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Prospect with an interesting set-up

Income shifting - where would you take this?

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I am due to meet a prospect this afternoon.

She is an employed professional person who has had a sole trader business on the side for a couple of years. Except the sole trader business is registered under her husband's name who is a stay-at-home-dad with, as far as I know, no other income. She is looking to leave her PAYE job and form a limited company via which she will (continue to) supply consultancy services.

Initially, I was a little wary about meeting. There are undoubtedly some gaps in her story which I would like to fill and I want to get a measure of her motives and integrity.

How do you think the meeting would go if you were me? Interested in how you would handle things.

PS. This is not homework.

 

 

 

 

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06th Jun 2018 12:26

Does Husband actually do any work / run the business?

If not, from your description, it sounds like tax evasion.

Similar to the scenario that probably many of us have encountered:-
"We've got a joint rental property but there's no tax because we get the rents paid into an account in the wife's name and she doesn't work"

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06th Jun 2018 12:18

Are you suggesting that the husband has reported her self-employed income to HMRC as though it were his in order to benefit from a second tax-free allowance and basic rate band?

If so, I would suggest that they ought to come clean and make correct Returns to HMRC. If they refuse, then you need to consider your responsibilities under AMLR.

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to SteLacca
06th Jun 2018 12:35

Absolutely! It has thrown me a bit because in all my years I have never come across it before. Sounded nice on the phone.

Of course the spouse working in the business 'nudge nudge wink wink' is a very familiar scenario, but this is a bit oddball.

I might regret this meeting.

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By ShayaG
to SteLacca
08th Jun 2018 16:47

I don't get hot under the collar with spouses being paid spurious salaries from companies, and I'm really struggling to care about this. The point is that the income is fully declared and taxed. Yes, technically this is illegal but it still doesn't have the ring of an aggressive scheme or deliberate evasion.

Had the couple formed a partnership with wife taking a 0% profit share does everyone agree this would have all been hunky dory? In effect, that's what happened.

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to ShayaG
08th Jun 2018 18:29

ShayaG wrote:

Yes, technically this is illegal but it still doesn't have the ring of an aggressive scheme or deliberate evasion.

Technically illegal eh? Is that like being slightly pregnant?
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By ShayaG
to Wanderer
11th Jun 2018 11:41

No, it's not like being slightly pregnant. You can only be pregnant or not pregnant.

You can make a range of good faith or a bad faith efforts to engage with the tax system, and this one feels to me more like a good faith effort.

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to ShayaG
09th Jun 2018 18:23

So a 40% taxpayer artificially shifting income to a 20% taxpayer in order to avoid the extra 20% (and potentially reduce that 40% to 0% for £11k) is not actively evading tax?

I must have a different dictionary.

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to SteLacca
09th Jun 2018 23:25

Leaving aside any questions of morality or legality, the sad thing as I see it about ShayaG's attitude is it belittles the value of any advice s/he may give. How can you charge for advising someone to do things properly if you think not doing things properly gives the same outcome?

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By ShayaG
to Tax Dragon
11th Jun 2018 11:31

1) If you give exactly the same perspective as an HMRC inspector I don't see the value in what you do. I am not a branch of the government. I act ethically in my client's interest.

2) Most clients are in technical default about something. I bet you are too. For example, expenses must be wholly and exclusively for the purposes of the business. More likely than not, your tax return includes 50% business usage of mobile phone or vehicles. That's not technically compliant either, but HMRC's long-standing policy has been not to pursue a reasonable claim.

3) My advice as a professional is now just drawn from legislation but from generally accepted practice and an awareness of how the system works.

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By ShayaG
to SteLacca
11th Jun 2018 11:37

1) I consider the taxpayer's arrangements to be made in good faith pursuant to a reasonable and arguable legal case, namely the existence of an implicit partnership. There are factors which mitigate both for and against this analysis, and I consider the taxpayer's case strong enough to be at least arguable. If this was my client, I would be filing late partnership tax returns.

I advise clients every day how to structure 'artificially' (whatever that means) their affairs to minimise tax, and I assume you do too.

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By DJKL
06th Jun 2018 13:05

Also consider how it may have impacted tax credits.

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to DJKL
06th Jun 2018 13:09

And HICB charge.

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06th Jun 2018 16:43

"We just want you to look after the new company. We'll deal with our personal tax returns ourselves."

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to andy.partridge
06th Jun 2018 17:02

That old chesnut.

I wont deal with anyone now where I don't also complete the SA return for the Directors.

As when doing it themselves Directors tend to forget about dividends then try and blame you when it goes [***] up.

Give it a wide birth.

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to andy.partridge
06th Jun 2018 17:02

That old chesnut.

I wont deal with anyone now where I don't also complete the SA return for the Directors.

As when doing it themselves Directors tend to forget about dividends then try and blame you when it goes [***] up.

Give it a wide birth.

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to Glennzy
06th Jun 2018 17:15

You are right, of course.

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By Matrix
06th Jun 2018 17:13

I am sure you can advise the optimal set up going forward for the husband and wife to extract the profits from the new company. If, in the course of your work, you determine that historic tax returns were submitted with errors then you can offer to fix it for them and, if they refuse, just file an SAR.

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to Matrix
06th Jun 2018 17:16

You too are right, of course.

I think it depends on energy levels. I'll sleep on it.

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By Matrix
to andy.partridge
06th Jun 2018 17:22

Just to add and not to spoil your beauty sleep, you probably need to submit an SAR anyway given the information you have been told.

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to Matrix
06th Jun 2018 17:43

We'll see. I think that might depend on the how my advice has been received. She did a very good job at looking genuinely surprised there might be a problem.

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06th Jun 2018 18:24

Can't they form a partnership with a 99/1 profit sharing split?

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to AnnAccountant
06th Jun 2018 18:48

AnnAccountant wrote:

Can't they form a partnership with a 99/1 profit sharing split?

How would that help?
History can't be rewritten, the future is in the process of being addressed.
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By ShayaG
to AnnAccountant
08th Jun 2018 16:49

I suppose Anne's point is that the implicitly have formed a partnership by virtue of the arrangements, domestic and business, that have been made. There's nothing in law requiring the specific invocation of a partnership or a written agreement (though there is plenty in tax law about filing partnership tax returns). I am sympathetic to this couple - it's very different from your typical fish and chip shop pocketing takings.

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By ShayaG
to AnnAccountant
08th Jun 2018 16:50
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29th Jun 2018 10:45

Isn't this in substance a H&W general p-ship with a 100% income split for husband (as a sleeping partner - Pooley v Driver refers, see para 1178 here http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05270.html)? That does not need any written p-ship agreement. I cannot think of any anti-avoidance (let alone evasion) here, and HMRC respect any income share agreed by the partners. I am happy to be proved wrong with any legislation/case law to the contrary on this point (he should include the income in the p-ship section of the tax return and register the p-ship with HMRC of course, but a lot of p-ships aren't properly compliant re all that and that does not change the underlying legal reality).

There have been plenty of comments on this forum about what is & isn't a general p-ship and at the end of the day if they confirm it's been a p-ship from the outset that should be the beginning & end of it (they can simply ratify the p-ship in a written agreement confirming it has existed since whatever date).

BIM82020 Partnerships - Capacity Of Partners
It is not a requirement of partnership that each member is capable of performing the full range of the activities of the partnership business, but each must be capable of performing a part of the activities. The differing abilities of the parties may have made partnership desirable in the first place; see, for example, Fenston v Johnstone [1940] 23TC29. In that case arrangements for the joint purchase and development of land, with one party providing expertise and the other finance, were held to be a partnership. See also Newstead v Frost [1980] 53TC525 in which an entertainer entered into an agreement with a company to exploit his artistic talents and the court decided that there was a valid partnership.

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to Justin Bryant
07th Jun 2018 10:10

That's not what the OP said though is it?

Could also be years of outstanding partnership returns.

And H hasn't been returning it is partnership section.

And what do the underlying records / bank statements / invoices say.

And .........................

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to Wanderer
29th Jun 2018 11:31

I have answered that in my above comment (i.e. it should makes no difference to the legal reality if they have as a matter of fact agreed a 100% profit split as partners) and you need to search this website for the salient commentary & case law on this point.
http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02856.html
http://www.bailii.org/uk/cases/UKFTT/TC/2018/TC06318.html
http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05392.html

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to Justin Bryant
07th Jun 2018 10:49

Justin Bryant wrote:

I have answered that in my above comment (i.e. it should makes no difference to the legal reality if they have as a matter of fact agreed a 100% profit split as partners) and you need to search this website for the salient commentary & case law on this point.

Sorry, utter rubbish based on what we've been told. The OP said:-
Quote:
She is an employed professional person who has had a sole trader business on the side for a couple of years. Except the sole trader business is registered under her husband's name who is a stay-at-home-dad with, as far as I know, no other income.
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to Wanderer
07th Jun 2018 10:58

Why can't a sleeping partner have the business in his name (if anything that helps the p-ship argument)? I have seen many tribunal cases where it is accepted without question that a H&W p-ship exists where they agree between themselves how to split the income however informally and however they like. I will end there, unless you can cite a case to the contrary.

The reason this is not commonly done is due to risk management (both partners can be sued potentially).

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to Justin Bryant
07th Jun 2018 10:58

Justin Bryant wrote:

Why can't a sleeping partner have the business in his name? I have seen many tribunal cases where it is accepted without question that a H&W p-ship exists where they agree between themselves how to split the income however informally and however they like. I will end there, unless you can cite a case to the contrary.

This is irrelevant, as are your other points.
Based on what we have been told they didn't have a business partnership.
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to Justin Bryant
07th Jun 2018 10:25

Justin Bryant wrote:

I am happy to be proved wrong with any legislation...


Erm, s1 PA 1890?
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to Tax Dragon
07th Jun 2018 10:37

That says:

"(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. "

Sleeping partners are fine, so why is there any problem there?

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to Justin Bryant
07th Jun 2018 11:50

And what about the lack of partnership returns since the inception of this alleged, fictitious partnership?

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to SteLacca
07th Jun 2018 14:11

There is no point in arguing. This is not the first time that Justin has said you can say that a partnership has existed the whole time. I have yet to see him accept any amount of evidence that no partnership existed makes the plan unworkable.

I think the only thing that he would accept is someone having a "sole trader agreement" so there was legal written proof it wasn't a partnership.

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to SteLacca
07th Jun 2018 14:14

By the way, he is also fond of challenging others to present case law that his idea doesn't work, but is markedly reluctant to present case law that shows that it does.

But since I'm here I will ask again. Justin, can you provide a single piece of case law that allowed a partnership to be declared to exist historically despite no legal steps (including registration with HMRC) being taken to establish it historically.

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to stepurhan
07th Jun 2018 14:18

We crossed in the post(ing) but I agree your comments.

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to Justin Bryant
07th Jun 2018 14:16

Justin Bryant wrote:

That says:

"(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. "


Correct. Which requires establishment of fact (and one reason why your
Justin Bryant wrote:

I am happy to be proved wrong with any legislation/case law to the contrary on this point

is just odd - it's the facts that matter more).

We don't know the facts. Why do you suggest there's a partnership and not suggest there's a settlement?

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07th Jun 2018 11:25

I'd ask her to bring a copy of her tax return with her. That may answer some questions or provoke more

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to bernard michael
07th Jun 2018 11:32

I have not seen her tax return, but I doubt it will make reference to self-employment (and certainly not a partnership).

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to bernard michael
07th Jun 2018 11:33

But a 0% profit split may not need to be notified to HMRC per para 32 from the case below:

“..The statutory obligation on every person is to notify liability if they are chargeable to tax and their income and gains do not fall within at least one of the exceptions in subsections (4) to (7) of s 7 TMA”

http://www.bailii.org/uk/cases/UKFTT/TC/2018/TC06320.html

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to Justin Bryant
07th Jun 2018 12:07

Justin, I've got a new client for you ;)

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to Justin Bryant
07th Jun 2018 12:28

Justin Bryant wrote:

But a 0% profit split may not need to be notified to HMRC per para 32 from the case below:

“..The statutory obligation on every person is to notify liability if they are chargeable to tax and their income and gains do not fall within at least one of the exceptions in subsections (4) to (7) of s 7 TMA”

http://www.bailii.org/uk/cases/UKFTT/TC/2018/TC06320.html

And how does that cover S9 TMA 1970?
Quote:
9 Partnership return
(1)Where a trade or profession is carried on by two or more persons jointly, the precedent partner, that is to say, the partner who, being resident in the United Kingdom—
(a)is first named in the agreement of partnership, or
(b)if there is no agreement, is named singly, or with precedence to the other partners in the usual name of the firm, or
(c)is the precedent acting partner, if the person named with precedence is not an acting partner,shall make and deliver a return under section 8 above of the profits or gains of the trade or profession, on behalf of himself and the other partners, and declare in the return the names and residences of the other partners.
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to Wanderer
08th Jun 2018 17:15

Noted (but this potential non-compliance issue has been addressed ad nauseum already as not determinative as to wheter there is a p-ship or not and I note that there is now as a matter of fact (which is determinative ) no p-ship).

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to Justin Bryant
09th Jun 2018 18:27

Justin, surely the sentence in the OP is determinative enough:

Quote:
She is an employed professional person who has had a sole trader business on the side for a couple of years.
.

Last time I looked, it was impossible to be a sole trader and a partner in exactly the same business.

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07th Jun 2018 14:22

A partnership is a matter of fact.If there are no formal documents can it be evidenced by actions taken eg splitting the income on a tax return

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By Matrix
to bernard michael
07th Jun 2018 14:53

Yes - but, as previous posters have commented, this is not what has happened here.

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to bernard michael
07th Jun 2018 17:40

bernard michael wrote:

A partnership is a matter of fact.If there are no formal documents can it be evidenced by actions taken eg splitting the income on a tax return

What's on a tax return is at best indirect evidence. It might suggest that those involved believed that a partnership existed. (It could be that the lack of such disclosures [such as has been supposed here - Andy hasn't actually told us, that I've noticed] would be stronger evidence that no partnership existed. Let's ask Justin - he knows all the case law.) On the other hand, making rubbish up on tax returns evidences something other than the existence of a partnership. Meanwhile I agree of course that the existence in fact of a partnership would leave a trail of (genuine, direct) evidence, to which the couple would be able to point. That should be the starting point of your (and Justin's) contentions. Neither of you has started there though.
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to Tax Dragon
08th Jun 2018 10:12

No, there was no partnership. I can now say that categorically because in conversation the prospect raised the possibility of forming a partnership as opposed to forming a limited company.

I try to be flexible, but really she couldn't believe there was already a partnership if she was contemplating it as a way to trade in future.

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to andy.partridge
08th Jun 2018 11:11

I doubt that revelation is a surprise to anyone who's posted on this thread.

That leaves the possibilities that a) she's kept the money but they've declared it (if at all) as his. Fraud. Or b) she's actually given him the money but not understood the rules on settlements. Fraudulent if no remedial steps taken.

Personally I don't see why the settlements rules wouldn't apply in the 1/99 solution suggested above. But that's another thread, I feel.

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By ShayaG
to andy.partridge
11th Jun 2018 11:29

She may have thought that a partnership was an entity which needed to be created explicitly rather than the legal reality, which is that a partnership is implicitly formed by the way these two have merged their financial and tax affairs, domestic arrangements, and business. My analysis is that there was in fact a partnership, and you should go back and file late P'ship tax returns.

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