ex gratia payment from company

max00d

I basically sold my shares in a company I was director of when I left. My business partner agreed to buy me out, paid me half of the money, and is now proposing to pay the other half to me via an ex gratia payment.

I am concerned by this as not only did I sign a stock transfer for for the full original amount (although I'm sure he has 'misplaced' this) but he now wants me to sign a settlement agreement where I agree to transfer the shares to him for a nominal £1 fee. In return I then forgo any claims to the company and him personally.

My gut feeling is that this is not a legitimate thing to do. However, he has told me he had help drafting this from a lawyer and an accountant (although I dont believe this at all). Basically, I am of the opinion that if HMRC got wind of this then I cant actually claim this to be an ex gratia payment because it would strictly fit their definition, i..e because there is no obligation requiring it to be paid, and I'd have to pay income tax it.

But this is being paid in relation to an existing obligation.

Is there any way this could actually be legit - or is my gut feeling correct?

Thanks for your time in advance.

firefox1956

Your gut feeling is correct........

InsideInsurance

Different accountants and lawyers have different levels of risk appetite. I know a former employer used to give 1 months salary as "redundancy" payment to people who had been there for only a few months and so had no actual legal entitlement to any payment.

The accountant in the finance team thought that these should be made as ex gratia to avoid the tax on them but the official approach was to pay it as redundancy money and so it attracted tax.

The choice is yours, you could accept it as ex gratia and hope HMRC dont ever spot it. Alternatively you declare it for what it really is and pay your dues. Evidently if HMRC did spot it then back tax, interest and fines are probably the least you could expect and possibly more

Mistral001

firefox1956 wrote: »

Your gut feeling is correct........

I agree with this. There is obviously something this guy wants in return for what apparently is helping you evade tax.

max00d

Thanks for the input.

I agree with this. There is obviously something this guy wants in return for what apparently is helping you evade tax.

Just to say that I am not trying to evade tax. I sold the shares to him and now he wants to pay half the debt this way instead from him personally. This is becasue he doesnt want to pay the income tax on the money he will then pay (from his company into his personal account and then to me). In this instance I am liable for capital gains but only above the allowable threshold.

He has previously refused to pay me the outstanding money. This is his attempt at a settlement. I guess I just want to be sure that I shoudnt accept the payment via this method and instead continue to demand he pay me personally. I dont want to sue him but it may come to that.

Mistral001

max00d wrote: »

Thanks for the input.



Just to say that I am not trying to evade tax. I sold the shares to him and now he wants to pay half the debt this way instead from him personally. This is becasue he doesnt want to pay the income tax on the money he will then pay (from his company into his personal account and then to me). In this instance I am liable for capital gains but only above the allowable threshold.

He has previously refused to pay me the outstanding money. This is his attempt at a settlement. I guess I just want to be sure that I shoudnt accept the payment via this method and instead continue to demand he pay me personally. I dont want to sue him but it may come to that.

I have no experience of Ltd companies, so I might have gotten this wrong. Is it that he can only pay the balance only if he takes it from the company as salary of something like that which he will have to pay income tax on. So instead of doing that he will give you the money personally. It does not make sense unless he is going to give you less that the balance.

max00d

I have no experience of Ltd companies, so I might have gotten this wrong. Is it that he can only pay the balance only if he takes it from the company as salary of something like that which he will have to pay income tax on. So instead of doing that he will give you the money personally. It does not make sense unless he is going to give you less that the balance.

Basically - 2 scenarios (he is wanting to go for number 1 becasue it costs him less):

1 - if he pays me the oustanding money owed on the stock transfer as an ex gratia payment from his company this, for him personally, is tax free (he doesnt pay any income tax on his salary and received the company shares).

2 - if he pays me personally he first has to transfer money from his company into his personal account (effectively paying himself). He pays income tax on this and then he pays me the outstanding money.

Scenario 2 is what we originally agreed, i.e. I sell him all of my shares and he pays me. But because he is the sole director/owner of the company now (even though technically I still own the %age of the shares outstanding) he greedy little eyes have spotted a loophole. If he didnt own a company then he would never have control of the finances to such a degree that he could see what he is effectively 'losing' by paying me personally.

So not only does he not want to pay his income tax to honor a contract and debt. The implications of this would be that he would not have to pay stamp duty to the stock purchase as well. So he is effectively trying to 'dodge' HMRC's rules on two seperate count.

My argument is that as the purchaser it is his liability to pay as in scenario 1 (our original agreement), and and income tax liability should be soley his. I should not have to take scenario 2 (ex gratia) because I most likely have to pay tax on this when I do my end of year self-assesment.

Do you think this makes me look unreasonable. Or is it fine for me to turn down the ex-gratia payment and demand he pay me personally. I know that legally I can demand this - but am I being reasonable here?

Aquamania

I too am struggling to understand any of this story, sorry.

What sort of money is involved here?

You sold shares (your half of the company) to the other shareholder.
You've been paid half the agreed price.

Presumably you have something in writing relating to this deal, particularly as only 50% was paid.

If not, it strikes me as you have 50% of the money agreed and still have the shares

If you do, then the other individual still owes you the 50% of the original sale price agreed.

If you've already transferred the shares, the company owes you nothing (assuming nothing was agreed otherwise such as selling the shares xD). If you've not sold the shares, you would still be entitled to any dividends.

I don't see where any ex-gratia payment comes into this? Who is the ex-gratia payment supposed to be paid by?

If the individual, why? He owes you 50% of the originally agreed sale price

If the company, why? And how will that ever be explained in the company accounts?
(not that you presumably care if you've sold your interest in the company)
And as you say later, you'll probably be taxed on such a payment (unless you can come up with an explanation as to why you shouldn't be taxed)

Alternatively, it by be possible for the company to buy back the shares
This used to be forbidden, but it can be possible today, although strict rules do apply.
(but obviously not from you if, as you say, you have already sold them elsewhere)

max00d

What sort of money is involved here?

This is a 5 figure sum (the remaining amount outstanding).

You sold shares (your half of the company) to the other shareholder.
You've been paid half the agreed price.

Yes - as of the moment of typing this.

Presumably you have something in writing relating to this deal, particularly as only 50% was paid.

I do and voice recordings of key conversations.

If not, it strikes me as you have 50% of the money agreed and still have the shares

If you do, then the other individual still owes you the 50% of the original sale price agreed.

I do - and that is what would be implied by the legal contract (to sell the shares). So I am actually still entitles to claim and dividend payments to the percentage that I still own. This has been going on for a few months now and my ex-business partner pays a considerable amount to himself in dividend payments each month (as part of a salary).

I don't see where any ex-gratia payment comes into this? Who is the ex-gratia payment supposed to be paid by?

Exactly,nor do I. But to limit his tax liability he wants to pay the remaining debt to me via this method and effectively alter our original contract.

If the company, why? And how will that ever be explained in the company accounts?
(not that you presumably care if you've sold your interest in the company)
And as you say later, you'll probably be taxed on such a payment (unless you can come up with an explanation as to why you shouldn't be taxed)

You raise a good point here. And no I dont really care. I am assuimng he has advice from his accountant on this.

And as you say later, you'll probably be taxed on such a payment (unless you can come up with an explanation as to why you shouldn't be taxed)

Exactly, and this is my concern. Why should I pay his tax bill?

Alternatively, it by be possible for the company to buy back the shares
This used to be forbidden, but it can be possible today, although strict rules do apply.
(but obviously not from you if, as you say, you have already sold them elsewhere)

I am not selling them to the company.

---

Essentially, I sold the shares in good faith. Signed a stock transfer to the amount we agreed. He paid me half the amount then told me he wasnt go to pay me the rest. And if I took him to court he was going to deny that I ever had the shares. He sold me them in the first place when I bought into his company. Thing is he didnt realise I had a copy of all the documents - he though he had got them all from me.

He is now just realising that I am serious and will sue him. In which case I will also go after the dividend payments. However, to complicate things even more he is one of my in-laws. He has approached me with offer now after a few months of being an a**h**e. I want this over because I dont really want to sue a members of my wifes family (obviously causing a lot of distress to her that this has occured).

So the thing is I have to have a good reason not to take this payment. And then if he refuses to pay anything else I will then have no choice but to sue him. But as I said - I don't want to do that is I can avoid it.

I don't trust him as far as I could through him.

Aquamania

Still confused, sorry.

You say you have the agreement in writing, so refer to it (and if necessary, enforce it)

Regarding the shares, you said you have only received half the originally agreed value.
Now you suggest you've only sold half the originally agreed quantity, which have been paid for in full, and you still have the other half.

Which is it?
This is an important difference as at the moment I feel you are trying to have your cake and eat it.

What do you mean by "I am not selling them to the company" ?

I only suggested this as a possible option (which may or may not work)
Do you mean "no way would I sell them to the company", or are you simply saying the original agreement was to sell to the individual.

As I understand it, the individual will own the entire company after you dispose of all your shares.

Mistral001

I really think you need professional legal advice on this one. Can you afford not to? All you have to say is " before I sign anything, I want to run it past my solicitor". Not an unreasonable request, in view of the amount of money involved.