Date: 12 April 2018
Location: Manchester Conference Centre, Manchester
Reported by: Mark McLaughlin
- Pete Miller, The Miller Partnership
- Peter Rayney, Peter Rayney Tax Consulting Ltd
- Anne Fairpo, Temple Tax Chambers
- Steven Bone, Capital Allowances Partnership
- Jonathan Schwarz, Temple Tax Chambers
- Steve Collings, Leavitt Walmsley Associates Ltd
Financing management buyouts
Pete Miller noted that an important issue in a management buyout (MBO) involving a new company (‘BidCo’) set up by the managers to acquire the target company (‘Target’) is the financing of the MBO. For example, following an acquisition consideration could be given to Target paying dividends to BidCo (such dividends are normally tax-free; see CTA 2009, Pt 9A). Those funds could then be used by BidCo to pay the former Target shareholders for their shares. The amounts due to the vendors could be repaid out of current and future profits. HMRC will generally look closely at whether the transactions in securities anti-avoidance provisions are in point. Care is needed if Target makes a loan to BidCo to finance the acquisition of shares from the Target shareholders. HMRC’s view is that a liability may arise under the loans to participators provisions (CTA 2010, s 459) in such circumstances (see HMRC’s Company Taxation manual at CTM61550), although this point is not universally accepted.
For further commentary on management buyouts, see ‘Tax Planning for Family and Owner-Managed Companies 2017/18’.
Waiver of loans between connected companies
Peter Rayney pointed out that under the loan relationships provisions, where a company releases or waives a financing loan or trading debt due from a connected company, it cannot obtain an impairment relief deduction for tax purposes, although there is generally symmetry in tax treatment between the companies. The ‘connected companies’ definition for loan relationship purposes (in CTA 2009, s 466(2)) is essentially a de facto control test. Thus, a person would have control of the company where they are able to secure that the affairs of a company are conducted in accordance with their wishes by reference to the holding of shares or the holding of voting power (CTA 2009, s 472). The relevant legislation refers to ‘person’ in the singular. However, HMRC states (in its Corporate Finance manual, at CFM35120) it accepts that the word ‘person’ can include ‘persons’. This point may be relevant (for example) in the context of husband and wife companies owned 50:50. A loan waiver should be evidenced by a deed of waiver.
For further commentary on loan relationships and connected companies, see ‘Core Tax Annual: Corporation Tax: 2017/18’.
Corporate carry-forward losses and claims
The changes to the rules for companies carrying forward losses (introduced in Finance (No. 2) Act 2017) were outlined by Anne Fairpo. A restriction in respect of carried-forward losses limits the amount of post-1 April 2017 profits against which carried forward losses can be relieved. Profits up to £5 million should generally not be affected by the loss restriction, but profits over £5 million are limited so that only 50% of the profits are available for offset. Where losses can be set against total profits, relief is not automatic and must be claimed. The company must state the amount of the loss it wants to set off. This allows companies flexibility on how they choose to use carried forward losses. Claims must be made within two years of the end of the accounting period of relief. Where losses cannot be set against total profits (i.e. pre-1 April 2017 trade losses and non-trading loan relationship deficits, plus certain other losses) the relief is automatically given. However, a company can claim (within the usual two-year period) to prevent this in respect of all or part of the loss or deficit.
For further commentary on the carry-forward of company losses, see ‘Core Tax Annual: Corporation Tax: 2017/18’.
Section 198 elections: ‘best’ and ‘worst’ practice
When a building is purchased second-hand, the buyer will be acquiring not only a shell building, but also plant elements contained therein, including plant and machinery fixtures. It is generally possible for the purchaser to claim capital allowances on such plant. Steven Bone explained that the parties to a sale may jointly elect to fix the amount to be allocated to fixtures under CAA 2001, s 198 (or s 199 for leases). For sellers, section 198 elections are useful to keep some or all of the allowances. On the other hand, best practice for buyers is generally to be wary of elections. However, if the buyer must have one, the election should ideally be at the amount of the seller’s original pooled cost; it should be robustly drafted to resist HMRC challenge; and it must be submitted on time. ‘Worst practice’ includes lazily worded section 198 elections (e.g. ‘all fixed plant’ or ‘all plant fixtures’), and elections mentioning chattels, ineligible fixtures assets that do not exist. Such practices give HMRC grounds to challenge and potentially reject elections. With the introduction of the ‘fixed value requirement’ and the ‘pooling requirement’ it is increasingly likely that HMRC will reject invalid elections. The drafting of elections presents a major risk to professional advisers, and capital allowances specialists should be involved.
For further commentary on fixtures elections, see ‘Capital Allowances: Transactions and Planning: 2017/18’.
BEPS and treaty anti-abuse
Jonathan Schwarz noted that over 70 countries have signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS). It will enter into force in the UK on the first day of the month following the expiration of three calendar months beginning on the date of the deposit by the UK of its instrument of ratification, acceptance or approval. The purpose of ‘covered tax agreements’ (ie tax treaties modified by the Multilateral Convention) is broadly to prevent double taxation without using tax avoidance or evasion (nb there is also an optional purpose of improving economic relations and tax cooperation). There are provisions to prevent treaty abuse, which state that a benefit under a covered tax agreement shall not be granted in respect of income or capital if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in the benefit, having regard to all the relevant facts and circumstances. However, this restriction does not apply if it is established that granting the benefit in those circumstances would be in accordance with the object and purpose of the relevant provisions of the covered tax agreement.
For further commentary on BEPS, see ‘Principles of International Taxation’.
Winding up the company: special purpose companies and the TAAR
Finance Act 2016 introduced a targeted anti-avoidance rule (TAAR) in ITTOIA 2005, s 396B to counter ‘phoenix arrangements’. Where liquidation arrangements fall within the TAAR, distributions paid during the winding up are treated as income dividends (and taxed at dividend rates), rather than as capital distributions in respect of an individual’s shares. The TAAR applies if the statutory conditions (A to D) are all satisfied. Condition C is broadly that within two years from the receipt of the liquidation distribution the shareholder is involved with carrying on a similar trade to the distributing company. Peter Rayney observed that this condition has been causing some difficulties in practice, notwithstanding that Condition D is a ‘no tax avoidance or reduction’ test. Whilst the legislation would not bite where a shareholder wishes to fully retire and extract the proceeds as capital, it could potentially catch the use of special purpose companies used for specific (e.g. building construction) projects. In such circumstances, consideration might be given to creating a group structure with the special purpose companies as subsidiaries instead.
For further commentary on the ‘anti-phoenix’ TAAR, see ‘Tax Planning for Family and Owner-Managed Companies: 2017/18’.
Corporate facilitation of tax evasion: defences
Anne Fairpo pointed out that the criminal offence of failure to prevent the facilitation of tax evasion applies from 30 September 2017 to companies, partnerships and limited liability partnerships. The offence broadly involves criminal tax evasion by another party and a person acting on behalf of the company etc. knowingly aiding, abetting etc. the evasion. There is no knowledge requirement for management etc., only for the person assisting the evasion. However, the company etc. has a complete defence if it can show that it had reasonable prevention procedures, i.e. a formal policy, with practical steps taken to implement, enforce and ensure compliance. There is no ‘one size fits all’ for prevention procedures, but they should involve: risk assessment (i.e. an assessment of the nature and extent of risk exposure); proportionality (i.e. procedures proportionate to the risk identified and level of control and supervision available); due diligence; communication (i.e. including training for employees, proportionate to risk); ongoing monitoring and review; and a commitment (i.e. from top-level management to create a culture where tax evasion is never acceptable).
For further commentary on the corporate offence of failure to prevent the facilitation of tax evasion, see ‘Guide to Taxpayers’ Rights and HMRC Powers’.
Accounting for tax: tax reconciliation note
Under previous generally accepted accounting practice in the UK, FRS 19 required a reconciliation of the current tax charge (credit) per the profit and loss account to the profit before tax multiplied by the applicable corporation tax rate. Steve Collings noted that reviews of financial statements indicate that the new requirements under FRS 102 are misunderstood. FRS 102 (at para 29.27(b)) requires a reconciliation between: (a) the tax expense (or income) per the profit and loss account; and (b) the profit (or loss) before tax multiplied by the applicable tax rate. The relationship between the two can be affected by various items (e.g. tax-free income, disallowable expenditure, changes in corporation tax rates and utilisation of tax losses). The starting point for the tax reconciliation is to determine the applicable tax rate. An explanation is also required (by para 29.27(d)) of changes in the applicable tax rate(s) compared with the previous accounting period (although small companies need not disclose this information).
For further commentary on FRS 102 and tax, see ‘UK Accounting Standards’.
Entrepreneurs’ relief consultation
The government published a consultation document (‘Financing growth in innovative firms: allowing Entrepreneurs Relief on gains before dilution’) on 13 March 2018. Vendors of shares in trading companies normally need to satisfy a ‘personal company’ requirement to access entrepreneurs’ relief, by holding at least 5% of the company’s ordinary share capital, and at least 5% of the voting rights exercisable by virtue of that holding (TCGA 1992, s 169S(3)). The consultation (which closes on 15 May 2018) follows concerns that this requirement discourages companies from seeking further investment if this would result in less than 5% being held by the original shareholders. Under the government’s proposals, taxpayers will have the right to crystallise gains immediately before their shareholding is diluted below 5%, by means of a deemed disposal and reacquisition. The shareholders will also be able to defer the gain until an actual disposal of the shares. Pete Miller observed that there is a 5% rule for companies but not for partnerships and queried why this should be the case, as it means that company owners are at a disadvantage to partners in a partnership or members of a limited liability partnership. Similarly, there is no 5% rule for enterprise management incentives option holders; this means that the founders and investors in a company can end up in a worse position than employees (who are, almost by definition, less entrepreneurial). The government’s proposals do not extend to trusts.
For further commentary on entrepreneurs’ relief and shareholders, see ‘Capital Gains Tax Reliefs for SMEs and Entrepreneurs 2017/18’.
Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is a consultant to professional firms with Mark McLaughlin Associates Ltd and The TACS Partnership. Mark is also co-founder of TaxationWeb. He can be contacted via Twitter and LinkedIn.