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Giant mistake leaves taxpayer with huge bill

15th Jul 2016
Tax Writer Taxwriter Ltd
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Giant tax bill leads to tribunal appeal
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Giant tax bill leads to tribunal appeal

Confusion over who held the shares in his personal company left the taxpayer with a tax and penalty bill of £41,450.  

The first tier tribunal appeal of Terrance Raine v HMRC [2016] UKFTT 0448 (TC) concerned an experienced chartered engineer who found himself unemployed in 2000. He was advised by a recruitment consultant to open his own limited company to get work as an interim or locum manager.

Raine and his partner Ms Hamilton met with a representative of Giant Accounting Limited, who offered them an off-the-shelf company (Linkdrive Solutions Ltd), and agreed to deal with all accounting, payroll and company secretarial requirements of Linkdrive Ltd. Raine and Hamilton were told that they would hold one share each, and would be appointed the company director and company secretary respectively.

However, Giant never completed the paperwork to allot shares to Hamilton or Raine, and technically the one subscriber share of Linkdrive remained in the name of the formation agent: Temple Secretaries Ltd. The annual returns for Linkdrive Ltd filed at Companies House showed Raine as the only shareholder holding two shares, and this continued for 10 years to 2011. The statutory accounts filed for Linkdrive Ltd also reflected that position.    

From 2004 when Linkdrive Ltd began to make profits, Giant advised on the payment of dividends. Giant prepared the dividend vouchers showing equal amounts of dividends payable to Raine and Hamilton, which were declared on their tax returns.

In 2006 Raine noticed that the company accounts did not agree with his understanding of how the shares were held and he asked Giant for copies of the share certificates, which were never provided.

In March 2011 HMRC investigated the mismatch between dividends declared on Raine’s tax returns and the shareholdings declared at Companies House, Raine contacted Giant. Raine said Gaint gave him verbal confirmation that there were two shares held in the names of Raine and Hamilton, but the paperwork did not support this assertion.

Using the reports filed at Companies House HMRC concluded that all the shares in Linkdrive ltd were held by Raine, so all the dividends from that company should be declared on his tax return. Assessments for underpaid tax for 2005/06 to 2010/11 were raised and penalties applied for careless errors.

It is clear that there was a misunderstanding between Giant and Raine from the beginning as to who was to hold the shares, and that Raine may not have understood the company accounts or annual returns which he signed.  

The tax tribunal decided that Raine must have realised that all the shares were in his name as he signed the company accounts just below a statement of that fact. Also that he should have understood that dividends can only be paid to shareholders.

The tax and penalties due were confirmed.    

Replies (12)

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By Tim Vane
15th Jul 2016 12:28

Do we know how HMRC spotted the discrepancy? Is this an example of the CONNECT system starting to work properly and bear fruit?

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Replying to Tim Vane:
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By Justin Bryant
15th Jul 2016 13:08

Yes; it will have been picked up by HMRC's big brother computer I expect. It was (understandably) not argued by the taxpayer that that the "ghost" (no pun intended) shareholder should have been taxed under PAYE and the real shareholder should correspondingly not be taxed to avoid double taxation, and I can't see why that couldn't potentially be the case if HMRC wanted to maximise their tax.

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By cfield
15th Jul 2016 20:00

It just goes to show the risks you run when you go with these mass-market "sausage machine" firms. The staff rarely have time to pick up on this sort of thing or even to become familiar with your company. Better to go with someone who'll spend a bit of time getting to know your business and go the extra mile for you.

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By Ian McTernan CTA
18th Jul 2016 11:54

I hope the taxpayer is recovering his money from Giants PI cover as it sounds fairly clear they failed to complete the necessary paperwork.
I'll agree with another poster, massive processing companies aren't for everyone.

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Replying to Ian McTernan CTA:
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By Andrew Lee
18th Jul 2016 12:43

I suspect that even if the shares had been properly issued and recorded and reflected in the accounts etc. that HMRC could have used the settlements legislation to assess him on all the dividend income anyway, as it appears unlikely his partner was actively involved in the business and contributing to the profit making and they would not have been protected by the husband and wife exemption for outright gifts?

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By pridgway
18th Jul 2016 12:39

I haven't read the case but Isn't there an argument that he held one of the shares on trust for his partner. There doesn't need to be a trust in writing for shares and all the evidence would tend to show that it was intended to be held 50/50?

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Replying to pridgway:
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By Justin Bryant
18th Jul 2016 13:02

The taxpayer was represented by counsel who obviously tried to argue the trust point, but the facts were against a trust, so that was always an uphill struggle. I note that the potential double taxation point did not arise coz the "ghost" shareholder's income was not taxable even with the "ghost" dividend, but presumably if that ghost shareholder had paid tax on it then possibly it would have been tough luck if they were out of time to make an amendment, subject to ECHR etc. issues perhaps.

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By MBK
18th Jul 2016 16:48

As Justin said, the facts were against the trust argument. The case report is an interesting read, and the tribunal chairman could easily have found the other way if he'd wanted to. The best thing about the judgement is that it shows that, in most situations, there would be a way out.

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By drakeltd
18th Jul 2016 19:17

If the following extract is true:
"Giant Accounting Limited, who offered them an off-the-shelf company (Linkdrive Solutions Ltd), and agreed to deal with all accounting, payroll and company secretarial requirements of Linkdrive Ltd. Raine and Hamilton were told that they would hold one share each, and would be appointed the company director and company secretary respectively."
then is Giant Accounting Limited in breach of contract?
If so then is there any recourse from this breach?

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By richards1
19th Jul 2016 22:44

It never cease to amaze me how business people trust so called professionals. I subscribe to this site not as an accountant but as a business person who want to stay informed.

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Chris M
By mr. mischief
23rd Jul 2016 15:02

I am not surprised. I always check the Register and send clients a copy when I get a new client. Several times what is on the Register has been totally different from what the client thought. In the worst case her boyfriend owned 20% of her company!!! (Good job they ended up getting married.)

I always issue proper share certificates, no exceptions. Really it is a 10 minute job, how hard can it be with £100,000s at stake in even quite small companies?

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By AndrewV12
19th Nov 2016 13:49

'Giant Accounting Limited' its naff already.

Moving on,........... a warning to us all, all statutory details should be checked when preparing the Accounts and annual returns.

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