Chapter 22 Corporate reorganisations Flashcards
1.1 Summary of disposing of shares or trade
Sale of shares Sale of trade and assets
Gains/profits:
Exempt if SSE conditions are met Gains/losses on assets.
Trading profits on IFAs and inventory.
BA/BC on P&M
Group: Implications are loss of group
relief and degrouping charges
No effect on group aspects
Losses: Transfer with the company
(MCINOCOT rules apply)
Do not transfer with trade and assets
VAT: Exempt from VAT If TOGC conditions fulfilled, outside the
scope of VAT
Contingent liabilities:
Transfer with the company Do not transfer with the trade
and assets
Complexity: easier complex
2.1 Sale of shares by a company – issues for seller
- sale of shares to a third party
o gain on disposal unless SSE applies. If no SSE consider sheltering the gain with a pre-sale dividend (possible value shifting), capital losses and trading losses. - Group implications
o If seller retains some shares (less than 50%) then any exempt dividends received will be ABGH distributions (included when determining augmented profits)
o Group loss relief, cease group relief when arrangements come into place to sell.
o Gains group degrouping charges could arise. If it does apply as part of qualifying share disposal it is added to the sales proceeds for the shares. If the shares are covered by SSE the DGC will also be exempt
o Stamp duty: any shares/land and buildings transferred within the group will not have a stamp duty charge. If the company leaves the group within three years of the transfer stamp duty will become payable
o VAT group: HMRC must be notified a company has left the VAT group, no VAT on sale of shares.
2.2 Sale of shares by a company – issues for company being sold.
- Trading losses can be carried forward and used within the company itself. Brought forward trading losses can only be relieved within the new group once a period of five years has elapsed. Change in ownership rules may also apply.
- Degrouping charges: taxable on company leaving the group if not due to a qualifying share disposal (for example if due to issue of new shares rather than sale of existing shares)
- Value of assets: chargeable assets keep their historic value unless subject to a degrouping charge, then the values are increased to market value. Assets on which capital allowances are available remain at their TWDV and the company continues to receive allowances as normal.
3.1 Purchase of shares by a company
The issues for the purchasing company are:
- Stamp duty: 0.5% on MV of shares
- Dividends received unlikely to be taxed and if buy more than 50% do not include in calculation of augmented profits.
- Group relief: use of losses from new company is restricted. Current year losses can be relieved immediately but only arising from purchase date. Must wait 5 years before claiming relief for bf losses. Brought forward losses can be surrendered from existing group to new company immediately.
- Pre-entry capital losses cannot be relieved against gains in the new group.
- A gain which is realised prior to the date of acquisition but in the same accounting period is a pre-entry capital gain. This may only be relieved against capital losses arising in the same company before it joined the group, or an asset held at the time it joined the group but disposed of subsequently.
4.1 Sale of trade and assets by a company
The issues for the parent company is how to extract the profits from subsidiary – by dividend, liquidation and striking off. The issues for the company making the disposal is:
Asset Capital gains Trading profits
Land and buildings: Gain/loss No balancing adjustments for
SBAs
Plant and machinery: Gains arise unless exempt
under chattel rules. No capital losses
on assets qualifying for CA
Balancing adjustments
Goodwill acquired post April 2002:
Trading asset and therefore
trading profit or loss
Investments (shares): Gain/loss, unless SSE applies
Inventory/receivables: Trading profit/loss
VAT – Transfer as a going concern: sale of trade and assets outside the scope of VAT if the following conditions are satisfied: business being transferred as a going concern, no significant break in trade, no change in trade and the buyer is VAT registered. Only exception is land and buildings with an option to and those which are less than 3 years old. VAT must still be charged unless the buyer opts to tax.
Cessation of trade: end of AP, balancing adjustments and relief for trading losses, total profits of current year and then prior to 12 months and then consider terminal loss relief.
5.1 Purchase of trade and assets by a company
Buying individual assets: Usually allocate total consideration according to MV of individual assets. If pay more than MV of assets excess treated as goodwill. Price paid/MV becomes base cost for any future disposal.
Asset Capital Trading profits
Land and buildings: Qualifying business asset
for ROR SBAs continue on the same
value as for the original owner for
the remaining original life
Plant and machinery: Fixed P+M qualifies for ROR Capital allowances
Goodwill: Qualifying asset for deferral of
profits on sale of other intangible
WDA available at 6.5% if
purchased after April 2019 from an
unconnected party (IP must be
purchased at the same time)
- Stamp duty land tax: Paid on land and buildings (on the VAT-inclusive price)
- VAT: TOGC but VAT will be charged on new buildings/old buildings with an option to tax unless purchaser opts to tax
- Start of trade: if starting to trade for the first time, this will prompt a new AP.
6.1 Sale of trade and assets within a 75% group
Legislation exists to provide some of the tax advantages of a share sale whilst avoiding some of the disadvantages. These benefits would not normally be allowed if the companies were not part of a 75% group. The issues for seller are:
- Transfer of chargeable assets at NGNL
- TOGC for VAT provided conditions met.
- S944 applies, so P+M automatically transfer at TWDV avoiding balancing adjustments and subject to restrictions, trading losses are transferred with the trade and assets.
There is a limit on the amount of losses that can be transferred. If the transferor company has a negative balance sheet directly following the transfer, then the losses that can be transferred are restricted. Trading losses equal to the net deficit must be left behind.
The issues for purchaser are no SLDT within the group unless:
- The company leaves the group within three years, or
- Arrangement already exist for the company to leave the group.
DGC may arise in the future.
6.2 Use of s944 – transfer of trading losses
1) Merging trades, this is when A Ltd has recently acquired B Ltd, and they transfer B’s trade to A
2) Splitting trades, is when A Ltd acquires B Ltd and they form two separate companies.
3) Hive downs, combines the sale of shares and the sale of shares and assets within a group to allow the transfer of trading losses and the purchaser to obtain a clean company. A Ltd is selling B Ltd. C Ltd buys the shares they will receive the trading losses but the contingent liabilities. If they buy the trade and assets, they will not get the contingent liabilities but not the losses.
6.3 Hive downs
Step 1:
A Ltd will transfer all of the trade into B Ltd, and a New Co is set up under B Ltd, and they use s944 to transfer tr. B Ltd receives shares and the base cost is the MV of the assets transferred. The tax implications are NGNL, no VAT, SLDT on land and buildings if arrangements exists for New Co to leave group, P&M transferred at TWDV, and losses transferred to New Co – unless arrangements to sell New Co at the date of the transfer.
Step 2:
C Ltd will purchase the new company. B Ltd will keep the contingent liabilities and C Ltd will use the trade and assets and trading losses in the new company. The tax implications are:
- C Ltd: No VAT on shares and stamp duty at 0.5% on shares
- New Co: still has trading losses but subject to s.673 change in ownership rules (if there is a major change in nature or conduct of trade in any five-year period starting no earlier than three years before the acquisition date). If no SDLT on L&B at hive down, it will become payable now if New Co has left the group within three years.
- B Ltd: based on period of time of ownership, B Ltd is unlikely to qualify for SSE on sale of New Co shares. But where a newly incorporated subsidiary receives the trade and assets of another group company, the disposal of shares will qualify for SSE if the assets transferred were held and used in the trade of another group company for the 12 months before the transfer. In addition, any DGC would also be covered by the SSE.
7.1 Management buyouts
A management buyout is where the managers of the company buy the business. The business is usually separated from the company via a hive down/demerger. Can be financed using external sources.
The tax implications are:
- Employment income consequences: if the managers paid less than the market value for the shares, then an assessable benefit as employment income equal to the difference between market value and price paid
- Partly paid shares: outstanding amount taxed as a beneficial loan.
- Close company/employee-controlled status for the new company: tax relief on money borrowed to fund the MBO. Subject to the restriction on income tax reliefs against total income
