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Unmarried shareholder, to be or not to be?

Should the joint shareholder (partner but not married) be a director, or won't it make a difference?

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Client wants to set up a PSC for a one-off contract worth circa £60K. Shares will be split 75:25 between himself and his partner (not married). (Coincidentally my client pays a higher rate of income tax than his partner). The client will carry out the 'professional' work, whilst the partner will carry out admin and support services. Dividends will be paid into their respective individual bank accounts. Assuming no arrangements for the partner's divs to be ultimately returned to my client then am happy that the Settlements legislation will not bite. My question, however, is if it will make any difference if the partner was also a director? I can only think that it might be advantageous if BADR was an issue. Thanks.

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By Hugo Fair
19th Jul 2021 18:12

I know this isn't the question you asked but I'd have thought that setting up "a PSC for a one-off contract" is almost bound to fall foul of IR35?

Anyway, when you ask "if it will make any difference if the partner was also a director" ... from what perspective are you asking (especially as you keep mentioning 'unmarried' as well)? Is there a particular aspect on which you seek re-assurance?

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Replying to Hugo Fair:
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By Leywood
19th Jul 2021 18:24

[quote=Hugo Fair] ''I know this isn't the question you asked but I'd have thought that setting up "a PSC for a one-off contract" is almost bound to fall foul of IR35?''

My thoughts exactly.

Also, if its a one off contract, wondering what possible admin and support services there could possibly be!

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Replying to Hugo Fair:
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By Software Seeker
19th Jul 2021 18:51

Hugo Fair wrote:

I know this isn't the question you asked but I'd have thought that setting up "a PSC for a one-off contract" is almost bound to fall foul of IR35?

Anyway, when you ask "if it will make any difference if the partner was also a director" ... from what perspective are you asking (especially as you keep mentioning 'unmarried' as well)? Is there a particular aspect on which you seek re-assurance?

Thanks.

IR35 has been checked and confident it won't apply here (other badges of trade in play). But thanks for highlighting.

The context about which I am asking the question is in relation to the Settlements legislation. Married couples are afforded the outright gifts protection of Arctic, but unmarried couples are not, hence why I mentioned that this couple is unmarried. I have, therefore, been looking at ensuring that the partner ‘earns her keep’ and keeps her earnings (so no retention of an interest). It occurred to me that someone in the AWeb community might have come across a situation where HMRC have challenged where the 'other' shareholder is not also a director. (I can’t think why this would make a difference, however someone might have specific experience.)

Cheers.

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Replying to Software Seeker:
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By Hugo Fair
19th Jul 2021 19:30

Hmm ... OK if you're happy about the potential IR35 aspect (although I'm not clear as to how 'badges of trade' affect the issue ... given they are usually used by HMRC to help determine whether an activity is a proper economic/business activity or is merely a money-making side line to a hobby)?

Anyway, although I'm no expert in the Settlements legislation, my understanding (mostly gleaned from taxinsider.co.uk ) is that:
* in Arctic HMRC did not lose the case on the question of whether a settlement was in place or not; it lost because Mr and Mrs Jones successfully deployed the spousal exemption clause within (what is now) ITTOIA 2005, 626, which only catches gifts between spouses (or civil partners) that are “wholly or substantially a right to income”. As Mrs Jones was an equal shareholder with equal voting rights etc, what she received was not purely a gift of income; the income matched her underlying shares, which carried all the same responsibilities.

Hopefully someone else can help you pick the bones out of all that - but, as I guess you were hinting, that phrase "spousal exemption clause" sounds like the death knell here if they're unmarried (although I don't understand what a 'civil partner' is in this specific context)!
I certainly can't see any reason why a Directorship (or lack of it) would make any difference to the efficacy of your plans to ring-fence the partner's earnings - if that is they are sufficient to keep HMRC at bay (given that the whole purpose here is patently to move some of the dividends to the person with a lower tax rate).

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Replying to Hugo Fair:
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By Software Seeker
20th Jul 2021 12:03

Thanks for your reply.

Yes, that's what I'm alluding to (unmarried couples unable to rely on Arctic). Am aware of the implications of the judgement, and thanks anyway.

(Badges of trade are relevant in status issues, as well as distinguishing between trades and hobbies, and thus are relevant for IR35, but thanks for highlighting).

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Melchett
By thestudyman
19th Jul 2021 20:02

I know you have done some checks already, but to confirm, is the potential contract provider (client's client) classed as a medium to large business? If so, it is up to them to provide a determination of your client's services whether it falls under IR35. Which could be at odds with your initial assessment.

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Replying to thestudyman:
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By Software Seeker
20th Jul 2021 12:04

Small business, and thanks for your comment.

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