My VIP Tax Team question of the week: Company funds held in trust
My client has significant cash reserves in the company and wishes to invest this money in high interest savings accounts for easy access. The accounts my client is looking at would be in his personal name to have a better interest rate. Are there any tax implications for the company’s money being used like this?

With the Bank of England base rate latest increase to 5.25% from 3 August (and HMRC’s late payment and repayment increases from 22 August), it is understandable that your client wants to maximise the return on cash. The initial concern is the withdrawal of funds would at best be considered a loan with benefit in kind and s455 tax to consider to the worst as either a dividend or employment income.

While there is not precedent from case law where such an arrangement has worked, we at least have Mirror Image Contracting Ltd [2012] UKFTT 679 where such an arrangement failed. In summary, Mr Sweeny withdrew funds from the company’s account and deposited these in both his personal savings account and a mortgage offset account with Ms Jordan. Mr Sweeny claimed the funds were held on trust for the company, but the FTT found his actions would likely have been considered a breach of trust at paragraph 13 with my emphasis in bold:

13. We find that the funds originally withdrawn by Mr Sweeny, and the funds withdrawn and deposited into the joint offset mortgage account were not held on trust for MIC. If the funds had been held on trust, they would have been kept in a separate account, and not intermingled with Mr Sweenyʼs and Ms Jordanʼs personal accounts. The legal effect of depositing funds into Mr Sweenyʼs and Ms Jordanʼs offset mortgage account is to discharge a loan owed by them. This would have been an egregious breach of any trust (had the funds truly been held on trust by them for MIC). We find that the amounts withdrawn by Mr Sweeny and deposited either into his personal account or into the joint offset mortgage account were lent by MIC as shareholder loans, and were never held on trust for MIC.

Importantly, this case only went to the FTT so is not binding precedent.

While we may be able to achieve the sums withdrawn from the company as not being loans or taxable in the directors’ hands, there would be other administrative aspects to consider:

– Reporting of information by the bank to HMRC may result in tax enquiries from HMRC from non-reporting.
– The bank’s terms and conditions regarding the holding of funds on trust and if such arrangement is permissible.
– Sufficient safeguards to ring-fence the funds held on trust from being used against personal creditors (which ties in with the bank’s T&Cs).
– Correct accounting treatment of the interest on accruals basis as opposed to the receipts basis.

A related issue to consider going forward is the potential problems with excess cash and the impact on the trading status of the company. Business Asset Disposal Relief (BADR) is only available for a trading company which does include to a substantial extent other activities, TCGA 1992, s165A (3). Unhelpfully, statute does not define the term “substantial” but has been tested in case law, most recently in Assem Allam v HMRC [2021] UKUT 0291. This case involved claims of Entrepreneurs Relief (now BADR) on disposal of shares of a company involving property development and property investment activities.

The FTT and UTT were critical of HMRC’s manuals in so narrowly attempting to interpret substantial through their broad rule of thumb of 80-20 when the legislation did not simplify or provide such an approach. The current version of CG64090 no longer references the strict numerical indicator but can still be accessed from their archived version here.

The appellant referred to the FTT decision in Potter & Anor [2019] UKFTT 554 which the UTT commented on at paragraphs 112 to 113. While the UTT was right they could not remake the decision in Potter, they appeared to disagree that the holding of the six-year investment bonds as being a non-activity but instead would have some level of activity.

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