Transcript Business Recovery Tax issues arising on restructuring

Business Recovery
Corporate Insolvency Procedures:
Company Tax Issues
David Payne
Introduction
Inter-company balances
debt forgiveness/ debt to equity swaps
Moving assets out of companies
Getting some money back
Research & Development
Capital Allowances/IBAS
Intercompany Balances
Co B
Co A
£10m
Terminology
Company A – “Creditor” (lender/ provider of good
services)
Company B – “Debtor” (borrower/recipient of goods and
services).
Inter-company Balances
Funding debt (loan relationship) v Trade debt
Loan relationships – money debts arising from lending
“Connected parties”
Control
“Ability to secure affairs are conducted in accordance
with their wishes”
Holding shares/ majority votes/AA/other powers
Majority votes
Greater part of loan and share capital
Right to majority of surplus assets as a winding up
Articles
Any other powers (shareholders agreement/options)
Removing unpaid inter-company balances
Debt forgiveness or debt waivers
Trade – release taxable/ bad debt allowable
unless relevant arrangement or compromise
Loans
“impairment” = bad debts
documentation - deed of waiver
Impairment of debt
Lender Impairs a loan (under GAAP)
Borrower may still recognise loan in full
tax relief if unconnected
no tax relief if connected
Claw back of previous impairment relief on
becoming connected (APs commencing on or after
1 Jan 2005).
Creditors in Insolvent liquidation/administration
can claim tax relief if impairment made after
commencement
Debt waiver
Creditor releases debtor from obligation to settle loan
Release taxable for debtor if unconnected unless:
Part of a voluntary arrangement
Debtor is in insolvent liquidation/administration
Connection broken because lender is in insolvent liquidation etc
Release not taxable if connected
If connection ends any release in future APs are
taxable
Uplift on value of debt purchased at a discount is
taxable for APs on or after 1 Jan 2005
Planning point - deal with inter-co debt prior to
acquisition
Debt to equity swaps
Capitalisation of loans
Release of liability under debtor relationship
No credit brought to account
Replace loan with share capital
CGT Base cost = value of loan
S17 TCGA 92 – restriction on capital losses
where company insolvent
Connected parties and late interest
Tax relief for Interest on accruals basis
unless:
Parties are connected (wide definition)
Interest not paid 12m from y/e
Corresponding credit not brought into account
under Loan relationship rules
Moving assets out of companies
Disposals to third parties
Shares
Other tangible assets
Internal re-organisations
Reorganisations & de-mergers
Substantial Shareholdings
Disposal of shares/assets related to shares
Substantial shareholdings Exemption (SSE)
Capital gains tax free/ capital loss not allowable
Primary exemption
Secondary exemption
Primary exemption
Substantial shareholding held in the company
invested in throughout a 12m period beginning not
more than 2 years before disposal
Substantial = “not less than 10%”
Investing company
trading company or qualifying group throughout period
before and immediately after disposal.
Company invested in
Trading company/ qualifying group throughout period
and immediately after disposal.
Secondary exemption
Primary exemption failed
Where investing company status fails
because no longer trading after sale, SSE
still possible if the company is liquidated as
soon as practicable
Disposals of other tangible assets
Chargeable assets
Gain = proceeds less allowable expenditure
Indexation
Relief vs. capital losses b/f / “other”cy losses
Shelter gain - rollover relief (qualifying assets)
Transaction with Connected persons
Group tax planning opportunities
Liquidations – retain CGT group (S170(11)TCGA92)
Match gains with losses
Group rollover relief
Internal re-organisations
Hive downs – transfer of a going concern
Parent controls 75% subsidiary before and after transfer
(beneficial ownership)
Timing crucial – Undertake before liquidation
commences, or administration share sale contract
Tax treatment mandatory
No cessation of trade
Losses & TWDV preserved
Losses c/f restricted if relevant liabilities retained
exceed relevant liabilities
CA planning
Hive downs: other tax issues
Transfer of chargeable assets – NGNL
Exit charge on uplift in value if sale < 6yrs
Mitigation tax planning
Intangibles – see later
VAT – TOGC
Stamp duty/ SDLT group relief
claw back on sale within 2 (SD) or 3 (SDLT) years
No cessation of trade no terminal loss
relief/balancing adjustments.
Reorganisations & De-mergers
S136/139TCGA92 reorganisations
S110 CA liquidations
No tax for shareholders or for company on
disposals of assets/shares if ‘scheme of
reconstruction’
‘Bone fide’ transaction / tax clearances
S110 - exit charge
Partitions - stamp duty relief restricted
Getting some money back
Research & Development
150% - SME
125% -Large
Create terminal loss and carry back
Take the tax credit
Getting some money back
Industrial Buildings Allowances
(and Agricultural Buildings Allowances)
IBAs to be withdrawn over a 4 year period
08/09
09/10
10/11
11/12
3%
2%
1%
nil
No balancing adjustments
Getting some money back
Capital Allowances
April 2008
First year allowances (FYA) on Plant and
Machinery – scrapped
Annual Investment Allowance on expenditure up
to £50,000 (2008/09)
FYA for small enterprises (2007/08) – 50%
FYA for medium enterprises (2007/08 – 40%