Client Case Studies
We believe that the cases below are representative of our practice's approach and spirit:
Tax Code blunder
An employee was faced with an underpayment of tax on her employment income in excess of £4,500 by HMRC over the previous 6 years. We built a successful case for her based on the Revenue’s own internal manuals and to Extra-statutory Concessions. We argued that the employee should not be asked to make up the underpayment as the underpayment arose either through the employer’s failure to operate the correct tax code or through the Revenue’s failure to act upon incorrect tax code used by an employer or through the Revenue’s failure to advise the employer of the correct code to be used. Eventually, the Revenue waived any action to collect the underpayment.
This case is a typical example of the appalling service taxpayers receive from HMRC nowadays: First they denied receipt of our letter. Then, after we resent it, they replied by acknowledging receipt of the original letter (!) and that they were unable to deal with it because "they are upgrading and improving their computer systems". They subsequently promised that they would provide a reply within 4 weeks. Needless to say, no reply was received within the time limit set by them. Finally, they replied after 12 weeks and they even offered an apology for the way they had dealt with the matter.
We defended a company director who was threatened by HMRC with legal action for not paying his income tax for a particular tax year, when in fact they should have offset the debt by re-allocating overpayments the taxpayer had made in previous years. As they often do, HMRC initially chose to ignore the agent by failing to correspond with us. The tax amount involved was £936! (By the way, we also recovered our costs!)
Efficient Business Acquisitions
In advising clients how to structure the acquisition of a Care Home business, we advised them to own the building personally so as not to lose valuable capital gains tax exemptions available to individuals in the event of a subsequent disposal of the property (Entrepreneur Relief). We also advised them to set up a limited company to purchase the assets of the seller company (and not the shares), so that the company could claim tax allowances for purchased goodwill.
We also advised the business owners to obtain a valuation of fixtures included in the purchase price of the building and on which no capital allowances had been claimed by the previous owners. Doing so led to tax savings of many thousands and to minimising the stamp duty land tax on the purchase of the property.
A solicitor was advised to incorporate his legal practice to save tax. Potential annual tax savings from trading through a limited company, compared with tax on self-employed profits amounted to approximately £10,000 per annum. In addition, the solicitor was able to extract a further £70,000 tax-free from the company, which was the value of the goodwill the solicitor had introduced into the company. We did that by arguing to the Revenue that the goodwill was attributed to factors other than the proprietor's personality and our reasoning was fully supported and properly explained by documentation and calculations in the valuation report. By doing so, we sidestepped the Revenue’s view that all goodwill in the business was personal and thus not being capable of being transferred to the limited company.
In sickness and in tax
We advised a company director not to own any shares in her husband’s new limited company as doing so would have triggered the then draconian “associated company” rules, leading to higher tax bills for both companies (on the grounds that the companies would be under common control by spouses, even though there was no inter-dependence between the companies). Luckily, in this case the common control obstacle was overcome because the husband had no control in his company (50% of shares is not control). Nonetheless, if the wife had acquired any shares in the husband’s company, the wife's shares would have brought the husband's company under common control by the two spouses and corporation tax bills in each company would have increased by £20k – £30k.
Zero or not zero?
A client building contractor entered into a contract with a customer who was not registered for VAT. The client was asked by his customer to zero rate sales invoices for VAT. After scrutinising the contract and the circumstances, we came to the conclusion that the transaction was not eligible for zero-rating. We argued the case successfully with the other person's accountants. Had our client zero-rated his sales invoices, he would have been extremely vulnerable in the event of a VAT inspection as he would be required to pay the lost VAT (approximately £400k) out of his profits from the job!
The taxman stopped a client's tax credits on the grounds that the client was not eligible, based on the number of hours she worked as self-employed. We challenged the taxman's decision by lodging an appeal on the grounds that the taxman's claims were completely unfair and totally unfounded and unsupported by the facts and circumstances. The individual had her tax credits reinstated.
Write it off tax-free!
An overdrawn shareholder-director’s account with his company was turned back into credit by writing off the loan to the director. The write-off was treated as a distribution to the director and the director had no income tax to pay on the distribution as he was a basic-rate taxpayer.
How many homes do you have?
On acquisition of a third house by a client, we lodged an election with HMRC to nominate the client’s main residence as his main home. Within a week, we lodged a variation of the election to nominate a flat, which was used occasionally as his main home after a period during which it was rented out. When the flat was sold in about six months, there was no capital gains tax as the last three years are always exempt from capital gains tax and also there was a further reduction to the gain attributed to the period it was let, because the client used the home as his residence for some time in the last 6 months. We then lodged a further variation to nominate the third house as the client’s home, as the client moved into it and rented out his previous house. By doing so, when the first home was sold after a few years, the last three years of ownership were exempt from CGT (that’s the law) even though the house was let and the small taxable gain that arose in the period between the last 3 years and the period after the client moved his home, was wiped out by lettings exemption and CGT annual exempt amounts.
Show me the exit!
Exit tax planning for a business owner who also had a portfolio of residential investment properties was advised to form an Interest in Possession Trust to pass ownership of half of his properties to his children without having to pay capital gains tax on the transfer. The other half of his properties would be transferred to the wife to benefit from inheritance tax exemptions of transfers to spouses and to take advantage of two nil-rate bands on the wife's death. in order to avoid Inheritance Tax on transfer of properties to the trust The problem of executing the tax plan while leaving the individual with enough income to live was solved by selling an interest in his trading business to his child rather than gifting the whole business and retiring. That solution had no Inheritance Tax implications as the transfer of the business is exempt from Inheritance Tax.
"You are not an Employee!"
A company director applied to the Home Office to be registered as an employee under the Accession State Worker Registration Scheme, being from an eligible country. His application was incorrectly and unreasonably turned down on the grounds that the scheme did not apply to employees of their own company. He was then arbitrarily classed as self-employed! We appealed on his behalf on the grounds that the Scheme is open to directors working as employees through their own limited companies. The decision was overturned in favour of the client.
"Please, get me out of here!"
We applied for VAT de-registration on behalf of a client who had been registered for a number of years, in spite of turnover being well below the limit for compulsory registration. The application was turned down on the grounds that reasons were needed why his turnover would fall below the deregistration threshold in the future! Of course, we regarded the reasons for refusal as totally incompetent and irrelevant, as the person's turnover had already been below the de-registration threshold for years. We built up a case for the person and they finally overturned their original decision.
Unfortunately, You Cannot Save Them All!
In Tax, it is absolutely vital that proper advice is taken before making important business decisions because it can be extremely costly to reverse any such decisions if they are later found to be tax-ineffective. So, any DIY solutions are strongly discouraged. Here are some cases where, unfortunately, we could not be of much assistance as the clients came to us after the event, presumably for assistance in unwinding the effect of previous decisions and mitigating the damage:
- "Back to the future!"
Wife had been working in family restaurant for decades. but she was not on the payroll. As a result, she was not entitled to state pension when she reached retirement age! That would have been avoided if she was put on the payroll for a small wage between the lower earnings level and earnings threshold for NIC - that would entitle her to a basic pension at no cost for the business (no NIC and income tax would have been suffered by the business on her wages).
- "Let's go fifty-fifty!"
Client set up a limited company with a 50% share ownership with another person to pursue their business idea. The second person never got involved into the company or contributed any capital into it, and all income came from the first person's hard work. However, the equal ownership and the fact that they both were directors meant that no person had control of the company. Thus, the inactive shareholder was legally entitled to participate into the profits generated only by the other shareholder, with the latter unable to change things! Eventually the active member unfairly had to buy out the other member’s shares by paying him a hefty chunk of the company profits. All that would have been avoided if the working person had been advised not to use the company and instead had started another company on his own for his work. Alternatively, if a shareholders agreement had been drafted, it would have taken care of all contingencies in view of the lack of control by a person.
- "Thanks for the gift, Mr Taxpayer!"
A common - albeit too expensive over the years in terms of taxes paid - mistake is not incorporating (i.e. changing the legal format of a business into a limited company) the sole trader or partnership business when it was advantageous for tax reasons.
- Nightmare on Elm Street:
Individual purchased a buy-to-let property and formed a limited company to own the property. This became the absolute nightmare scenario when the individual wanted to gift the house to his children. This is because the company, not only had to pay tax at 28% on the transfer back to the shareholder (or to his children, being connected persons), but the shareholder would also have to pay income tax on the gift (either as dividend in kind or, even worse, as benefit in kind with Employer NIC in addition to income tax). The owner-director was advised to sit tight! If the house had been owned personally, capital gains tax on the gift would be the only tax to arise.
- "Too late!"
Individual set up a restaurant in a leasehold shop and incurred considerable capital expenditure renovating the building. A significant portion of the total expense qualified for capital allowances but none were claimed at the time. When the error (that cost the business owner over £3,000 in unnecessary taxes over the years) was discovered, the business had already ceased trading and the individual had moved on to other business ventures.
- It's all in the small print:
Company director sold his shares back to his company at market value due to being unable to work because of illness. The proceeds from the sale of shares were treated as dividends and he had to pay income tax on it. If he had held the shares for 3 months longer before selling them, the proceeds would have been treated as a capital payment subject to capital gains tax and he would have paid about £17,000 less tax because of the difference between income tax and capital gains tax rates!