I agree - taxable under CTA 2010 s1000 (1) B or G.

Though I still think neither would apply in the case of a transfer of assets to a non-member participator.

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By pauljohnston
06th Jul 2017 10:32

Well done guys this is what Aweb is all about. S1020 (2) "The amount of relief is to be reduced by a just and reasonable amount." Good Luck with that looks to me as if the legislators gave up too

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Replying to pauljohnston:
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By Portia Nina Levin
06th Jul 2017 10:40

Paul, you appear to be quoting from the wrong Corporation Tax Act. That is from CTA 2009, s 1020, rather than CTA 2010, s 1020.

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By Montrose
10th Jul 2017 22:53

HMRC do take the view that when CTA 2010 s1064 applies, then so does CTA 2009 s1305(1) so that the distribution itself is added back, not as PNL argues the costs incurred by the company concerned in providing the quasi benefit. That may seem ridiculous, but is an argument I have met from HMRC, who would not budge on it. In the case concerned, it was clear that HMRC did not want to have the matter discussed before a Tribunal, and wriggled to find a reason that s1064 did not apply at all.

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Replying to Montrose:
By Ruddles
11th Jul 2017 10:00

You can't add something back that is not otherwise shown as a deduction. HMRC seem to be confusing "taxable" with "non-deductible".

But I'd love to see that argument in front of a Tribunal and I think that the fact that HMRC were unwilling to take it to Tribunal tells you all you need to know.

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Replying to Montrose:
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By Portia Nina Levin
11th Jul 2017 10:56

Put another way, how much of the deemed distribution is it that you think has been deducted, contrary to s 1305, in calculating the company's profits?

Incidentally, you might have tried referring HMRC to their own manuals:
https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm60520

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By Montrose
12th Jul 2017 14:23

In response to PNL, look at the simplest example to see why her argument is not practicable. Suppose a company allows a participator to have free use of a corporate luxury car. We know how to evaluate the benefit to which the notional distribution is equated, but what is the cost to the company?

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Replying to Montrose:
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By Portia Nina Levin
12th Jul 2017 14:36

No. You answer your own question.

How much has been deducted from the company's profits that relates to the provision of the car that needs to be added back in order to achieve what s 1305 requires.

The costs of maintaining, taxing and insuring the car one would imagine.

The cost of purchasing the car will already not have been deducted from profits, because it is capital in nature, and doesn't qualify for capital allowances.

How frigging hard is this, seriously?

Why do you persist with this c0ckwaffle?

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Replying to Portia Nina Levin:
By Ruddles
12th Jul 2017 14:56

Unsurprisingly, Portia is spot on. We had a case with a shareholder occupying company property (with H&L etc paid by the company). Due to circumstances, it was impractical to determine the actual costs incurred, and charged to the P&L, of providing the accommodation and so agreement was reached with HMRC as to a reasonable approximation of annual running costs and these were added back. At no time did HMRC even suggest that we should be 'adding back' the amount of the assessable deemed dividend.

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Replying to Ruddles:
By Ruddles
12th Jul 2017 16:02

Actually, here's a thought, Portia:

We're agreed that no deduction is allowed for the (deemed) distribution. But that is all that the legislation says. So, s1064 tells you what the amount of the distribution is, and that amount is the expense, and the expense is further defined not as expenditure incurred but as the amount of the benefit calculated under ITEPA rules. Once you've established the amount of the (deemed) distribution then the law says that you cannot get a deduction for it - nothing more, nothing less.

So the question then arises - where does it say that the actual expenditure (fuel etc) is not allowed? (Other than an interpretation of the wording at CTM60520.) I guess that if you tried to push it, HMRC might argue that costs incurred in providing a benefit to a non-employee/director participator are not incurred for the purposes of the trade and therefore failing on first principles.

Thoughts?

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Replying to Ruddles:
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By Portia Nina Levin
12th Jul 2017 16:11

The question remains as to how much of the expenditure incurred has been deducted in calculating profits.

If s 1064 deems a benefit of £1,000 and the actual P&L costs are £600, then I think a tribunal would accept that £600 of the£1,000 has been deducted in calculating profits.

If s 1064 deems a benefit of £600 and the actual P&L costs are £1,000 though, I might be inclined to resist an add-back in excess of £600. Seems an unlikely scenario though.

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Replying to Portia Nina Levin:
By Ruddles
12th Jul 2017 16:35

Yes, but ...

... in the first case, where - in the legislation - does it say that the P&L costs of £600 have to be added back? All I can see is a provision which says that the £1,000 "expense" cannot be deducted. But the "expense" that cannot be deducted is not in fact expenditure but is defined as the value of the benefit - which may or may not bear any relation to actual expenditure incurred.

I have to say that until now I wouldn't have given a second thought to adding back the actual costs, but now I'm not so certain.

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Replying to Ruddles:
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By Portia Nina Levin
12th Jul 2017 16:54

I take the point, but we know that HMRC would be looking for add-back of the costs, and I think a tribunal would support that view.

I think a tribunal might be sympathetic though to limiting the add-back to the amount of the deemed distribution.

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Replying to Portia Nina Levin:
By Ruddles
12th Jul 2017 17:07

I don't disagree on the first point, but as we both know what HMRC might be looking for and what the legislation says are often two different things.

But by the same token, since HMRC's manual talks about non-deductibility of expenses in providing the benefit, I would expect them to be looking for an add-back of whatever those expenses are, regardless of the amount of the distribution (to suggest that the add-back would be restricted to the amount of the distribution might lead to an accusation that you're starting to agree with Montrose. And no-one wants that.)

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Replying to Ruddles:
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By Portia Nina Levin
12th Jul 2017 17:17

Quote:

to suggest that the add-back would be restricted to the amount of the distribution might lead to an accusation that you're starting to agree with Montrose. And no-one wants that.

Yes. I'm hoping that will go unnoticed! As I say though, I think the circumstances in which that would apply would be rare.

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Replying to Ruddles:
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By Montrose
17th Jul 2017 00:00

Dear Ruddles and Portia
What is wrong with conceding the possibility that I might be right?

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Replying to Montrose:
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By Tax Dragon
17th Jul 2017 04:50

You're not. In the OP's example, £1,000 was spent acquiring a capital asset many moons ago. That £1,000 was disallowable at the point it was incurred. What further disallowance is needed now? In respect of what cost - other than of course the costs of providing the benefit, eg legal fees etc, which s1305 denies?

There may be other tax consequences - eg a taxable gain on a disposal to a connected person and/or on a non-arm's length basis - but that's another set of rules. Presumably if the expenditure qualified at the time for ABAs or IBAs, those allowances stand - but would be reflected in the capital gain.

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Replying to Montrose:
By Ruddles
17th Jul 2017 07:58

I don't think there's any possibility that you're right, so nothing to concede.

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Replying to Montrose:
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By Tax Dragon
17th Jul 2017 08:14

Please don't feel bad. Ruddles and Portia (if and to the extent that it appeared they might agree with you in the £600 MV example) are also wrong. There too the £1,000 should be disallowed. Why does it matter whether there is a gain or loss on the subsequent disposal?

The difference is that they have the nous to self-correct.

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Replying to Tax Dragon:
By Ruddles
17th Jul 2017 11:52

For the avoidance of doubt, and if you read my uncorrected post above you will see, I never agreed that only the £600 should be disallowed. The legislation is clear enough to me - in that case, it says that the full £1,000 should be disallowed - but not necessarily that anything at all needs to be added back.

If a benefit costs £600 to provide, and is valued at £1,000 (or costs £1,000 to provide, and is - unusually - valued at £600), there is actually nothing in the legislation that says either the £600 or the £1,000 has to be added back (save perhaps CTA 2009 s54).

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Replying to Tax Dragon:
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By Portia Nina Levin
17th Jul 2017 09:19

Quote:

Ruddles and Portia (if and to the extent that it appeared they might agree with you in the £600 MV example) are also wrong. There too the £1,000 should be disallowed. Why does it matter whether there is a gain or loss on the subsequent disposal?

Yes, the £600 is disallowable under s 1305, but that's only after the whole £1,000 is disallowable under s 53/s 54/s 210/s 1219, rendering s 1305 redundant really.

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Replying to Montrose:
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By Tax Dragon
17th Jul 2017 13:48

See? Nous.

Ruddles - I'm not sure whether I read your uncorrected comment; too late now I guess, but anyway I agree your comment shown above as at 12th Jul 2017 17:07.

Portia - I'm not sure I agree that s1305 disallows just £600 of the £1,000, in that example (mind you, I'm not sure I disagree either - I take the point Ruddles made about HMRC's "interpretation" at CTM60520); but like you say, it doesn't matter, since the full £1,000 is disallowed by other provisions.

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Replying to Tax Dragon:
By Ruddles
17th Jul 2017 14:31

"Uncorrected" as in "unchanged" - I've never agreed that the disallowance in Portia's example would be restricted to the £600.

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Replying to Ruddles:
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By Tax Dragon
17th Jul 2017 15:08

Ah, sorry. Then, yes, I have (if not until today).

Do you think the legal fees would be disallowed as I mentioned in my post at stupid o'clock this morning? I confess that I misread s1305 through my sleepy eyes; when I subsequently woke up and reread it was far from clear that it said anything of the sort (although that is how HMRC interprets it).

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Replying to Tax Dragon:
By Ruddles
17th Jul 2017 15:24

I think HMRC would certainly argue that the legal fees should be disallowed - given that is how their guidance is couched.

But I don't believe that the guidance reflects what the legislation actually says (there are other areas of their guidance on participator benefits that also appear to have little or no statutory basis).

But if one were to contest HMRC on this point I suspect (and would hope) that they'd have the sense to consider the W&E rule.

On balance, therefore, I'd say that the legal fees should be disallowed - not under s1305 but s54.

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Replying to Ruddles:
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By Tax Dragon
17th Jul 2017 15:33

I think on that we are all agreed.

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By Montrose
12th Jul 2017 15:31

If we disagree with one another, that does not require personal abuse. On this occasion, however unpalatable it may be to accept, I am right.
Taking PNL up on her challenge, on what basis would you calculate the sum expended in any year of assessment by a company in providing free use of a private motor car to a participator, where the Taxes Acts do not allow depreciation for example as an allowable expense?

Insurance and petrol costs are easy, but depreciation is not expended, hence the elaborate WDA codes.

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Replying to Montrose:
By Ruddles
12th Jul 2017 16:07

Saying that you are right doesn't make it so. Please direct us to the statutory authority that says that the amount of the deemed dividend must be added to taxable profits. Or are you as equally confused as HMRC appear to be?

Portia has already explained what costs incurred in respect of a car would need to be added back - but see my further thoughts above.

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Replying to Montrose:
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By Portia Nina Levin
12th Jul 2017 15:59

Telling somebody that what they are saying is c0ckwaffle, when it is a statement of fact, is not personal abuse.

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