Business RecoveryCorporate 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 backResearch & Development

Capital Allowances/IBAS

Intercompany Balances

Terminology

Company A – “Creditor” (lender/ provider of good services)

Company B – “Debtor” (borrower/recipient of goods and services).

Co A Co B

£10m

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 waiversTrade – 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 unconnectedno 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 loanRelease taxable for debtor if unconnected unless:

Part of a voluntary arrangementDebtor is in insolvent liquidation/administrationConnection 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 relationshipNo 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 partiesShares

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 assetsGain = proceeds less allowable expenditureIndexation

Relief vs. capital losses b/f / “other”cy lossesShelter gain - rollover relief (qualifying assets)Transaction with Connected persons Group tax planning opportunities

Liquidations – retain CGT group (S170(11)TCGA92) Match gains with lossesGroup rollover relief

Internal re-organisations

Hive downs – transfer of a going concernParent controls 75% subsidiary before and after transfer (beneficial ownership)

Timing crucial – Undertake before liquidation commences, or administration share sale contractTax treatment mandatoryNo cessation of tradeLosses & TWDV preservedLosses c/f restricted if relevant liabilities retained exceed relevant liabilitiesCA planning

Hive downs: other tax issues

Transfer of chargeable assets – NGNLExit charge on uplift in value if sale < 6yrs

Mitigation tax planning Intangibles – see later

VAT – TOGC

Stamp duty/ SDLT group reliefclaw 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 & Development150% - 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 period08/09 3%

09/10 2%

10/11 1%

11/12 nil

No balancing adjustments

Getting some money back

Capital Allowances

April 2008First 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%