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 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 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 08/093% 09/102% 10/111% 11/12nil 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%