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HMRC loses s660a dividends tax case

HMRC loses s660a dividends tax case

Contractor accountants and limited company contractors might be interested to hear that HMRC has lost their case against a couple who it claimed owed nearly £20,000 tax on four years’ dividends.

The Revenue took the Patmores to court under s660a of the Income and Corporation Taxes Act 1988 but Barbara Mosedale, the tribunal judge, decided that when Mr Patmore paid dividends to his wife this was not an s660a settlement.

In the 1990s the Patmore’s bought a small manufacturing company for £320,000. The first payment of £100,000 was obtained by taking out a second mortgage on their home.

Their accountant advised them to reorganise the company shares into two classes, of which Mrs Patmore owned 2% of the A shares and 10% of the non-voting B shares. Dividends were paid on the non-voting B shares between 1999 and 2003 and this money was paid into Mr Patmore’s loan account to be offset against the purchase price of the company. HMRC’s case was that Mr Patmore was using his control of the company to award large dividends to his wife as a tax saving scheme but that she never received any of them as the money went straight into the loan account.

In court, the couple’s adviser said that the two tier share structure meant the couple did not need to pay dividends to Mr Patmore and it also reflected that although Mrs Patmore was not involved in the daily running of the company, she was at risk because of the mortgage liability.

The judge noted that the accountant had set up the company structure in a tax efficient way but this was not a significant factor in the case. She also stated that the Revenue had not taken a broad and realistic view of the circumstances. Whilst HMRC had accepted that Mrs Patmore shared joint and equal responsibility for the repayment of loans to buy the company, it did not register that this arrangement would mean she was entitled to half of the share capital and a fitting share of dividends.

Mosedale ruled that the way the Patmore’s bought their company was “a constructive trust in Mrs Patmore’s favour” and not a settlement under s660a as the Revenue had first claimed. The 10% of non-voting B shares were not a gift and they did not fully reflect her investment. The judge also stated that Mr Patmore held in law the 40.5 shares that his wife should have been entitled to but these were in trust for her.

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