Disclosure of Tax Avoidance Schemes
The company we have recently been called to advise has traded profitably in past years and continues to do so. In 2011 the company took part in a tax avoidance scheme which was disclosed to HMRC under the DOTAS regime and given a scheme number. This scheme saved the company between £25,000 and £50,000 in corporation tax. To them this was a significant saving but it may well come back to bite them on the behind.
Under this scheme 200,000 E Shares were newly issued with a value of £1.00 each. The shareholder only paid £0.01 per share but retained an obligation to pay the remaining £0.99 per share if called upon. It was never envisaged it would be called upon.
In November 2013 HMRC issued new guidance which indicated that this scheme was to be challenged.
This will create two problems, as follows:
- There is likely to be a call upon the shareholder to pay the balance of his share value i.e. £198,000. This he does not have.
- HMRC will consider that the share value attributed to the E Shares should be treated as taxable income and will be subject to PAYE/NIC. This will create a substantial tax liability for the company which it is unable to pay. At this time the company will be deemed insolvent in that a) its liabilities outweigh its assets and b) it is unable to meet its liabilities as and when they fall due.
There are various options available to the company which may enable them to avoid a formal insolvency process. Swift action will be required.
If you too have a client that may be facing a similar situation and would like to explore their options please telephone Isobel Brett on our free phone number 0808 168 7540