UT (Tax & Chancery) UT/2023/000098 - [2024] UKUT 00404 (TCC)

MC established a painting and decorating business in the early 1980s, initially as a sole trader. His wife, Kimberly Currell (“KC”), joined him as a partner in the business at a relatively early stage. The business grew and its success increased; most profits of what was then a partnership were reinvested ([15(1)-(3)]).

In 2002 the Appellant was incorporated and took over that business. The Appellant achieved substantial success and in the years ending 30 April 2009, 2010, and 2011 generated profits of (respectively) £440,000, £330,000, and £750,000 ([15(4)]).

Between 2002 and November 2010 MC and KC were the directors of the Appellant. MC was “a driving force” and “any significant decisions” would have been approved by MC but the success was not achieved by his efforts alone; KC was extremely important in assisting him ([15(5)-(6)]). By 2010, MC and KC’s two sons were becoming increasingly involved in the business ([15(7)]).

By November 2010 the Appellant employed contract managers (along with other employees) who were “essential to the success of the business”. The Appellant had a “culture” of paying “sizeable bonuses” to its contract managers when targets were hit. Those bonuses on average approximated to 10% of an employee’s basic salary. This practice continued in all of the years following the setting up of the arrangements ([15(8)-(9)]).

As at November 2010, the Appellant had five shareholders. MC and KC held about 31% of the shares each, their two sons each held about 5%, and a share incentive plan owned approximately 28% ([15(10)]).

For the three tax years ended 30 April 2009, 2010 and 2011, MC took a salary of £4,800. For the period between 30 April 2009 and 30 April 2019, the maximum salary that he took from the Appellant was £10,800. In that period, the Appellant declared dividends (payable to all shareholders not just to MC) of between £50,000 and £160,000, most payments being in the region of £60,000-£80,000. MC also received dividends from other sources, and for the year ended 30 April 2009, his income from salary and dividends amounted to £34,750, and for the period 30 April 2009 to 30 April 2019, ranged between £14,599 and approximately £41,000 ([15(11)]).

If the Appellant had not made the Payment, the Appellant would not have paid MC £800,000 as remuneration for his work for the Appellant ([15(12)]).

The Payment did not replace remuneration which MC had sacrificed or reduced in anticipation of receiving it ([15(13)]).