Pre-incorporation contracts

Sometimes legal formalities lag behind commercial agreements. The recent Tribunal case of Hepburn [2013] UKFTT 455 (TC) is in many ways a surprising decision. It leaves some questions unanswered but warrants close reading by anyone in dispute with HMRC about “pre-incorporation” transactions or engaged in undertaking them.

Maureen Hepburn owned 80% of a company, Envireneer and was a director of it. For reasons which are not recorded she wanted to form another company and to supply consultancy services to Envireneer. This would have been in breach of the terms of her service agreement so in December 2004 it was minuted that she would be permitted to do just that.

In October 2005 a contract was signed for the provision of consultancy services between Envireneer and “Newco Ltd (a company which will be incorporated once it has been determined if there are fees chargeable under clause 4)”. Under the contract the engagement was deemed to have commenced on 1 January 2005.

In December 2005 Envireneer received an invoice for some £2.3m in the name of Torglenn Limited. Envireneer paid that amount to its solicitors which held it in its client account as a sum appropriated to Torglenn.

Finally, on 4 January 2006 Torglenn Limited was incorporated. It included the £2.3m as turnover in its first accounts for the period 4 January 2006 to 31 December 2006.

Given that the whole of this amount was as a matter of fact earned and paid while Torglenn was but a twinkle in Maureen’s eye, HMRC predictably took the view that it was Maureen and not Torglenn who should pay tax on it. Indeed they went so far as to assess Maureen for penalties for her failure to include the amount on her self-assessment return.

Rather surprisingly, the Tribunal did not agree: they considered that the substance and commercial effect of the arrangements were that Maureen was not and never would be entitled to payment of the consultancy fee. Accordingly the assessments to Income Tax and penalties were discharged. Awkward questions such as what would have happened if the company had never been formed; or who would have been liable if the consultancy advice had been negligently given were airily dismissed, essentially on the basis that they were merely hypothetical; the question who was liable to account for VAT (and when) is equally interesting but was not even posed.

We think Miss Hepburn was fortunate to have had such a sympathetic hearing: and we would not be surprised to see the case reversed by a higher tribunal. But meanwhile it is well worth looking at the decision if only to see the controversy which can be caused by failing to do things in the right order.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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