How important is the link between tax and company secretarial services?

There are a number of reasons why you may need to make changes to the share structure of your company. Examples include incentivising staff by introducing a share option scheme; selling shares in order to introduce new shareholders; effecting a company purchase of shares to enable a director/ shareholder to exit the company; altering a class of shares or introducing a new class of shares.

In all these scenarios company secretarial work will be required to ensure the correct paperwork is in place and the necessary Companies House reporting requirements are met. In addition however, there are tax implications to each of these which mean that it is not sufficient to review only the company secretarial requirements; the tax implications must also be considered and dealt with. As a result, company secretarial and tax services are very closely connected.

This is the first in a series of articles in which we illustrate, using examples we have seen in practice, the connection between the two services and the dangers of considering only one aspect.

In this first article we consider share issues; when a company is incorporated the issuing of shares is one of the first tasks undertaken by the company secretary and if changes are made to the company’s share structure in the future the company secretary will be required to issue new shares or transfer existing shares. At first glance the issue or transfer of shares is simply a case of completing Companies House forms and it can therefore seem very tempting to deal with these ‘in house’ in order to save on fees. However this is a dangerous approach because if one aspect only is dealt with, or indeed not dealt with fully, there can be far reaching implications for the company in the future.

Examples we have seen of these implications include:

1. A transfer of shares from one spouse to another, where the share rights were altered such that the spouse receiving shares did not have any voting rights. The result was that on the sale of the company, that spouse did not receive entrepreneurs’ relief on the share disposal. In this case the tax implications were not considered at the time of the share transfer;
2. A company sale where the purchaser reduced the offer price by a significant amount because the company did not have full statutory records. In this case all company secretarial work had been carried out ‘in-house’ and because full records were not available at a glance, the purchaser could not be sure that everything had been dealt with correctly;
3. A company sale where the purchaser required the seller to provide far-reaching tax warranties covering all company secretarial matters over many years. Again the company secretarial work had been carried out ‘in house’, the records were not correct and the tax implications of a number of transactions had not been considered. As a result the purchaser anticipated problems could arise in the future and required the seller to pay any costs and tax liabilities arising, even though he had sold the company;
4. A share issue that gave rise to an unexpected income tax liability of £30,000. This arose because shares had been issued without considering the tax implications, and HMRC opened an enquiry;
5. A share issue of 4.75% of the company’s shares to a new shareholder. When the company was sold, that shareholder was not entitled to entrepreneurs’ relief and therefore paid capital gains tax at the rate of 28% rather than 10%. This arose because the tax implications were not considered at the time of the share issue; if they had been it would have been possible to structure the issue in such a way as to ensure the shareholder would be entitled to entrepreneurs’ relief.;
6. An enquiry opened by HMRC following a company sale where the recommended tax clearances had not been sought. This resulted in deferred consideration on the sale being subjected to income tax at the rate of 50% rather than capital gains tax at the rate of 10%.

As these scenarios illustrate, taking early advice and working with a professional who will review all aspects of a share transaction is essential; if you are going to ‘go it alone’ be aware of the pitfalls!

For more information on how to conduct your company secretarial obligations in a more tax efficient way, please contact Lesley Stalker by emailing las@rjp.co.uk.