Pete Miller, The Miller Partnership
Peter Rayney, Peter Rayney Tax Consulting Ltd
Anne Fairpo, Barrister, Temple Tax Chambers
Steven Bone, Gateley Capitus
Chris Erwood, Erwood & Associates Ltd
Steve Collings, Leavitt Walmsley Associates Ltd
Transactions in Securities: Current Issues
Pete Miller highlighted some current issues from practical experience of dealing with recent cases concerning the transactions in securities anti-avoidance provisions (ITA 2007, Pt 13). Pete pointed out that he was dealing with a number of cases in which HMRC was threatening to counteract share exchange transactions where capital was repaid to shareholders some years after the insertion of a new holding company. There have also been recent cases in which he had prepared venture capital reports to support investment structures, where HMRC had refused clearance. Pete noted that there have been major changes in HMRC’s clearance and counteraction team. This has resulted in some difficulty in terms of obtaining clearances for apparently inoffensive transactions, seemingly because the HMRC team included new members who were inexperienced. The ICAEW and CIOT are currently monitoring the situation. In the context of management buyout type transactions, the 1960s cases CIR v Cleary; CIR v Perren HL 1967, 44 TC 399 are still relevant (e.g. in staged buyouts), so need to be understood. The Cleary and Perren cases broadly involved individuals who each owned half of the issued share capital of two companies arranging for one of those companies to buy shares in the other out of accumulated profits. The Inland Revenue (as it then was) issued both individuals with a counteraction notice in respect of the resulting capital receipts, which were upheld in the House of Lords.
Update on Entrepreneurs’ Relief
Peter Rayney noted a useful rule introduced in FA 2019 for entrepreneurs’ relief (ER) purposes where a business is incorporated. Under the previous ER regime, where an existing sole trader or partnership trade incorporated, the shareholder’s ER qualification ‘clock’ commenced when they acquired their shares in the newly incorporated company (or when the company started trading, if later). This meant that where a company was sold shortly after incorporation, ER would not be available to the shareholders. However, for share sales after 5 April 2019, it is now possible to include the ER qualifying period before the trade was transferred to the company. Therefore, for the purposes of the ER two-year ownership test, a shareholder can now include the period they carried on the trade as a sole trader or in partnership together with the qualifying shareholding period post-incorporation. However, Peter emphasised that this ‘aggregation’ rule only applies where the sole trader or partnership has incorporated using the CGT incorporation relief rules in TCGA 1992, s 162. This means that all the assets of the trade (possibly apart from cash) must be transferred as a going concern wholly or partly in consideration for the issue of the relevant shares by the company.
Intellectual Property Tax and the Owner Managed Business
Intellectual property (IP) taxation differs between corporates and sole traders. The corporate taxation of IP is a separate tax regime. Anne Fairpo stated that for sole traders, general rules apply with the addition of a few special rules. It will normally be necessary to consider whether IP income and expenses are revenue or capital (although income of creative professionals from IP is always revenue), and there is no deduction for IP acquired or capitalised until sold. Furthermore, no rollover relief is available on the acquisition/disposal of IP unless it is within the definition of goodwill. In relation to patents and know-how, receipts by sole traders are always taxed as income even on a complete disposal; and deemed market value rules are likely to apply to non-third party sales (which is by definition at market value). Therefore, no CGT reliefs are available, most notably incorporation relief and entrepreneurs’ relief. Thus caution is needed on (for example) transferring patents to a company; Anne recommended that owners’ expectations as to tax relief on a future sale of the business should be carefully managed.
Capital Allowances Update
Steven Bone highlighted some points to note about structures and buildings allowances (SBAs), which were introduced in FA 2019, s 30 and SI 2019/1087. The main body of the SBAs legislation is in CAA 2001, Pt 2A. Claiming SBAs is prohibited for plant and machinery (e.g. fixtures, integral features). Therefore, SBA assets cannot qualify for the 100% annual investment allowance, and it remains essential to identify plant and machinery. Most normal qualifying activities will benefit, but not furnished holiday lettings. The property can be located in the UK or overseas (when subject to UK tax), and the taxpayer must have a ‘relevant interest’ in the property (e.g. freehold or leasehold). Qualifying assets for SBAs purposes include offices, hotels, factories and retail premises, but (for example) home offices and university student accommodation is excluded. SBAs can continue to be claimed during periods of temporary disuse, but a claim will stop if the asset is sold, demolished or used for a non-qualifying purpose.
Business Property Relief and the Owner Managed Business
The use of limited liability partnerships (LLPs) has advantages for income tax and CGT purposes. Chris Erwood pointed out that for inheritance tax (IHT) purposes the LLP is treated as opaque. Consequently, it is often the case that an interest in the LLP will not qualify for business property relief (BPR) even though the constituent parts of the LLP may be trading companies; the LLP itself is not trading, but merely holding businesses. For BPR purposes, it is therefore necessary to distinguish between a structure where an LLP holds shares in one or more companies, and a group of companies. BPR is not available where the LLP invests in unquoted shares in trading companies. The LLP itself is similar to a holding company with no trade, but unlike conventional holding company structures (see IHTA 1984, s 111) there is no parallel relief to enable the LLP to ‘piggyback’ on the underlying trading activity.
Practical Case Studies for Owner Managed Businesses
Peter Rayney explained that owner-managed companies often invest surplus trading profits in buying investment properties to rent out. This need not necessarily adversely affect the owner-managers’ entitlement to entrepreneurs’ relief on their subsequent sale of the shares, due to the way in which the ‘substantial’ (i.e. 20%) non-trading activity tests are applied. Company purchasers will often ask for the properties to be extracted on or before completion of the sale. However, it is generally not possible to implement a competent demerger of an investment property business once negotiations with a potential purchaser of the company have commenced. Extracting investment properties through an in-specie distribution is likely to give rise to tax charges (e.g. corporate tax on any gain in the company, and a penal income tax charge in the hands of the recipient individual shareholder(s)). However, Peter stated that in most cases it is possible to reduce the tax charge on extracting property by arranging for the deal to structured on the following basis: (a) ‘Grossing-up’ the sale consideration for the shares, to take account of the value of the relevant properties less any corporation tax on sale; (b) Granting the vendor shareholders an option to purchase the properties from the company (exercisable on completion of the share sale); (c) on completion, the vendor shareholders will exercise their option, with the proceeds being received by the company. A corporate buyer would be able to extract the property purchase monies from the company as a tax-free post-completion dividend, so the impact on the buyer should be negligible.
Penalties for Enablers & Facilitators
Anne Fairpo highlighted that the corporate facilitation of tax evasion regime applies to companies, partnerships and LLPs (individuals are already caught). The rules require UK or foreign criminal tax evasion by someone else and a person acting on behalf of the company etc. knowingly aiding, abetting etc. the evasion. There must be deliberate intentional assistance (i.e. not carelessness or negligence), but there is no knowledge requirement for management etc., only the assisting person. Penalties are criminal, with prosecution (for directors/partners and/or unlimited fines. However, there is a complete defence if the company etc. can show it had ‘reasonable’ prevention procedures (i.e. compared to the size, nature etc. of the business). ‘Prevention procedures’ involve a formal policy and practical steps taken to implement, ensure and enforce compliance. There is no ‘one size fits all’ procedure, but it should involve: a risk assessment (i.e. the nature and extent of risk exposure); proportionality; due diligence; communication (e.g. training); ongoing monitoring and review; and commitment from top-level management.
Accounting Issues for Tax
Among the accounting issues for tax purposes, Steve Collings highlighted timing differences (for small companies and upwards) between accounting profit (or loss) and taxable profit (or loss). Timing differences arise when items are recognised in the accounts in one period but in the tax computation in a different period. Timing differences are commonly created in various ways. These can include: pension contributions accrued but not paid; unpaid holiday pay entitlement accrued but not paid; the difference between net book value of fixed assets and their tax written-down value, and unused corporation tax losses. Three additional situations can create deferred tax consequences under FRS102: revaluations of non-monetary assets; unremitted earnings in overseas subsidiaries, associates, branches and joint ventures; and business combinations.
Intangible Assets - What's New?
Pete Miller pointed out that a relaxation of the substantial shareholdings exemption (SSE) rules was introduced in FA 2011, to make the packaging of trades easier. The provisions (TCGA 1992, Sch 7AC, para 15A) broadly allow the SSE to apply in situations involving the disposal of part of a group’s trading activity where the trading assets have been transferred into a new subsidiary prior to disposal. It treats the minimum 12-month substantial shareholding requirement (in Sch 7AC, para 7) as having been met for the period assets were used for a trade conducted by another group company before being transferred to the investee company, if certain conditions are met. HMRC’s view (in CG53080C) is that Sch 7AC, para 7 extends the holding period by reference to the previous use of trading assets by a member of the group while it was a member of a group; therefore, a capital gains group must have existed at the time (ie the provision cannot apply where the transferee company is a newly-acquired subsidiary of what was previously a single trading company). Some single companies have therefore incorporated (say) a £100 subsidiary, in an attempt to alleviate this problem.
Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is a consultant to professional firms with the TACS Partnership LLP (www.tacs.co.uk). Mark is also co-founder of TaxationWeb (www.taxationweb.co.uk).