It could be a sobering thought to some that at some point in the future the taxman is going to look into a company’s affairs and will try to put his own spin on company actions. The best defence against this is very simple and is only a matter of simple, straightforward note taking. So, going back to basics this month we need to discuss company paperwork!
A company (or indeed a partnership, a sole trader or even trustees on behalf of a settlement) will make hundreds of decisions throughout the business’s/trust’s lifetime, any one of which could have tax implications. If the taxman visits and thinks he can collect more tax, he could argue that any decision made was “for the purpose of avoiding tax”. The taxman can try, but he has no right to tell people how to run their businesses – he can only apply tax law. In borderline cases, the taxman has to argue that the avoidance of tax or the conveyance of a benefit has occurred as a result of the transactions undertaken. If your paperwork shows good commercial reasons (intended to benefit the business as a whole) behind any decision taken, the Inspector of Taxes will have a hard job proving otherwise.
All you need do is keep evidence of your decisions as you go.
The evidence to be kept should include notes of telephone conversations, a note of any decisions made at informal meetings of company directors and, of course, minutes of formal board meetings; the latter having to be kept in the company minute books. I am not saying that routine everyday decisions of a trivial nature should be recorded ad nauseam. I am talking more of the one-off things such as decisions to rent a particular property (for example from one particular person or party over another), a commercial decision to obtain finance from a particular source (possibly a director) and other things that are generally considered before formally being put before the board for agreement. Ideally you should record your thinking behind these decisions. (Companies are actually required by law to declare most transactions with directors’ non-company affairs in the annual accounts and it is these declarations that give HM Revenue & Customs most of their ammunition). Any notes taken should naturally include the date the meeting/decision occurred and the names of those party to the decision. It may sound obvious, but it is surprising how often these little things are overlooked.
Just a quick example of this in action – a director discussed his forthcoming Far East trip with his company. The subject of the discussion was the fact that the director’s wife was due to accompany him to assist him at various social engagements for the benefit of the company’s business. It was also recorded that it was thought that the presence of the director’s wife produced minimal additional expenditure. At a subsequent PAYE audit, HMRC ultimately accepted that no benefit charges (which would have been substantial) should be levied for the director’s wife accompanying him to the Far East.
I am not suggesting that everyone promptly goes abroad to follow the above example – for one thing the trip had to be of a business nature in the first place. My point is that by recording your good intentions at the time decisions are made, this can put the brakes on the taxman’s spin at a later stage.
For more information on any of the above points, please contact Robin direct.