As a director shareholder if you want to trade with your company you need to comply with company law. However, there are still tricky tax hurdles to clear if you want the arrangement to be tax efficient. What steps should you be taking to ensure this?
Companies and their owners
The two related cases of Sidebottom v HMRC 2018 and Pickett v HMRC 2018 illustrate an important point about transactions between companies and their shareholders. Specifically, that in almost every situation, including tax, the law considers each as a separate person with their own rights and obligations.
The background
In 2002 Robert Sidebottom (S) and Jane Pickett (P) jointly owned a property which they intended to develop and sell for a profit. Rather than undertake this project in their own names S and P formed a company as equal shareholders, Mainstone Properties Ltd (M), to do the work. An agreement to develop the property was drawn up between S and P on the one hand and M on the other.
The funding transactions
At this point the situation wasn’t unusual. There can be tax advantages to developing a property through a company although it’s more usual for it to own the asset and not just to carry out the work.
To cover the development costs S transferred money to M which it used to pay the bills. The amount transferred, around £250,000, was treated as a loan in the company’s records and credited to S’s director’s loan account.
Realising the gain
When the work was complete the property was sold and the company wound up. The sale was not reported by S and P on their tax returns because the purchase plus development cost was greater than the proceeds of the sale. In other words, they made a loss. At a quick glance that sounds reasonable, but HMRC didn’t think so. It demanded tax on the basis that S and P had made a capital gain, arguing that they weren’t entitled to deduct the costs of developing the property. S and P appealed to the First-tier Tribunal (FTT) to overturn HMRC’s demand.
The decision
It wasn’t difficult for the FTT to decide that HMRC was correct. M incurred the development expenditure and not S or P. S had provided the funding, but that was not the same as incurring the costs. The distinction between the company and its owners scuppered S and P’s claim.
Solutions
With hindsight it would have been easy for M to have billed S and P for the cost of developing the property. The couple could have settled the bill by debiting it to S’s director’s loan account and thus balancing it off against the money he had lent it.
A simple paper transaction would have saved them many thousands in tax and the cost and trouble of a tribunal hearing.
Tip. As a director or shareholder treat transactions with your company as if they were a normal business to customer arrangement. This will help you remember to properly record and document them. For example, if you personally pay bills for your company, submit an expenses claim.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit <a href=”http://www.indicator-flm.co.uk”>www.indicator-flm.co.uk</a> or call 01233 653500.