1. Restructuring the smaller business: what it means in practice Andrew Hubbard National Tax Technical Director Tenon Group Plc

2. The choice There are two ways to structure this lecture

3. Option one I can give you a detailed exposition of Type 3 indirect statutory demergers S213 relief The judicial interpretation of the term “scheme of reconstruction” The finer points of the SDLT reconstruction provisions OR

4. Option two I can talk about Mistresses and yachts Missing share certificates Difficult bank managers Your mistakes causing your colleagues to lose their homes Explaining to your boss how you have managed to make a 20% recovery on your best client

5. It’s up to you Believe that and you will believe anything!! Who is in charge here? And that’s a rhetorical question

6. The smaller company context ‘informal’ approach to corporate governance Often no retained profits or reserves ‘it’s my company so it must be my money’ Often no experience of specialist tax and legal advice Yachts and mistresses

7. And Extreme fee resistance No spare cash So working with a small company on a reconstructions is as much about dealing with all of these issues as it is about having a grasp of the technical nuances of the reconstruction reliefs

8. Why restructure? To take out shareholder(s) To split up the business To get a better tax position Will the costs and complications outweigh the tax savings?

9. Business splits Typical small business will not have given much thought to structure Often find all sorts of activities mixed up in single companies or an a non-optimal group structure Offer to sell off part of the business Surprise that 10% relief is not available

10. Objective Get the part of the business to be sold into a company/group whose shares can be sold with 10% BATR In theory all sorts of options available But if reorganization is preparatory to a sale you will almost certainly need to do a s110 demerger

11. S110 reconstruction Company placed into liquidation Liquidator spins out assets to new companies owned by existing shareholders in exchange for issue of new shares Tax free at corporate level No CGT disposal at shareholder level: new shares take on history of old shares Taper relief preserved Can be carried out immediately prior to sale of part of business

12. S179 TCGA 1992 No protection from s179 degrouping charges Can be a real problem if you have to move assets around first to get everything in the right place Remember that the liquidator can only spin out assets in the company in liquidation: he cannot distribute assets out of subsidiary companies Must review prior history of intra-group transfers and dormant companies

13. S110 reconstruction schematic Newco 1 Sub 2Sub 1 Newco 2 Newco 3

14. Liquidation Scary word Even when a solvent voluntary liquidation Attitude of purchaser Almost always put a clean Newco on top first Practical difficulties - publicity Use a anonymous name

15. Be nice to the liquidator! Without his/her name on the documents you can’t proceed He/she will probably not get a decent share of the fee But he/she is personally on the hook if it all goes wrong No hiding behind the corporate veil Will want to be be indemnified against risk Charge over assets or personal guarantees MUST explain this at the outset or you are storing up problems for later

16. Other stakeholders Moving assets about has implications for others Bank security Leases Trade agreements Change of control clauses Employees (TUPE) These all have to be managed They can be with proper planning

17. Accounting How does all of this get reflected in the accounts? It matters: Reserves/dividend traps Asset base Gearing ratios Assets appear to arrive in the newcos for no consideration! Get your accounting colleagues on side early

18. Hey - I’m a tax expert! You’ve hardly mentioned tax Do I have to manage everything myself? NO - but you need an awareness You are likely to end up as project manager because this will be seen as a tax project People will look to you for answers And blame you if it goes wrong And there will be lots of people with their fingers in this particular pie

19. Sharing the pie A s110 reconstruction can easily have a cast of thousands You and your tax team Corporate lawyers Liquidator Liquidator’s lawyers Bank’s lawyers Property lawyers Employment lawyers Property consultant ….and the poor client

20. Some specific issues If you are very lucky you will be able to do the s110 without moving assets about first But in most cases you will need to move assets around Two ways to do this Intra-group transfers Dividend in specie Often better to do the latter if there are reserves This can be more effective for SDLT And will not leave inter company accounts which may have to be written off later

21. Stamp duties Two possible charges SDLT on any property movement SD on shares spun out Usually possible to get into the reconstruction reliefs Though watch out if you are getting rid of minority shareholders in the process But are you clear which one of the cast of thousands is actually advising on the stamp duty aspects. Can often fall through the middle

22. VAT Two main issues Is there a TOGC? Watch trade transfers in quick succession Mechanics of registration Getting the companies/groups registered in time Take time to explain the mechanics of the reconstruction to your VAT colleagues Not natural territory for many VAT practitioners VAT is likely to be a major concern of the liquidator because he would be left with the liability if there is VAT to pay on transfers out of Newco

23. Clearances You will need clearances under the reconstruction rules for both the company and the shareholders. This can be done in one application and in generally is not that difficult to obtain But what about s703 clearances? Usually OK but sometimes problems The smaller the part to be sold the more likely it is that s703 clearance will be refused

24. Clearing up afterwards New 41Gs etc PAYE/NIC schemes Dispensations PSA Accounting periods - tax payment dates Elections

25. Final thoughts Some complex technical areas Particular s179 and SDLT You can learn these from the text books But in practice there is a huge difference between drawing the diagrams and ensuring that the transaction can actually be done Every case is different Make sure that you get the fee right in both quantum or structure Or the client will assume that you fee covers everybody else’s fees as well as your own And all your hard work will end up lining the pockets of all of the other advisors and you will have very little to show for your efforts

26. And remember Hubbard’s rule Every s110 is twice as complicated, and will take twice as long to complete, as your first estimate *Even if you take account of Hubbard’s rule! (*With apologies to the great Richard Hofstadter)