Timing Issue Leads to Tax Argument

When a consultant commenced work for a company, her intention was to carry out the work through the medium of a limited company.

She delayed forming the company, however, and this led to her first consultancy invoice being sent to the client company before her own company had been formed in Guernsey. The invoice was raised in the name of the company she intended to form. The invoice related to work carried out between January and December 2005 and was issued on 31 December 2005. The company was formed on 4 January 2006.

When the invoice (for more than £2 million) was paid, the income was recognised in the consulting company’s accounts, but was not returned as personal income by the consultant.

HM Revenue and Customs (HMRC) concluded that the income should have been treated as that of the consultant, not the company, which, they argued, could not have earned it since it did not exist at the time the income was earned. Key to their contentions was that the person responsible for paying tax is ‘the person receiving or entitled to’ the profits. Accordingly, they sought to tax the consultant personally (and to charge interest and penalties).

The dispute came before the First-tier Tribunal, which concluded that the consultant would never have been legally entitled to the payment and had not in fact received it personally. HMRC’s contentions were therefore rejected.

The matter would have been very unlikely to have been raised had the invoice been dated a few days later or the company incorporated earlier, and the case clearly illustrates the point that with care and forward planning, potential arguments can be avoided.

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