Business Recovery Corporate Insolvency Procedures: Company Tax Issues

1. Business RecoveryCorporate Insolvency Procedures: Company Tax Issues David Payne

2. Introduction • Inter-company balances • debt forgiveness/ debt to equity swaps • Moving assets out of companies • Getting some money back • Research & Development • Capital Allowances/IBAS

3. Intercompany Balances • Terminology • Company A – “Creditor” (lender/ provider of good services) • Company B – “Debtor” (borrower/recipient of goods and services). Co B Co A £10m

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. Moving assets out of companies • Disposals to third parties • Shares • Other tangible assets • Internal re-organisations • Reorganisations & de-mergers

11. 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

12. 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.

13. 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

14. 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

15. 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

16. 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.

17. 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

18. Getting some money back • Research & Development • 150% - SME • 125% -Large Create terminal loss and carry back • Take the tax credit

19. Getting some money back Industrial Buildings Allowances (and Agricultural Buildings Allowances) • IBAs to be withdrawn over a 4 year period • 08/09 3% • 09/10 2% • 10/11 1% • 11/12 nil • No balancing adjustments

20. 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%