Unknown Associates

How much evidence do you need to substantiate a claim for tax relief?

This can be tricky question, particularly where the legislation does not specify the form or nature of evidence required. The Firt-tier Tribunal  turned its attention to such matters recently in Seascope Insurance Services Ltd v HMRC [2011] UKFTT 828, a case concerning a disputed claim for marginal small companies’ relief.

The structure of any group of companies is of course hugely important for tax purposes, not least for determining the applicable limits for small companies' relief. The threshold for obtaining the relief depends on how many associated companies the company has. A company is associated with another company if it either controls the other or if both are under the control of the same person (including individuals, partnerships and companies). It does not matter if such a company is resident in the UK, and this is where things can become complicated.

Whilst it may seem like a fairly simple exercise to determine how many associated companies there are in the UK, given the wealth of available official data and record-keeping requirements. This is often not the case overseas however, particularly in some less developed economies and in so called 'tax havens'.

Seascope was owned 67.59% by Gulfstream Investments Limited (a Liberian company), 16.67% by Maritime Brokers Limited (also Liberian) and the remaining shares were held by two individual shareholders (who had no interests in the Liberian companies).

Gulfstream Limited confirmed to HMRC that it was not owned more than 49% by another company and was not owned more than 49% by a person who controlled another company.

The burden of proof for substantiating a claim for relief falls on the taxpayer, and it was common ground that a theoretical possibility existed that there could be other associated companies, by virtue of their relationship with Gulfstream and Maritime Brokers. However, HMRC were essentially insisting that Seascope prove, beyond all reasonable doubt, that no other associates existed, whereas Seascope contended that it needed to establish that, on a balance of probabilities, no other associates existed.

In the Tribunal's view the approach adopted by HMRC came close to asking Seascope to prove a negative - that there are no associated companies other than those taken into account in the claims for marginal small companies' relief, and that this was taking matters too far. It is always theoretically possible for associations to exist, often by purely coincidental circumstances. 

Cases such as this always turn on their own particular facts and this limits their wider impact, but the Tribunal's approach at the very least represents a welcome victory for pragmatism!