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Legal Costs to Ltd Co with Director as Guarantor

Share purchase agreement Legal Costs to Ltd Co with Director as Guarantor

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I wonder if anyone can advise on whether the Clamants costs (or partial costs) in the scenario below, could be allowed as expenses for tax purposes, given that the 2 defendents where the Holding Company and the Director personally?

I have been given a document from a new client whereby, a shareholder of a small trading Ltd Co, sold their shares to the Holding Company, and the Director of the Holding Company stood as Guarantor, whereby in the terms, the Director would become liable to the seller, should the buyer (the Holding Company) default under the terms of the Acquisition Agreement. 

It dragged on, and the funds where not paid across in a timely manner and this went to the County Court, the defendents had to pay a substantial amount for Claimants Costs.  The 2 defendents being the Holding Company and the Director (with the Director acting as Guarantor).

Many thanks in advance.

 

 

Replies (9)

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By Montrose
13th Mar 2019 20:44

Were the legal fees incurred wholly and exclusively for the purpose of the trade or business of the Holding company?

VAT is a different question again

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Replying to Montrose:
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By WhichTyler
13th Mar 2019 20:49

I think you are looking at the wrong side? The op is asking about costs incurred by the claimant in enforcing the terms of a share sale....

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By Accountant A
13th Mar 2019 21:52

WhichTyler wrote:

I think you are looking at the wrong side? The op is asking about costs incurred by the claimant in enforcing the terms of a share sale....

Having read it again, I'm not sure what's happening. I suspect the OP's clients are the ones who have been sued. As I said in my response, the claimant has no net cost of they have recovered them via the courts.

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Replying to Accountant A:
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By WhichTyler
13th Mar 2019 22:22

I've read it again and you could be right.

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By Accountant A
13th Mar 2019 21:36

Against what income would the claimant be entitled to a deduction?

Presumably the court award was to reimburse the claimant's expenses so they haven't incurred anything.

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By Carolynne
14th Mar 2019 09:58

Hello

Thanks for your replies.

What has happened is that person A (The Seller) incurred legal costs when suing Person B (The Holding Company) and Person C (The Director and Guarantor).

The Holding Company (Person B), paid thousands to reimburse legal costs to Person A (The Seller), but on the County Court Order, there were 2 Defendents named (Person B the Holding Company) and Person C (the Director who was guarantor).

My question is really, can I put the whole reimbursed legal costs paid to the seller (Person A), by the Holding Company (Person B), as in my view the reason for late payment was that some sort of squabble ensued prior to the court action, and the Director (Person C) delayed matters.

The Court order states that the Defendants are to pay etc.....

I am pondering whether none, half or all of these legal costs can be claimed as an allowable expense for tax purposes within the Ltd Company (Holding Company). Or should the fees paid go against the Directors Loan Account?

Thanks in advance.

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Replying to Carolynne:
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By chicken farmer
14th Mar 2019 12:49

Regardless of who is liable to pay the reimbursed costs, I doubt whether any tax relief is due at all. They would have to qualify under s. 38(1)(a) as incidental costs of the acquisition of the shares and then relief would only be due if and when the shares are the subject of a disposal. I would suggest that these costs were not 'wholly and exclusively' incurred for the acquisition of the shares.

As far as the burden of the costs my gut reaction is that as person C was only the guarantor, he would only have a liability if person B failed to meet that liability.

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Psycho
By Wilson Philips
14th Mar 2019 13:35

Have I got this right?

Setting aside the co-defendants issue, A sells something to B.

B fails to pay so A sues B

B wants to claim the costs arising from the failure to pay as an additional expense in acquiring the asset?

The answer really should be fairly obvious.

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Replying to Wilson Philips:
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By Carolynne
14th Mar 2019 15:31

My feeling has always been that is a disallowable expense for tax purposes. I just wanted to be sure by checking it out, with the Director being named as well as the Company, in case that changed things. Thank you everyone for your help.

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