SCIG12470 - Reaching agreement on income or profit addition: Tax treatment: Extracted income or profits of a company - other situations
Arguments to support other treatment are sometimes put to us vigorously. Often, but not invariably, the overall tax bill, if a different approach were adopted would be substantially less than that produced by the normal approach.
Additional Remuneration (The ‘Employment Income route’)
There is extensive advice at EM8700 that should be followed, except that referral of a case where the Employment Income route is recommended should be to the Operational Leader and not to TaxesAdminAdvice (formerly CCP).
(This text has been withheld because of exemptions in the Freedom of Information Act 2000)
The treatment of extractions as income or profits distributed as dividends cannot usually be justified. The extractions cannot pass the first hurdle to be regarded as a dividend unless the company had made a properly constituted non-retroactive resolution to that effect. It is extremely unlikely that this could be shown, and even if it could a valid dividend has to be in relation to the company’s income or profits as disclosed. (This text has been withheld because of exemptions in the Freedom of Information Act 2000)
We would normally want to see very clear evidence that a director was conducting a separate sole trade before accepting that income or profits should be assessed on the individual rather than as additional income or profits of the company. If the claimed trade area is the same or similar to that of the company the claim is likely to be especially weak.
In the case of Curtis v Oldfield 9 TC 319, defalcations by a managing director have been held not to be admissible deductions even though the shareholding was a minority one. At the other end of the scale defalcations by a subordinate employee are admissible. Between the two is a grey area where it is important to establish the facts as accurately as possible. The Operational Leader’s advice should be sought once this has been done and the Technical Manager (Powers and Penalties) may be consulted.