We write to report on a recent tax case won by HM Revenue & Customs (HMRC). It concerned a family general partnership which provided services to a company in which the main individuals are also directors.
In the D J Cooper case, cars and fuel were made available by the partnership to its partners. The First Tier Tribunal upheld HMRC’s view that the attempt to avoid a benefit in kind (BIK) charge by arranging for the cars to be provided by an associated partnership, rather than directly by the company, was unsuccessful.
The partners were directors of a company (or the family members of such directors) to which the partnership provided administrative services. The First Tier Tribunal decided that, despite being provided by the partnership, the cars and fuel were made available by reason of the employment of the directors by the company. As a result, they were taxable as BIKs and also subject to Class 1A national insurance contributions (NIC).
The partnership carried on the business of providing the services of its personnel and administrative services to, its only customer, the company. The partnership had a number of employees who between them carried on the business. The partners themselves had a minimal role in carrying on that business.
The Tribunal concluded that the partnership’s business did not require that its partners were provided with the use of the cars. The cars would not have been provided if the partners were not directors of the company.
Although the cost of the cars was met by the partnership, the partnership issued an invoice to the company on a monthly basis in respect of payment of fees and the cost of providing those cars. Ultimately, the cost of providing the cars was borne by the company.
The Tribunal considered that the partnership would not have existed, commercially, but for the company its only customer.
The company and its directors face a tax and NIC bill of well over £200,000 going back several years. This is despite the fact that tax has already been paid through the partnership on any “private use” element of the cars.
1. To date, it is not clear whether the taxpayer will appeal.
2. The ruling is likely to be used by HMRC going forward.
3. Consideration should be given to the rationale and commerciality of existing (and proposed) parallel company and partnership structures, particularly where cars are provided to the partners by the partnership.
4. Businesses that have historically entered into such arrangements may be the subject of review and HMRC may look for settlement of earlier liabilities plus interest and penalties where its challenge is successful.
5. As penalties are based on the behaviour of the taxpayer and the way in which a disclosure is made, we recommend that a review of existing arrangements is carried out to determine whether a disclosure to HMRC would be beneficial to negotiate reduced tax and penalties.
6. In cases where existing arrangements include a partnership carrying on a separate business, the facts are not on all fours with the Cooper case, however, HMRC are likely to take a greater interest in such arrangements going forward.
To summarise, care needs to be taken when implementing arrangements to mitigate taxation of directors. Please contact us for further information.
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