Company shares error costs contractor £41,450

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Chartered Accountants & Tax Advisers

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Running a contracting or freelance company involves dealing with a myriad of detail that is easy to overlook and which can lead to massive fines.

Few contractors are up to speed with the regulations governing how to properly administrate a company and the complicated rules are not always obvious.

Contractor Terrance Raine found this to his cost when a decade after forming a company for his engineering business, HM Revenue and Customs (HMRC) decided to match up the details of shareholdings on his accounts with those held at Companies House.

He and his partner were recommended to start a company holding one share each as director and company secretary.

His accountants agreed to carry out bookkeeping, accounting, payroll, VAT and company reporting responsibilities for the off-the-shelf company.

Unfortunately, they never filed the paper allocating the shares in 2000.

In 2006, Raine asked the accountant to send him the share certificates confirming their original discussions of how they were to be allocated, but they were never sent.

In 2011, HMRC discovered the discrepancy and recalculated all the dividends that were paid on each share in the favour of Raine. This meant tax for six years was under-assessed and penalty payments and interest were due as money paid from the company to his partner was reallocated to him.

The total HMRC bill came to £41,450.

Raine appealed to the First Tier Tribunal, but they dismissed his claim arguing he signed the accounts below the details of the shareholding and that he should have understood dividends could only be paid to shareholders.

Even though Raine obviously misunderstood the arrangements his accountant made, the final responsibility for checking and filing accounts and returns lay with him.

The case also shows that HMRC will check shareholding details against papers filed with Companies House.