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March 11, 2014
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Family Dividend Case Waived Away - It is a settlement

See our Spring 2014 Tax Update for more recent cases.

Arctic Systems paved the way for shares to be held, for example, by a spouse that doesn't work in the business.  However, its protection is not all encompassing.

An example of a weak structure for cash extraction was provided by the recent First Tier Tribunal Decision of Donovan and Mclaren v HMRC (TC03188). 

Two couples owned the share capital in a trading company between them.  The Tribunal heard that, on a regular basis, the husbands waived rights to dividends declared on their class of share.  It was found that the dividend waivers were made so that their wives received a relatively higher level of dividend than the husbands would.  This would aggregate the couples' joint income in the most tax effective manner, according to the tax computations that on the face of it ensued.

HMRC picked up on the structure adopted and challenged it on the basis that the dividend waivers constituted an "arrangement" under the settlements legislation.

The First Tier Tribunal agreed with HMRC, quoting precedent such as Buck v HMRC, the Taxpayers having very little defence in the matter, as it was clear that the transactions weren't at arms length therefore there was an element of bounty.

A further interesting point in this case was that had the husband's not waived their dividends the company would have had insufficient distributable reserves to pay all of the dividends declared.

HMRC's closure notices and discovery assessment therefore held firm and the husbands were required to pay additional tax of over £27,000 between them for the three year period in question.

This case shows that HMRC continue to pay close attention to income splitting between spouses.

See our Spring 2014 Tax Update for more recent cases.

Contact us today to discuss your tax requirements.
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