Mark McLaughlin highlights a possible exception to the general rule that compliance with company law formalities is essential in disputes with HMRC.
Running a business through a limited company requires adherence to certain legal formalities. However, many family and owner-managed companies dispense with such formalities in some instances. Does this make their actions invalid? Not necessarily.
The Duomatic principle
If a company’s affairs have been conducted with relative informality, the principle established in the (non-tax) case Re: Duomatic Ltd (1969) 2 Ch 365 might be of some assistance to company owners.
The broad thrust of the Duomatic principle is that actions based on an informal agreement of all the shareholders with rights to attend and vote at a general meeting are as valid as if they had been based on a resolution passed formally in a general meeting.
Can it help?
The Duomatic principle is recognised by HM Revenue and Customs (HMRC) where there is no company resolution to determine directors’ remuneration. HMRC states (in its Employment Income Manual, at EIM42300): ‘If there is no such specific resolution, but the directors’ remuneration is approved by the shareholders entitled to attend and vote at a general meeting, this has the same effect as a resolution passed by the company in general meeting.’
For example, a relatively common situation might be a company owned by a husband and wife, who have always agreed to their own remuneration as directors.
Two key elements of the Duomatic principle are: firstly, that the shareholders who have dispensed with the formalities of a formal resolution at a general meeting nevertheless applied their minds to the question of remuneration (in the above example); and secondly, that their assent was intra vires (i.e., within the scope of their authority).
Not necessarily…
However, the Duomatic principle is not a ‘fix all’ solution where a family or owner-managed company is run informally.
For example, in The Executors of Mrs Mary Dugan-Chapman & Anor v HMRC [2008] SpC 666, the appellants were unsuccessful in seeking to invoke the Duomatic principle; the Special Commissioner held that the principle could not be applied in that case to rewrite a transaction and give the character of a share rights issue to what was essentially a share subscription.
More recently, in Gould v Revenue and Customs [2022] UKFTT 431 (TC), upon the payment of a dividend to shareholders on different dates, the later dividend was held to be due and payable when it was paid, not in the tax year when the earlier dividend was paid. The minutes of a company board recorded that the directors resolved that an interim dividend be declared but did not record any decisions about the payment date for the dividend. The company had also argued that the shareholders should be treated as having varied their rights under the Duomatic principle. However, the First-tier Tribunal held that the Duomatic principle did not apply, as (among other things) the evidence suggested that the appellant had not even thought about the point.
Practical tip
Better to be safe than sorry. Best practice will be to follow formalities and retain documentary evidence wherever possible, and to fully comply with any legal requirements. Satisfying HMRC’s evidential standards in its guidance should also be helpful in terms of resolving disputes, albeit that such guidance does not generally carry the force of law.
