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istock_liquidate_Olivier Le Moal

Botched winding-up costs accountant £600k income tax

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The Court of Appeal (CA) offered sympathy but no redress to Mr. Khan, an accountant who did not understand the tax consequences of participating in a cash extraction exercise for his client company and its shareholders without taking advice.

24th May 2021
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They say no good deed goes unpunished and this was certainly the fate of Mr. Khan when he was buying a company and using share repurchase to pay for it.

He believed he would not be taxed on the proceeds of a company purchase of own shares (POOS) used to pay the cost of acquiring them from the company’s former owners. Khan provided management accounting services to a company and was its landlord but was otherwise unconnected with it or its shareholders.

The company was cash-rich to the tune of £1.95m but the owner/directors were of the opinion that its fortunes were due to take a downward turn and so the time was right for them to realise that cash and withdraw from the business.

For reasons that were not entirely clear but which included reluctance to cease trading immediately and make the staff redundant, they sought a way for the company to be wound down in an orderly way after they had extracted the cash and ceased to be involved.

The intention was that Khan would take over the Company and gradually wind it up over the course of the next two to three years. He had no experience or expertise in the company’s area of business which was as an employment bureau for design consultants.

The original idea

The original plan was for the Company to buy back for £1.8m 96 of its 99 issued shares from the original owners who would then sell the remaining three shares to Khan, leaving him in sole control of the company.

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Replies (19)

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Lone Wolf
By Lone_Wolf
25th May 2021 00:37

Ouch!

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By Self-Employed and Happy
25th May 2021 09:57

Khan who provided "Management Accounting Services"

Is this a case of a CIMA who really needed a Tax Expert? What I find amusing is that even a competent ACA / ACCA would have (I hope) at the very least had one of "those" feelings where they think something doesn't feel right and they need to go away and investigate.

I've found a couple of examples locally where we have gained clients from CIMA qualified people who offer the full tax/accounting package but sometimes really don't quite get certain aspects.

Of course ACA/ACCA drift into Management Accounts for clients / provide them for clients that need them but I've always thought it more dangerous / risky when a CIMA goes the other way, primarily because falling foul of HMRC / not understanding can lead to clients having to fork out money they maybe need not have to.

Obviously in this case it was the Accountant himself which unfortunately fell foul, hopefully lessons learned not just for him but others around him.

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By david_dbu
25th May 2021 10:05

Not only is this a level of complicated arrangement that I wouldn't want to get involved in or advise on, there are things I know what I don't know as the saying goes!

I would however be very sceptical of any arrangement where the funds touch a personal bank account. It is very clearly accessible even if they do have a legal obligation to fulfil a duty, surely that separates the parts of the arrangement.

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SMH
By ShakingMyHead
25th May 2021 10:24

"The company was cash-rich to the tune of £1.95m but the owner/directors were of the opinion that its fortunes were due to take a downward turn and so the time was right for them to realise that cash and withdraw from the business."

You can say that again! I can't help but think the vendors took advice, realised what could happen and quickly made a change. Effectively, Khan has paid £600k for a company that he doesn't know how to run and never had any intention of keeping. And these guys have skipped off with the cash. Dreadful.

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Replying to ShakingMyHead:
David Winch
By David Winch
25th May 2021 10:31

But the real vendors will have a CGT liability on the £1.95m (as well as Mr Khan's liability).

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David Winch
By David Winch
25th May 2021 10:26

Para 1 of the Court of Appeal judgment, "This is a cautionary tale, which illustrates all too graphically the importance of seeking specialist tax advice before entering into commercial arrangements that might have adverse tax consequences, however remote that risk might appear".
https://www.bailii.org/ew/cases/EWCA/Civ/2021/624.html

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By Duggimon
25th May 2021 10:54

The former owners appear to have very neatly shovelled an income tax liability that they could not themselves have avoided onto poor Mr Khan. I don't expect the purchase of own shares could ever have met the "for the benefit of the trade" requirement if it's part of the exit strategy, but then I'm no more an expert than Mr Khan.

I think I would have tried to talk them into the MVL or sent them off on their merry way.

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By Mr J Andrews
25th May 2021 11:37

Obviously this is more than just a hard luck story. Khan's beliefs, if correct and not picked upon by HMRC, would have seen him £600K better off. His knowledge - or as the article indicates , lack of knowledge - cost him £600K , plus the knock on appeal costs.
I may be old school but whether £6 , £60 , £600 , £6000 or Khan's great heights , I tend to seek advice if there's anything I'm not sure about. Something as complicated as this so called ''planning'' shouldn't be left to gut 'understanding' and 'beliefs'.
Did Khan neither have any idea about HMRC enquiries ?

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By alltaxedout
25th May 2021 11:48

What a sad story. Well and truly shafted. It is almost like a reverse Ramsey principle for Kahn i.e. a series of transactions that served no commercial purpose other than the payment of tax from his point of view.

It is hard to see how his appeal could have succeeded.

Thanks (4)
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By North East Accountant
25th May 2021 12:02

There are many sharks out there asking you to jump off your boat and have a swim around with them (promise we'll not bite).

Saying No I'd rather sit here on deck drinking a beer is always a safe response.......

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By Ian McTernan CTA
25th May 2021 12:11

Valuable lessons to be taken away from this: get proper advice, and don't agree to last minute changes to any plan without taking further expert advice.

If you are not an expert in the field, use one. For example, I'm not a VAT expert so I have one to refer to (and clients are happy to pay them for the expert advice) when dealing with, say, property transactions.

I have no sympathy for Mr Khan who should have taken proper expert advice (but was probably too tight to do so, despite thinking his payment was going to be around £150k).

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By Paul Crowley
25th May 2021 12:32

The vendors knew.
The vendors paid for advice, why else was there a last minute change of plan?

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By bobsto12
25th May 2021 13:39

I've seen strange arrangements drawn up by lawyers to buy and sell companies that have fairly obvious potential highly negative consequences,creating unintentional liabilities tax or otherwise. Any attempt to point it out to higher ups is often met with " yes but it's obvious whats intended so its ok. ".

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By AndrewV12
25th May 2021 14:28

What tangled webs we do weave ................................

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By Paul Steward
25th May 2021 16:30

Mr Khan was extremely unwise to not take advice from a tax specialist who has specialised in this area. Section 385(1) ITTOIA 2005 was also relevant in the case of Rebecca Vowles v HMRC [2017] TC 06123 in which the man who had the beneficial interest in the share was liable to Income Tax on the dividends paid on the sole share rather than on the woman (R Vowles) who had the legal interest in the share, but who held the share on trust for the man (Max Walker). Presumably Mr Khan held his shares as both the legal owner and the person entitled to the beneficial interest therein.

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RLI
By lionofludesch
26th May 2021 06:58

Ooops.

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Stuart Walker Yellow Tomato Copy
By winton50
26th May 2021 09:42

The truth is that if something seems too good to be true then it probably is.

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By AndyC555
26th May 2021 12:19

A cautionary tale indeed. And another example of how the 'morality' of tax only seems to work in one direction. Khan didn't personally benefit from the arrangements but cocked up the planning and gets lumbered with a tax bill. This will always happen in such situations.

Well planned arrangements are often attacked on some sort of 'moral' basis, as if people should arrange their affairs so as to pay the maximum amount of tax they can and it's 'immoral' if they don't. Yet when planning is bad, HMRC's attitude is 'tough luck, those are the rules'.

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