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's 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's 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
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's 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
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't 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