I have a limited company client, wholly owned by a sole director. He constantly overdraws dividends and as a result the company is circa £19k insolvent. He wants to transfer 50% of the shares to his girlfriend to mitigate his higher rate tax on the dividends (last year these dividends were £90k net). I have told him that this will be challenged under S660 as there is no commercial justification for this transaction, particularly as the company is a service company and she could contribute nothing other than (perhaps) occasional secretarial services. He wants to know if there would be any difference if she put money into the company (circa £10k). My view is that it would make no difference at all to the Revenue view. Do you agree?
My first response would be that id the company is overdrawn by circa £19k through drawing excess dividends - this itself is an issue as they would be deemed 'illegal' dividends in that the company does not have sufficient distributable reserves to pay the dividends.
Your client will have to try and argue that at the point of drawing the dividend, they had management information which suggested there were sufficient profits to take the dividend and the reason for the deficit on the balance sheet is due to unforeseen circumstances.
Being an 'illegal dividend' - technically it becomes a debtor to the company as the dividend should be repaid. HMRC will be all over this looking to treat it as salary or S419 tax.
Regarding the S660 issue - this is an interesting one.
My view would be to make the partner a director, this certainly adds more weight to the arguement
As a director she has various powers to sign off accounts, Vat returns (which I appreciate she can do as secretary) and has all the risks of a director.
I also take the view that her 50% shareholding is an investment. The fact that the return on the investment is quite high is based on the fact it is a significant risk she is taking. If the company went under, she would lose her shareholding.
Overall, I have found HMRC struggle to challange the S660 as it is such a grey area and have seen cases won and lost on HMRC's point. My main concern at this stage would be that the company is insolvent and dividends are still being drawn
Certified Chartered Accountant