Claimants with limited companies
I have already noted the recent change to the taxation of company profits but there are other personal injury loss quantum issues with companies to be aware of.
Earnings losses for claimants that trade through their own limited company, will typically be focused on the lost profits of the company (income adjusted for costs), that are attributed to the accident, reduced by taxes (based on how the profits would have been drawn from the company).
Situations where the claimant’s spouse holds company shares (often up to 50%) and possibly is also employed by the company yet have little involvement in the business.
The structure described is commonplace and is a regular feature of the claims involving business related claimants that I come across. Such business structures are not illegal and are not against tax regulations. The case law for personal injury loss quantum in this situation is found in Ward v Newalls Insulation Cp Ltd  1 W.L.R. 1722.
The approach to take is to look at the realistic commercial input of the respective partners (i.e. claimant and spouse) – and typically quantify the lost earnings based on the claimant’s time input to the business relative to their spouse.
So with claims where there is husband & wife owned company, please make sure that you get a full explanation from the claimant about what work/tasks they do and what their spouse does. Reference the time spent in business activities by the spouse in the Claimant witness statement.
So, if we have (say) an injured surveyor, that trades through a limited company whose shares are held 50/50 with their spouse. Let’s say the spouse takes bookings, does the record keeping and maybe updates the business website and runs Social Media for the business AND the claimant undertakes all of the surveys, writes up reports, meets customers, keeps up to date with their professional obligations etc.
Ask the Claimant to make a careful assessment of time input by them and their spouse.
If, say, their labours are split 85% claimant and 15% spouse. Then, applying Ward v Newalls Insulation Co Ltd, the Claimant’s losses are calculated as 85% of all of the business sourced losses: lost business income, less costs = lost business profits less taxes (corporation tax, PAYE, NIC, dividend tax etc.) X 85% = Claimant’s lost earnings. Don’t forget to allow for the overall effective tax arising from ‘warehousing’ profits via the spouse.
Also, don’t forget to allow for the Claimant’s pension planning activities. The reason for this is that pension contributions reduce the tax charge on profits generated in the business. Ignoring the claimant’s pension provision plans could result in understating the earnings loss quantum.
At Formby Forensics, we’re passionate about helping our clients and we’d love to chat with you about the best approach to take. Don’t hesitate to reach out – we’re always happy to help!
Richard Formby FCA MAE