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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4419
Experience:  FCCA FCMA CGMA ACIS
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Bit of a strange situation. I was partner and director in a

Customer Question

Bit of a strange situation. I was partner and director in a start-up. My partner then wanted to buy me out and we agreed a price. My partner paid me just under half of the agreed price and then started pulling strange stunts (very paranoid personality) and accusing me of trying to screw him out of money (by asking for a fair price that he agreed to!). Threatened to refuse to pay me, I threatened to sue him and he came and offered a pay out from the company in exchange for the transfer of stock as an ex-gratia payment.
I know, very strange. That's everyones reaction. What has an ex-gratia payment got to do with anything. At the heart of it its my ex-business partners attempt to reduce his tax bill. By paying the money out his company he doesn't have to first pay himself, pay tax on his earnings / drawings, and then pay me (we are talking 5 figures here BTW).
I have been advised that I shouldn't take this payment and only accept a payment from him personally. But at the end of the day am I being stubborn. If this 'deal' reduces his tax liability should I not just help him out? (even with the way he has behaved). It is my understanding, from the advice I have been given, that I will have no choice but to declare this as income and pay any associated tax. If this is the case then I really shouldn't have to pay 'his' tax bill and if push comes to shove I will take him to court. Although, he keeps saying (and of course he would either way) that there is no tax liability at my end and any 'good' accountant would tell me that (the word 'good' for an accountant can have many meanings depending on your requirements). Would this payment qualify as income, or how would I actually declare it? Now from his point as view as soon as I sign anything and take the payment he is laughing, and this is clearly in his best interests.
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.
I would suggest to you that if you accept this payment it would constitute the balance of the sum agreed to buy you out and would thus be a capital receipt in your books of account and not income at all. Of course any difference between the total sum paid by and the original investment might be a gain subject to Capital Gains Tax (CGT) but that is quite a different kettle of fish. To an extent he is correct in his remark that there is no tax liability your end, save the small matter of CGT, but that would be there in any event.
I would be inclined to take the money and run. You would appear to be well out of the situation in which you currently find yourself embroiled.
I do hope I have helped point a way ahead for you with my answer.
Customer: replied 3 years ago.

Thanks for your reply Keith. My concern was that the definition of an ex-gratia payment from HMRC is one where "...the employer makes when under no legal or contractual obligation to do so". Given that there is a current contractual obligation to pay me money (i.e. the contract to sell the stock) this is the source of my concern.

However, from your response you state that this would be a capital receipt in my books and not income, i.e. a payment received for the sale of stock.

How do I make this clear from my point of view (for my year end self-assesment). Because my ex-business partner wants me to sign a settlement agreement outlining that I will receive an ex gratia payment. Additionally, he wants the stock transfer to be a nominal amount, i.e. not include the sum of this payment. Should I insist that the stock transfer amount is to the entirety of the sale, i.e. the money already received + the 'ex-gratia' payment.

I do want to 'take the money and run' so to speak. Just want to be sure that I dont end up paying his tax bill (I dont trust him at all at this stage).

Expert:  bigduckontax replied 3 years ago.
Cash the remittance.
Do not enter into any further correspondence on the matter.
Your partner was not your employer, it was a partnership so there is no ex gratia payment by an employer involved. Your partner had a legal obligation to pay off your share when he bought you out. It matters not one jot to you from whence the moneys come, provided that the debt is settled. Post it to your capital account.
Emulate Brer Fox 'For he lay low and say nuffin!'
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.