There must be something legally wrong with this, I'm just not sure what.
Let me start by saying that I am only engaged with Mr X. Mr X is the son of Mr Y. Companies A, B, C & D Ltd have the shareholding 40/60 X/Y. Y is the sole director of all.
A is a decent trading company, B-D are dormant.
Y has come up with this cunning idea for profit extraction. BCD each charge A £25k so A's taxable profts reduce by £75k. BCD have year-ends way in the future and so those CT liabilites of 3xc£5k are deferred. NB They will be paid. The 'planning' bit is that in each of the tax years 21/22, 22/23 & 23/24 BCD are in turn dissolved, legitimately via DS01. Reserves will be £20k in each, Y's capital gain will be £12k pa so not taxable. Y has therefore saved income tax of 40%x£12k=£4.8k each year.
My client X is an innocent(?) bystander but will benefit to the tune of £3.2k tax saving pa (40% shareholding of £20k reserves @ HR)
Surely there's a rule against this?
Replies (26)
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What are B, C and D going to charge A for exactly? And will it be expenditure incurred wholly and exclusively for the purposes of its trade?
If you know the answer to that question then you should already have the answer to your own.
To start with, I would suggest reporting dividend income of £30k.
Unless you can persuade the son to tell his father to stop being an idiot.
A few questions that might be relevant or just show my ignorance
- Can a 60% shareholder dissolve a company without consent of the 40% shareholder? I don't know but if your guy has to consent, he's no longer a bystander.
- How can BCD provide any services to A if they have no resources with which to provide those services?
- How exactly is the cash extracted from BCD? That bit seems to be glossed over. Doesn't there have to be a dividend?
Your second point has already been addressed - somewhat rhetorically.
Re your third point, the intention is to dissolve BCD and take advantage of the £25k limit for capital treatment.
But, as I think the OP understands, it’s a plan that is doomed to fail.
From memory liquidation control was 75% exercised at I think an SGM but it is a long time (84-85) since I passed my company law exams, CA 1985 had not even gone live, so you might want to check this is still the case given 1985 and 2006 have happened since.
You are correct. A special resolution must be proposed which requires approval of no less than 75% of members to voluntarily wind up a comoany:
https://www.informdirect.co.uk/company-records/special-resolution-what-i...
Transactions in Securities rules are widely cast to catch just about any situation which involves shares and converts what would otherwise have been income into capital gains.
This doesn't get as far as TiS. A is making de facto income distributions, dressed up as "management charges".
"Y has come up with this cunning idea for profit extraction."
Not far adrift from a Baldrick cunning plan
One extraction route is you get someone to have an accident at the premises of the company that has the dosh and they sue, company by chance not insured, barely defends case, damages are awarded.
So, do they know anyone who will break something, arm, leg, skull etc to assist with the cash extraction?
I wonder how far that one could be pushed?
Could a director sue his own company if he was injured at work, even though it was his responsibility to ensure H&S procedures are followed?
Maybe it was his wife's responsibility (also a director) and so he was not directly responsible.
I do not see why not, they are different legal persons. To deflect fraud allegations they really have to be uninsured and for valuation issues re connected parties I suspect a court needs to set the damages.
There is likely something that prevents but it is an interesting idea.
Variants might be harassment within a family company giving rise to a claim for constructive dismissal at employment tribunal and the payment of non contractual damages.
B, C and D are doing nothing for the £25k, and so I would say we have a distribution here from Company A.
The benefiting shareholders will be taxed on the amounts as dividends.
The "management charges" won't be deductible for corporation tax.
Anyone suggesting this "tax planning" works is relying on the fact that it is unlikely to get noticed by HMRC and so slips under the radar. They are advocating tax evasion, not avoidance.
It annoys the hell out of me when clients who sit there all day like spiders, waiting for their phone to ring so they can make their one sale of the day / week / month, get bored with their normal daytime activities of desk-tidying, playing online games, and sniffing their armpits and turn their attention instead to chiselling the edges from their tax bills.
ALISK, try replying to your client that your initial thoughts are that the companies' scheme appears flawed; but that if he wants you to investigate the matter in depth and produce a report and recommendations he must so instruct you. I know he's not a director, but presumably he is authorised to contract on the companies behalf and pay you a large retainer up front; and if not he can contract and pay you himself from the £3.2k tax savings he's sitting on.
I think they're having you over, trying to solve / validate their issue for free. See how much of your time they want to consume with your meter running!