Back in the day, when all sort of wild and wonderful tax avoidance schemes were on the go, HMRC always used to go through the implementation documents in some detail. They knew that even if the idea worked in theory, it was often the implementation that let the client down.
In my work with accounting firms and especially when I look at their new corporate clients, I always have a nose around their Companies House filings and see what the previous accountant might have done. Quite often we see new classes of shares being set up to enable dividends to be paid to the “non-working” spouse.
Setting up a new class of shares? Pretty straightforward, but it does seem to me that many accountants take a bit of a shortcut which might leave their clients vulnerable to an HMRC enquiry.
Often, I see the new class of shares simply being “created” by completing the form SH01 and then the new class of shares magically appears on the next Confirmation Statement with a statement of the rights attached to the new class. Do we see Articles of Association being changed? What about Directors and Members resolutions?
Unfortunately the SH01 and Confirmation Statement are simply documents which seek to confirm what has been agreed by the directors and members. They are not the documents which effect any changes. In most cases, it is the Articles which set out the rights attaching to shares so if we are going to introduce a new class then the Articles need to be changed to reflect this.
Without those changes then any new shares that are issued, even if we say they are of a new class, simply rank as additional shares of the existing class of shares. From a tax planning point of view that can be disastrous as that then, of course, means that the new shares will only receive dividends when declared on the “main” shares and at the same rate too. The opposite of what we were trying to achieve through introducing the new class.
It should go without saying that these new shares would potentially also get votes so our poor client might also get their non-working spouse interfering in the business and that’s definitely to be avoided!
Even in the most simple tax planning, getting the detail right is so important.
