When is a director not a director? A: When she’s a shadow director.
I was approached by an accountant some months ago in a bit of a panic. HMRC had refused a claim for Entrepreneur Relief for one of her clients, who had sold a hotel in Morecambe. The grounds for their decision was that she was not a director and didn’t work full time at the business.
I arranged to meet the client and her husband (co-shareholder) at their house in Altrincham, to talk to them about what she actually did in the hotel. It soon became clear that when they bought the business it was in a poor state of décor and that she was tasked to design the new look for the hotel. She previously had an interior design company and so this was right up her street. Having sourced all of the material, paint, furniture etc, she then project managed the contractors with the re-fit.
Once the hotel was open, the three shareholders met regularly to discuss the day-to-day running of the hotel but they were always minuted as shareholders’ meetings rather than directors’ meetings.
I have written a reply to HMRC along the lines that as a shadow director, the board regularly sought her advice and acted on it and as such, she should be treated as a director and that her claim for Entrepreneur Relief was valid.
The initial reply acknowledged that a shadow director could claim Entrepreneur Relief and asked for further details. I have sent two lots of further information HMRC have accepted the claim.
Given that the capital gains tax rate on the sale is 10% if successful, and 28% if not, then this has been a great result for the client – and a huge relief for the accountant.