Taxman still chasing 'husband and wife' companies

It may involve a limited company with monetary arrangements not practiced by most contractors, but a new s660A case is sufficient proof that HMRC is still chasing 'husband and wife' businesses showing a tax advantage.

On its surface, argued legal advisor Egos, the judgement in Patmore Vs The Commissioners for HM Revenue & Customs appears to be "of little interest" to most contractors who solely, or even jointly, own a limited company.

The allocation of shares, for example, by David Patmore, the appellant, to his wife that arose from their jointly-funded share purchase of engineering firm Cambridge Dynamic Ltd, is a complication not affecting the typical contractor, agreed Bauer & Cottrell.

Even so, said co-founder Kate Cottrell, the "message" from HMRC is that they are "still considering and trying to apply the Settlements legislation (s660A) despite their defeat in the Arctic Systems case."

The former Inland Revenue tax inspector cautioned: "We must not forget that it is still open to HMRC to simply change the law where the law does not adequately deal with perceived tax advantages."

According to HMRC's Counsel, those tax advantages were reaped by Mr Patmore between 1999 and 2003 and were valued at a total of almost £20,000, according to the Revenue's five assessments issued against him.

He owed this sum, HMRC argued, because it reflected dividend income from created shares, that although received by his wife and taxed at her lower rate, should have been taxable at his higher rate.

Mr Patmore therefore settled shares or dividends to his wife, the Revenue claimed, as spelt out in s660A ICTA 88, under which he, the higher rate taxpayer, should be liable for paying HMRC on the income.

But the tribunal disagreed, ruling that there had not been a settlement of so-called B shares, (those shares which had been created and issued only to Mrs Patmore) because there had not been an element of bounty.

Under s660A, there is an exemption for gifts between spouses where there is the right to the whole of the income arising, or an 'outright gift', advises Paul Spindler, technology partner at Kingston Smith LLP.

"The tribunal concluded there had actually been a gift of income," the chartered accountant said

"[Even then] the actual amount of the gift of income was much lower than HMRC had contended because Mrs Patmore was jointly liable for a loan which had been secured on the family home and used to buy ordinary shares.

"Mrs Patmore had not received 50% of these shares, as most were acquired by Mr Patmore, so the tribunal considered this a constructive trust in favour of Mrs Patmore."

In handing down her judgement to the first-tier tax tribunal at London's High Court, Judge Barbara Mosedale was considerably less sympathetic to the taxman.

She told HMRC's solicitor: "Lord Hoffman in [the] Arctic Systems [judgement] at paragraph 11 said that the courts should take 'a broad and realistic view' of the arrangements. It certainly seems to me that this is a case where HMRC has not done so."

"The tribunal did criticise HMRC", reflected Kingston Smith. "Though it is clear that individuals who would like to split their income and take advantage of the exemptions [to s660A] must ensure that they have taken professional advice before creating new shares or altering the rights of existing shares."

And despite the atypical circumstances in Patmore Vs HMRC, taxpayers with similarly structured affairs might need to be even more alert because their accountant's best advice could be about to change.

"With the recent creation of the new Office of Tax Simplification, Section 660 could now be back in the spotlight as part of the Small Business Tax Simplification Review," Cottrell said. "Contractors who have entered into such arrangements should remain vigilant."

However for Roger Sinclair, of Egos, the most "interesting" inference from the case is that "HMRC undoubtedly threw a lot of resources at it, and ended up substantially losing."

Aug 18, 2010

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