Reverse Tax Avoidance

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Published: 22 Jun 2020

Reverse Tax Avoidance

Reducing Tax Liabilities

Over the last few years a number of schemes to avoid tax have been put in place by tax specialists and tax counsel to assist clients in reducing their tax liabilities. Most of them are now being rejected by the Courts as not workable, with the taxpayer having to cough up not inconsiderable amounts of unpaid tax.

HMRC denies use of tax relief

You may or not be surprised to hear that the reverse also happens, where HMRC try and deny the taxpayer from the legitimate use of tax reliefs on the sale of a business or trading company.

The Tax Tribunal

Take the case of Richard Villar who ran a successful medical practice which he sold as a going concern to Spire for £1M.

Mr Villar thought that the transaction gave rise to a capital gain: Unbelievably, HMRC argued that the payment to Villar was subject to income tax, being a payment of goodwill which was personal to him and so could not be transferred to Spire.

Effectively, HMRC was saying that Villar had no goodwill to dispose of and the payment of £1M represented a payment in advance of future income!

Fortunately, the Tax Tribunal agreed with Mr Villar that the sale of the practice was a capital transaction. The significance of this is that the £1M gain was assessed to capital gains tax, with Entrepreneurs’ Relief, at 10%, instead of the top rate of income tax at 45%.

In this case, HMRC was totally out of order and it is unfortunate that Mr Villar had to go to the Tax Tribunal to prove his point.

The Moral of the Story

It is important that a proper record is kept of the sale transaction and the sale price of the medical practice is based on the valuation of an expert valuer to support the entries on his tax return.

Apart from suffering the trauma and effort of going to Tribunal, Mr Villar should be able to reclaim the cost of the fees of his professional advisers in defending the action of HMRC.

If you would like advice on the tax treatment on the sale of your business or company, please do not hesitate to contact David Cane on 07749 080 806 or send an email.

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