Shareholding mix-up costs taxpayer over £41K
Confusion about who held shares in a PSC ended up costing Terence Raine £41,540 in tax and penalties.
Mr Raine, a 69-year old Chartered Engineer, formed his own company, Linkdrive Solutions Ltd, in September 2000. Prior to this he had never been involved with the day-to-day management of a company and therefore knew nothing about shares, dividends or remuneration structures.
After a meeting with Graeme Hunt of Giant Accounting Ltd (Giant), who was principally a pension’s adviser, in September 2000, Raine purchased an ‘off the shelf’ company. Raine was told that he would be appointed a director and, his long term partner, Barbara Hamilton, company secretary. Giant would deal with all necessary procedures and paperwork to formalise the appointments and also deal with the share issues.
The company had two issued shares held by the formation agent available for immediate transfer which the couple asked to be transferred in the ratio of one each. Giant, however, did not complete the necessary documentation and technically one ordinary subscriber share remained in the name of the formation agent.
In October 2000, Giant issued Raine with a ‘Welcome’ pack that contained the company’s Certificate of Incorporation, Memorandum and Articles of Association, a document titled Statutory Registers, Minutes and Share Certificates. None of the registers, minutes or certificates had been completed however. Raine and Hamilton did not bother to do anything with this pack.
Annual Company Returns and Accounts
Linkdrive Solutions’ Annual Returns were prepared by Giant and these showed Mr Raine as the only shareholder owning two shares but this was not picked up by Raine.
The company’s accounts, also prepared by Giant, referred to Raine as owning two ordinary shares which again went unnoticed by Mr Raine.
From the 2003 accounts onwards, the company was stated as being under Raine’s control, until 2009 when the accounts contained an apparently contradictory statement that whilst being a 50% shareholder, Mr Raine was still the controlling shareholder. Despite having made previous enquiries about the shareholdings within the company, this did not register with Raine.
In October 2006, Raine contacted Giant as he had noticed for the first time that the description within the accounts appeared at odds with his understanding of how the shares in Linkdrive Solutions were held. He therefore requested a copy of the share certificates and the procedure for transferring shares. Giant responded that they did not have this documentation readily available but that “as for transferring shares we would recommend that you do not do this, as it may alert the Inland Revenue to an investigation under Section 660.” Raine told the Tribunal that whilst he did not receive a copy of the share certificates, he was comforted that Giant appeared unconcerned as to the position.
Dividends
In 2004 Linkdrive Solutions moved into profit and Giant advised their client to pay dividends. Giant prepared the dividend tax vouchers which showed dividends split equally between Raine and Hamilton. Both parties therefore declared these dividends on their tax returns until in March 2011 HMRC wrote to Raine having noted apparent differences/inaccuracies in the amounts of dividend income shown in the company accounts and his tax returns. At this point Raine said he contacted Giant who confirmed his understanding that he and his partner were joint and equal shareholders.
Despite amended Company Annual Returns being filed in October 2012 to show that Raine and Hamilton owned one share each the damage had already been done and HMRC raised tax assessments for the six years ended 5th April 2011 showing tax due of £36,123 together with penalties for incorrect returns totalling £5,417. An assessment could not be raised for 2004/05 as the time limit had expired.
Whilst the Tax Tribunal accepted there may have been some initial confusion as to who the shareholders were they did not accept that Raine thought shares were held equally with Ms Hamilton. He signed off the company accounts which clearly showed him as owning both shares and giving no mention to Ms Hamilton. Raine should have therefore suspected that his partner was not a shareholder and, as such, not entitled to dividends.
Despite accepting that Raine had no previous experience of running a company and owning shares, the Tribunal judge felt it was reasonable to consider that a layman would ordinarily be aware that dividends are only paid to shareholders and that Ms Hamilton, having checked, was not a shareholder. The appeal was therefore dismissed and the assessments and penalties confirmed.
This is pretty awful. No contractor wants to be a company – we’re forced to be by government legislation. So we’re all thrown into this snake-pit of confusing rules and regulations. And then the government fines us tens of thousands, if we get it wrong? Ew.
It’s quite clear from this what the chap meant to do. This is just paper-shuffling. There’s no suggestion that he dodged tax. But for getting the paperwork wrong – and who hasn’t goofed sometimes? – he has to sell his home? That is unbelievably oppressive.
It’s like the days of King John’s tax collectors, really it is.
It sounds as if Giant screwed him over, because they didn’t give a damn about doing the job they were paid for. I have never trusted my accountant, and this sort of thing is why.
I wonder if he could sue Giant?
On the face of it, it sounds as if Giant could be held to be negligent. A lot will depend on the evidence of who agreed to what, when.
Looking at Companies House records for Giant – it has since changed name to Giant Accounts Ltd – it was formed in 2007. Giant could not have undertaken the initial work in 2000. So one would need to establish negligence, and who was negligent.
The other factor to consider is that, even if you win such a case, can the defendant pay up? Assuming no PI, though there might be, Giant had c.£50k of assets in 2015 so at least some substance there at that time. I would take legal advice.