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Tax Planning and the ‘Super’ Rate of Tax

Tax Planning and the ‘Super’ Rate of Tax
Looking ahead to 6 April 2010, Julie Butler asks “What tax planning is there around the 50% rate of income tax?”

 

An interesting set of choices will arise depending on whether someone is a higher rate taxpayer or even a new “super higher rate” taxpayer from 2011. 

 

From 2010, the owner of a small business who earns over £100,000 will see his or her personal allowance being tapered away until he or she reaches £140,000, when the personal allowance will disappear entirely.  The rate of National Insurance Contribution (NIC) is also increasing by 0.5 per cent from 2011.

 

The tax adviser, therefore, has to build into current tax planning the opportunity of paying 40 per cent tax now before the increase in tax rates, i.e. in the year to 5 April 2010 and onwards, and to maximise dividends at 40 per cent whilst it can be enjoyed.

 

Case Study
In a fairly recent case, Paycheck Services No 3 Limited, Revenue & Customs Commissions v Holland (2008) All ER(D) 319 (June 24, 2008), the respondents were directors of Paycheck Service No 3 Limited (PS) which they operated as their trading company.  The directors each held 50 per cent of the issued shared capital. 

 

PS Limited itself held 100 per cent of the issued shared capital of PDS Limited and PSS Limited and the respondents were each appointed as directors of PDS and PSS. 

 

All three companies, together known as the composite companies, relied on an HM Revenue & Customs (HMRC) extra statutory concession in relation to the calculation of corporation tax.

 

In April 2001, HMRC claimed that the composite companies might not be entitled to rely on the extra statutory concession.  While the respondents took legal advice, they were never advised that the composite companies should stop paying dividends. 

 

HMRC subsequently commenced proceedings against the respondents, seeking to make them responsible to meet the further liability for the higher rate of corporation tax payable by the composite companies. 

 

The Revenue’s case was that by causing the composite companies to continue to trade and pay dividends, with knowledge that the composite companies were then rendered insolvent given the additional tax liability, the respondents were in breach of their duties as directors, i.e. they could not pay illegal dividends.

 

Outcome
The Judge held that from the time the directors received legal advice about the tax position, there was no reasonably held belief that the Revenue’s claims to additional corporation tax would be defeated and accordingly, from that date onwards, the interim accounts ought to have made provision for the additional tax liability.  In the circumstances, any dividends paid after that date had been unlawful and were liable to be repaid. 

 

Prior to receiving legal advice, there were reasonable grounds for the continuation of payment of dividends.  However, once the liability was known, dividends should have stopped.

 

The fine balance between tax planning, directors’ duties and cash flow management is made clear by tax planning to avoid the “super higher rate of tax” as emphasised by the PBR, cash flow management and prudence, together with the risk of trading insolvently shown in this case.