Are HMRC going to tax directors for keeping too much money in their company?

I must first point out that I am not a tax advisor.  I would add that you don’t need to be a Vet to recognise the difference between a cat and a goldfish!  

Why do I say this?  Well, I am constantly irritated by the use of threats, fear and overzealous, self-serving caution in marketing literature.  

Last year the focus was on Directors Loans up to the date of Liquidation being treated as Income.  And this year we have Money boxing.

Treating Directors loans as Income arose from a suggestion that HMRC were taking a case through the Courts which they were confident of winning which would mean that anything a small business owner received before Liquidation would be treated as Income (i.e. dividends).

As a Liquidator of 500 Members Liquidations a year who utilises a shareholder debt generation process to minimise the costs of Liquidation, I clearly needed to get to the bottom of this.    

What I found was HMRC consider companies that make loans to Directors on an annual basis that are never repaid to be aggressive tax avoidance.  The phrase ‘aggressive tax avoidance’ is non-sensical, but I don’t think many taxpayers would disagree that receiving income without paying tax is to be discouraged.  But there was NO case and, whereas the statement would best be described as an HMRC aspiration, it actually flew in the face of government policy.   Why else would we have a s455 charge paid by the Company on long term overdrawn Directors Loan Accounts that is refundable and the availability of In-specie asset distributions to shareholders!

As I planned this article, I was reminded of another attack HMRC made on the small business community when it decided that it should have the right to decide, between a husband a wife, how much each should earn (Known in the trade as either Jones vs Garnett or Artic Systems).  At the time I wondered whether I should offer them the chance to discuss the various risks that small businesses owners run and the remuneration business owners draw with my co-Director and Shareholder without removing all the sharp objects from the room.  I refrained from such an approach when HMRC came third in the litigation.  The Court in that instance was very clear that it was not the role of HMRC to decide how small businesses remunerated their owners and staff.

And so we get to this year and the flavour appears to be Money boxing; a practice where some business owners, whether it be as a result of distrust of professional advice, commercial reality or general pessimism and a desire to maintain control, in essence choose to treat their Company as a pension scheme or saving s scheme and spend years building up reserves to be drawn as the life of the business and their working life came to their end.    

Would I do it?  Certainly not; there are much more ways to avoid tax, sorry I mean effectively manage your tax affairs in a legal manner for the benefit of shareholders.  

But this is not the point.  I spend most of my life engaged with clients who manage their business in ways that I would not.  Some are in respect of businesses which are insolvent, but most are successful.  I am an Insolvency Practitioner and know a little bit about running a business in this sector.  I know very little about running a ‘Widget Maker’.  What I have learnt from my career is how quickly things change and how little I know about the individual challenges of a particular business model.  If I, who specialises in this subject can admit my failings, how on earth can an organisation with such a narrow focus comment?  Just so we are clear.  It is not the role of Directors to maximise the payments of tax by the Companies they manage, indeed I can see a very strong case that the Shareholders might have a claim against them if they take actions that actively increase the tax charge.  

Money boxing was deemed to be a problem several years ago and HMRC did issue a consultation on it three years ago.  Nothing has happened since.

Speaking to my “tax guy”  (Andrew Mckenzie-Smart of Smart Accounting and Tax Solutions LLP) today he actually took the time to send me an e-mail: “The article is stretching the conditions in the Transactions in Securities legislation [the relevant anti- tax avoidance legislation] .To be successful HMRC would need to  argue that the retention of undistributed reserves by Companies is not motived by commercial reasons. As there are many good commercial reasons for a Company to retain funds such as meeting downturns, working capital, funding future business acquisitions and the like, it would seem highly unlikely that HMRC would ultimately be successful with their arguments . Should HMRC take on such cases they will fall foul of the similar considerations as they did in the “Arctic Systems” case [Jones vs Garnett] with similar results.”

So much is changing and so little has changed.

At Frost Group we are committed to maximise the return to Shareholders.  This means a sensible reasoned approach to HMRC investigation risks coupled with a cost-effective procedural approach.  We get material cost savings arising from the number of cases we do and can spend quality time reviewing those issues that require specialist advice.  We do not provide tax advice but know a man who does and, if we think it is required, we tell you about it before the appointment.

In the end clients have a choice, (1) Patrony and fear or (2) cost-effective advice based on your circumstances?    

Please do get in touch at enquiries@frostbr.co.uk if you want approach (2). If you want (1) there are a number of options.

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Jeremy Frost

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