Who holds the shares, Payroll pains, Paying HMRC

For the first time in over 6 years the UK has a new Chancellor of the Exchequer. Let’s hope he takes a considered approach to any tax changes, as there are many problems to fix with our tax system, before adding new complications. We have three examples of such problems with payroll systems this week, and two issues found when trying to pay HMRC. But first we examine the mess created by sloppy work when setting up a personal service company.

This is an extract from our topical tax tips newsletter dated 14 July 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Who holds the shares 
When you take on a new client do you check the Companies House record for their personal service company, if they have one?  The reality of who holds the shares may not agree with the client's understanding. 

A mismatch can be very expensive, as Terrance Raine discovered. He was landed with a tax and penalty bill of £41,450 because he believed what he was told by the firm who set up his personal service company.    

Mr Raine was advised by a recruitment consultant to open his own limited company in order to gain work as an interim or locum manager. Raine and his partner Ms Hamilton met with 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. Raine and Hamilton were told that they would hold one share each, and would be appointed as 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 remained in the name of the formation agent. The annual returns for Linkdrive Ltd filed at Companies House, showed Raine as the only shareholder with two shares, and this continued for 10 years to 2011. The statutory accounts for Linkdrive also reflected that position.     

From 2004 to 2011 Giant prepared dividend vouchers showing equal amounts of dividend payable to Raine and Hamilton, which were declared on their respective tax returns. 

When HMRC investigated the mismatch between dividends shown on Raine's tax returns and the shareholdings declared at Companies House, Giant initially denied there was a problem. 

The Tax Tribunal decided that Raine must have realised that all the shares were in his name as he signed the company accounts, and he should have realised that dividends can only be paid to shareholders. The tax and penalties due were confirmed.    

This is an extract from our topical tax tips newsletter dated 14 July 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>