UK Company Tax Planning

UK Corporation Tax Planning & Compliance Made Simple

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Corporate structures and reorganisations

Tax matters include:
1. taxation of different business structures
2. taxation impact of acquisitions and disposals
3. Compare branch versus subsidiary,
4. Advantages and disadvantages of joint ventures,
5. Advantages and disadvantages of partnerships
6. company reconstructions
7. Gains on disposals of assets including shares within the same capital gains group and outside the capital gains group,
8. De-grouping charges
9. Consequences of transferring assets to an overseas group company.

SSE or NGNL or SFS – which takes priority?

1. 3rd party sales – SSE & SFS applies. However SSE takes priority.
2. Interco sale of shares for cash – SSE doesn’t apply, NGNL applies
3. Interco sale of shares for shares– SSE doesn’t apply, SFS applies
Note- SSE doesn’t apply for INTERCO transactions

Potential cessation of trade or sale of subsidiary shares
If company is liquidated, any proceeds distributed prior to liquidation is treated as income distributions; for shareholder companies dividends are exempt from tax assuming it is a qualifying distribution.
– Alternatively, any capital distribution on liquidation should be taxed as a chargeable gain. Any gain will qualify for the substantial shareholding exemption (SSE) if the SSE conditions below are met:

Substantial shareholding exemption
Any gain will qualify for the substantial shareholding exemption (SSE) (or an allowable loss will be ignored) if the conditions as set out below are met.
– the investor company making the disposal must be a trading company or a member of a trading group (>51%), and
– the investee company must be a trading company or the holding company of a trading group (or subgroup), and the investing company held a ‘substantial shareholding’ (broadly, at least a 10% interest) investee company, and
– the shares were part of a total holding of at least 10% (group companies can aggregate holdings) held for a continuous 12 month period beginning not more than two years before the disposal. If the shares are disposed of piecemeal then provided that this condition is met, SSE exemption applies
– the exemption does not apply if the transaction would otherwise be regarded as a nil gain/nil loss disposal;
– The trading requirement means no substantial non-trading activities or assets – normally accepted as
20% by market value or turnover.

The exemption is automatic and a claim does not need to be made;

Succession rules

 Background: A wants to buy B without B’s liabilities, Hence B sets up a newco C and transfers B’s trade into C and then A buys C.

  1.  Hive down of the trade between related companies
  • if a trade is transferred from B to C, there is a cessation of the trade by B and commencement of the trade by C; therefore, B’s c/f trading losses are lost & balancing charges may arise.
  • If “succession rules” apply (75% group and continuing of trade):
    • then unrelieved c/f trading losses should be transferred to C (reduced by the amount of net liabilities remaining in B) along with the trade.
    • capital losses remain /” stick “with B
    • plant and machinery transfer at WDTV so no balancing adjustments.
  • If the trade is hived down to C immediately before its sale to A such that it does not trade in that period, the succession rules are unlikely to apply.
  1. Acquisition of C by A
  • Upon the purchase of C by A, the base cost of those shares would be the price paid for them.
  • As there is a change in ownership of C, restrictions on the use of the b/f trading losses would apply if, within three years, there is also a major change in the nature or conduct of the trade carried on by C. If a change in C’s trade occurs, the trading losses b/f will be forfeit as at the date of the acquisition.
  1. Future utilisation of trading losses by A
  • HMRC’s interpretation of the ‘loss streaming’ rules where a predecessor ceases to carry on a whole trade and the successor merges the activities of that trade with an existing trade is that whilst all of the predecessor’s losses may be transferred to the successor, those losses are allowed against subsequent profits of the transferred activity only.
  • However, following the recent decision in the Leekes case, it may be possible to argue that when C’s trade is transferred to A, the enlarged trade of A is the same as the trade previously carried on by B or C. It may, therefore be possible for A to utilise the brought forward trading losses currently in B or C, but that outcome is not certain.
  • Losses are restricted if C is left insolvent after transferring asset/trade to A. If C transfers liabilities as well – no restriction; deduct trading losses at C less (excess of “leftover” liabilities over “leftover” assets (may include proceeds (cash) from selling trade to A).
Share for share exchange
– Eg A ltd owns 100% of B Ltd and C ltd. A ltd wants C ltd to be directly owned by B ltd. Assume market value of C ltd is £100m and original cost of shares in C ltd was £1m.
– Share for share exchange – B ltd now owns 100% of C ltd and the investment is recorded at market value of £100m. The shares issued to A ltd by B ltd would be at original cost of £1m = no gain/no loss apply.
-Share for share exchange applies for bona fide commercial transactions and not avoidance schemes. It is common to seek advance clearance from HRMC before transfer.

Tax on transfer of assets between associated companies
If both companies are controlled by the same persons and the ownership is 75% or more (immediately before and after the transfer), then CTA 2010 s941 applies ie Succession rules.

In summary:
Plant and machinery is transferred at tax written down value
Losses are transferred with the trade to the new company (and if the transferring company doesnt have other any trading activities, then it may cease to trade)
Assets– if both companies are in the same capital gains group then the transfer is at no gain no loss;
Intangible assets including goodwill will transfer at tax neutral values.if goodwill acquired before 2002- then this is not considered new intangible, no tax deductions
Stocks – if companies connected, then transfer is at market value otherwise transfer is at just and reasonable price.

Capital Gains Tax on takeover through cash, shares or loan notes
Takeover payments include cash or shares only; or a mixture of shares and cash or
If paid cash only – you pay Capital Gains Tax on the cash you get (no deferment; ER may apply for individuals)
If paid in shares – you’re treated as though you acquire the new shares at the same time and at the same price as the old shares ie Defer gains till eventual disposal of new shares. ER (>5% required) or SSE may apply.
If paid in loan notes – either Qualifying or Non-Qualifying Corporate Bonds. QCB are “genuine commercial loans” and are exempt from CGT – however the initial gain from old shares is still chargeable to CGT. You can elect to defer the gain till disposal, redemption or write off of loan notes. This means if QCB are worthless you will still pay CGT on the initial transfer. Non QCB are treated like shares, hence on eventual redemption, write off etc, CGT is computed; though you can elect to pay the gain on the old shares earlier. For corporates, loan notes profit or loss fall in loan relationship rules.

If combination of loan notes, cash and shares – original cost split to calculate cost base for CGT.

OTHER ISSUES
no tax relief on goodwill from consolidation
pay attention to whether intangible is acquired or a company with intangible is acquired. Rollover relief may be available in the acquiring company or >50% group company through cgt group

Intra-group reorganisations
1.If within a chargeable gains group – TCGA 1992 s 171 applies transfer of capital assets (shares/property) will be on a no gain/no loss basis.
2.If NOT within the same cgt group but connected, then it is likely that the connected party rules will apply so that market value will be imputed (TCGA 1992 s 18). Though the substantial shareholdings exemption (SSE) in TCGA 1992 Sch 7AC may apply.
The position is similar as regards the transfer of goodwill, intellectual property and other intangibles under the ‘post-2002’ intangible asset regime.
3.Where shares in a group company are transferred in consideration for the issue of shares by the transferee company, the transfer will not be within the no gain/no loss rules in TCGA 1992 s 171 but should instead be within the share for share exchange rules in TCGA 1992 s 135 (assuming the exchange satisfies the bona fide test in TCGA 1992 s 138) (TCGA 1992 s 171(3)). The effect of this is that the transferor will obtain a base cost in the new shares equal to the base cost in the shares in the company transferred. Clearance should be obtained from HRMC.

NOTE – New shares or any acquisitions of shares may result in stamp duty.