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Court in a trap

Some of you will remember the case of Hurlingham v Wilde (The Experts,


Money Marketing, August 27) and the significance it has for solicitors and


other professionals in giving tax advice, having the appropriate tax


knowledge or, if not, limiting the extent of advice to exclude tax matters.


Well, the courts have done it again. The Court of Appeal, in a 2-1


decision in the case of Palmer v Moloney and another on July 26, found for


the plaintiff against an accountant over a tax advice matter and held that


an appropriate order for damages would be made.


The decision is from a higher court than that in Hurlingham v Wilde, which


was held in the High Court.


The accountant in Palmer v Moloney may be seen to be somewhat unlucky as


the Court of Appeal overturned the earlier decision made on the case in the


High Court and there was a dissenting judgment. At the time of writing, it


is not known whether the case will be appealed again.


The case involved Palmer&#39s eligibility for capital gains tax retirement


relief. The accountant advised him to extract capital from his business by


way of interim dividend rather than a capital distribution as, in his


opinion, CGT retirement relief would not be available on the latter.


The accountant&#39s view was that, as Palmer had another business interest in


which he spent some (but not much) time, he could not be classed as a


full-time working employee in his main business. The earlier court agreed


with this but the Court of Appeal overturned this judgment as at least 42.5


hours a week were spent working for the company. He was an employee who


worked full-time in a managerial capacity.


But had the extraction been by capital distribution, Palmer would have


been eligible for CGT retirement relief.


So what impact does this have on the financial services industry? The


answer, in my view, is enormous. Any decision on CGT retirement relief is


not a million miles away from having a relevance to CGT taper relief and


this is where accountants purporting to give any tax advice have to be


extremely careful when dealing, for example, with surplus profits which,


after all, could easily become available for capital distribution at some


stage in the future.


The rules relating to CGT taper relief are extremely complex and may have


some nasty consequences unless great care and diligence are exercised.


Here are some reasons why, instead of leaving surplus profits in the


company – probably not required for future business development – it may be


better to extract them early by way of salary, dividend or pension


contribution and ensure that at least part of them are saved for retirement


planning.


As the arguments are well aired as to which savings method(s) should be


used in which circumstances, this will not be expanded upon here.


The first reason is that, if a company has assets which have a substantial


effect on the company&#39s trading activity, then, on disposal of the company,


the Inland Revenue will only allow the non-business taper relief table to


apply and not the more favourable business taper relief table – for the


whole disposal.


The Revenue has rather vaguely said that “substantial” in this context


will mean “20 per cent of any reasonable measure in the circumstances of


the case – what is a reasonable measure will be a matter of dealing with


the inspector in the light of the full facts”.


So, what is the effect if surplus retained profits build to a reasonable


measure of investment? Will this mean the non-business taper relief table


is used for the entire company disposal? Who knows? Is it safer to extract


profits as stated? It is certainly a good talking point.


The second reason is that a complicated paragraph – paragraph 11 of


schedule A1 of the Taxation of Chargeable Gains Act 1992 – means that


carrying on the business of hold ing investments in a company could result,


in general, in the loss of all previous time credit periods for taper


relief from the time that such business (that is, carrying on the business


of holding investments) commenced.


Is holding an investment, in this context, the same as carrying on the


business of holding investments? Again, a vague reply has been received


from the Revenue which intimates that it may be but there seems to be a


very fine line between the two. Do you want clients to take the chance?


By the way, money on deposit does not have this effect so, unless surplus


profits are extracted and you do not want to take a chance on losing time


credit periods for taper relief, the company may be forced to accept


current low rates of deposit return. Bizarre, isn&#39t it.


Again, should you extract? This is the dilemma facing accountants.


Following Palmer v Moloney, what will they advise? This must all lead to


golden opportunities arising for substantial retirement planning if handled


correctly.

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