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  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.