Private Acquisitions - Tax Flashcards
Structure
- Share or business sale?
- Who is receiving the consideration?
- What tax(es) will be payable?
- How is it/are they calculated?
- Are there any exemptions or reliefs?
- Apply any tests relevant to the exemptions to the facts.
- Conclude whether the exemption or relief applies on the facts.
- Consider Buyer tax issues e.g. Stamp Duty on shares, SDLT on real property.
ER - Criteria?
- Trading company (i.e. listed or unlisted)
- Shares held at least one year prior to disposal
- Person disposing WAS officer/employee
- Person disposing held at least 5% ordinary shares
NB unlikely to apply in case of deferred consideration in form of shares, since recipient unlikely to be officer of the buyer
IR - Criteria?
- Fully paid ordinary shares, issued for cash on or after 17 March 2016
- Trading company, or holding company of trading group
- NO shares on stock exchange (contrast Entrepreneur’s Relief)
- Shares held for at least three years from 6 April 2016
- Person disposing NOT officer or employee
3 year period INCLUDES the time the individual held the original shares in Target (can add that to time spent holding the new shares)
If consideration in loan notes, IR cannot be claimed on their later redemption
SSE - Criteria?
- Seller owned at least 10% of the ordinary share capital
- Owned for at least 12 consecutive months in the 6 years prior to sale
- Target must be trading company or holding company of a trading group, throughout the period beginning with the start of the 12 consecutive month period (above) and ending with the sale
What is the memo of understanding published by BVCA regarding HMRC treatment of managers’ shares in Newco 1 where there are no ratchet provisions?
(Not treated as income, but CAPITAL GAIN)
Old Codgers Pay Silly Money For No Ratchet
- Ordinary share capital
- Commercial terms of leverage provided by other holders of share capital (if applicable)
- Price paid same as that paid by fund
- Same time acquired as fund
- Management’s shares have no special features
- Fully remunerated
- (Not for ratchet provisions)
What is the memo of understanding published by BVCA regarding HMRC treatment of managers’ shares in Newco 1 - WITH ratchet provisions?
Not treated as income, but CAPITAL GAIN
Old Codgers Stay Fully Prepped Except Peter
- Ordinary shares
- Commercial terms of leverage provided by other holders of share capital (if applicable)
- Simultaneous acquisition of shares
- Fully remunerated
- Performance of the company variation in ratchet performance
- Existence at the same time (the ratchets)
- Price reflects maximum economic entitlement they could achieve under the ratchet
What is the test for group relief for trading losses?
- Beneficially own at least 75% of subsidiary (i.e. ordinary share capital)
- Beneficially entitled to at least 75% of profits for distribution AND assets on winding up (this is the economic ownership test)
Indirect ownership applies for both
Losses can be set off against gains in both current accounting period and future accounting periods
Chargeable gains group test?
- Principal company
- Its 75% subsidiaries
- The 75% subsidiaries of those subsidiaries BENEFICIALLY (i.e. ordinary share capital)
So long as the parent company is ECONOMICALLY entitled to at least 50% of the subsidiaries profits for distribution and assets available on winding up
NB 75% test is not the same as ‘indirect ownership’ test for group relief - could have an infinite number of 75% subsidiaries
BUT indirect ownership does apply for effective 51% subsidiary test
What is the test for a consortium group?
At least 75% owned by at least 2 corporate shareholders with at least 5% ownership each
NB cannot be consortium company if 75% subsidiary of another company
How do you calculate consortium relief?
- Find each member’s ‘relevant fraction’ - the lowest of:
- Shareholding
- Percentage entitlement to profits
- Percentage entitlement to assets on winding up - If consortium company is surrendering company (i.e. has losses), multiply fraction by the company’s loss
- If consortium company is the claimant company (i.e. has gains), multiply fraction by the company’s gains
NB consortium relief cannot turn profits into loss for claimant company
On what basis is a transfer of chargeable assets within chargeable gains groups?
Transfer is on no gain/no loss basis at the time the time of transfer
How is the disposal of goodwill and IP acquired or created after 1 April 2002 treated for tax purposes?
What is the de-grouping treatment?
Disposal - treated as INCOME receipt
Different treatment under de-grouping - still treated as capital gain, but (unlike other de-grouping charges), the charge arises in the TARGET (i.e. company leaving the group) [see card on de-grouping for intangibles]
How do chargeable gains groups offset losses against gains within the group?
If one company in group makes a loss, can set this off against a gain arising in another group, so long as BOTH jointly elect to do so within 2 YEARS after the end of the accounting period in which the disposal occurs
How is the de-grouping charge calculated for chargeable gains groups?
If company, which has received chargeable asset, leaves group within 6 YEARS of receipt, de-grouping charge applies:
- Leaving company treated as disposing of asset at market value at time of transfer, with its ‘old’ base cost equal to the base cost of the asset first entering the group –> chargeable gain
- Leaving company also treated as immediately reacquiring asset at market value at time of transfer (‘new’ base cost in asset)
Deemed gain notionally added to consideration due to the SELLER –> taxable gain
However, SSE may apply, to prevent the charge
How is the de-grouping charge for ‘intangibles’ regime calculated?
Same rules as for other assets within chargeable gains group, but charge arises in TARGET,
However, possible for member of Seller’s group to make a joint election with Seller that the charge will arise in them (not Target)
Chargeable gains groups - rollover relief available?
Yes - gains from one group member can be rolled over into acquisition costs of another group member
What is the test for groups for stamp taxes (stamp duty and SDLT)?
- Beneficial owner (directly or indirectly) of at least 75% of ordinary share capital
- Beneficially entitled to at least 75% of profits of subsidiary
- Would be beneficially entitled to 75% of assets of subsidiary on winding up
I.e. same test as for groups for surrendering trading losses
Are stamp taxes payable on intra-group transfers? If not, how is relief claimed?
Stamp taxes are not generally payable on intra-group transfers between stamp duty groups
Relief from stamp duty must be claimed by submitting a s.42 letter to HMRC
Relief from SDLT is claimed in the land transaction return which is submitted to HMRC within 30 days of the transfer
Stamp duty - who pays?
The buyer of the shares (normally)
What are the anti-avoidance provisions for stamp taxes?
Both stamp duty and SDLT relief denied if:
- Arrangements in place where any person is to have control of transferee company but not transferor company
- Beneficial interest subject to the transfer has been previously transferred, directly or indirectly, by a person outside the stamp tax group
- Where the transferor and transferee are to cease to be within the same stamp tax group by reason of the transferor’s or a third party ceasing to be the transferee’s parent for stamp duty purposes, or
- Where any part of the consideration for the transfer is provided or received directly or indirectly by a person outside the stamp tax group
Also, SDLT relief denied if intra-group transaction: - Not effected for bona fide commercial reasons, or
- Forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of stamp duty, SDLT, income tax, corporation tax or capital gains tax
How does the SDLT clawback work?
Clawback can be charged if recipient company leaves group within 3 YEARS of transfer
Like the de-grouping charge EXCEPT that the clawback charge arises in the TARGET (leaving the group)
Target liable to pay SDLT on market value at date of intra-group transfer
NB only relevant to SHARE SALES
How is a group for VAT purposes formed?
Two or more companies may apply to HMRC for group VAT registration if one controls the other or under common control –> made in name of representative member, who becomes liable for VAT for the whole group All members of the group are jointly and severally liable to the representative member for VAT –>
buyer of Target will want to ensure that application is made to HMRC to remove the Target from Seller’s VAT group from completion, and that either:
- All VAT due from group is paid up at time company leaves group (normally not practical) OR - Buyer is indemnified for any costs incurred after the sale for any of Seller’s group’s VAT
How does the VAT TOGC exception apply?
Rule - taxable person making taxable supplies of goods or services in the course of business must charge VAT to recipient
Exception - Transfer of a Going Concern under Art 5 VAT (Special Provisions) Order 1995:
- Business assets transferred used in same kind of business, with no significant break
- Buyer must be registered or become registered for VAT before or after completion
How does the seller deal with the risk of the TOGC exception not being satisfied?
In case Art 5 VAT (Special Provisions) Order 1995 not met, AA should include:
- Seller oblige buyer to pay any VAT due
- Seller state that price exclusive of VAT
- Obtain confirmation from buyer that latter will comply with the provisions of the Order
What is the name given to SDLT aggregation within one transaction?
Linked transaction rule
Tax deferral conditions for paper consideration (loan notes and shares)?
- Buyer hold 25% of Target
- Bona fide commercial reason
HMRC won’t normally clear unless notes irredeemable for 6 months
How can management in a PE deal claim tax relief on interest payments made on a loan?
Loan to an individual, applied in acquiring ORDINARY shares
Shares must be of a close company - controlled by five or fewer participators or any number of participators who are also directors (control = having over 50% voting rights)
Company exists for a COMMERCIAL TRADE
Throughout period between loan being made and interest being paid, individual must have owned shares in the company and participated in the MANAGEMENT of the company OR hold a MATERIAL INTEREST (5% or more) in the company
Balancing allowances
Asset sold for more than TWDV –> balancing charge
Asset sold for less than TWDV –> balancing allowance
NB buyer may want higher base cost in order to claim greater reducing allowances in future; seller will resist on basis of higher balancing charge
Only applies on an ASSET sale
VAT - TOGC - if lease included?
If lease included, additional req:
- Buyer must check whether seller has elected to waive the exemption to VAT;
If so, buyer must make the same election –> VAT chargeable
Otherwise, VAT payable on consideration for property, and TOGC exception does not apply
What are the two different methods of transferring the assets of a shell company to its holding company?
What are their tax consequences?
Are there any reliefs available?
If dividend paid to holding company, that company does not pay corporation tax on that dividend
If distribution on liquidation, holding company treated as disposing of the shares in subsidiary (chargeable gain) but may benefit from SSE (no tax payable)
Balancing charge - apportionment of consideration
Once parties have agreed apportionment, should make s.198 election to HMRC, otherwise buyer’s qualifying expenditure on the items is set to 0 –> no future capital allowances
