Tightening of loss relief provisions

Posted on November 25, 2009 by Cathy Corns

The Government recently announced action to counter tax planning that relies on using loss relief.

The new rules will prevent loss relief and capital gains relief from being given for a loss from a trade, profession or vocation where the loss arises from tax avoidance arrangements. The legislation will be included in the Finance Bill 2010 but will be effective from 21 October 2009.

This measure seeks to target those who enter into arrangement for the purpose of obtaining a reduction in tax liability by means of loss relief but should not impact on those who make losses but have not entered into avoidance arrangements.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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Income shifting

Posted on June 8, 2009 by Cathy Corns

The Chancellor announced a further deferral of the proposed ‘income shifting’ legislation in the Budget. However, the ‘settlements’ anti-avoidance provisions are still very much in force and the Revenue is applying them.

In a recent case (Buck v Revenue and Customs Commissioners [2008] SpC 716) Mr Buck owned 9,999 shares and Mrs Buck 1 share in a company. Mr Buck waived the dividends on his shares, which enabled enhanced dividends to be paid on his wife’s share. HMRC argued and won that the dividend waivers constituted a ‘settlement’, and assessed Mr Buck on the enhanced dividends.
The main problem was that there were insufficient reserves to cover the dividend if the waiver had not been made.

In another case (Mr and Mrs Bird v Revenue and Customs Commissioners [2008]), Mr and Mrs Bird were the initial shareholders of a company, owning one share each. The company issued a further 98 shares at par, 19 shares each to Mr and Mrs Bird, and 20 shares to each of their three daughters. Dividends were paid to all shareholders. HMRC argued, and again won, that the dividends paid to the daughters (until they reached age 18) constituted income arising under a ‘settlement’, which should be treated as Mr and Mrs Bird’s income.

Any tax planning of this nature will need to be considered carefully if it is to be effective.

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Cathy Corns is a Tax partner at Mercer & Hole.  
 

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Solvent Liquidations - Tax Planning and other issues

Posted on February 5, 2008 by Steve Smith
A members' voluntary liquidation ("MVL") can be a tax efficient exit option for the shareholders of a solvent company.

Under current legislation shareholders receiving a distribution through an MVL or, where appropriate, using Extra Statutory Concession C16, may benefit from the business asset taper relief provisions.

The government has recently announced (http://www.hmrc.gov.uk/cgt/disposal.htm) that as from 6 April 2008 all capital gains will be taxed at a flat rate of 18% irrespective of the marginal income tax rate of the taxpayer concerned; and also that the current systems of taper relief and of indexation allowance will be abolished. Alongside these reforms the government will introduce a tax relief for many entrepreneurs that will deliver a 10% tax rate for up to the first £1 million of lifetime capital gains.

MVL

An MVL is a statutory procedure for realising assets, agreeing and settling liabilities and distributing surplus funds to shareholders. The majority of MVLs arise as a result of:

  • Tax planning - Taking advantage of changes in tax legislation when it may be appropriate to withdraw capital, or alternatively divide the business interest between shareholder groups
    and mitigate or defer tax liabilities (S.110 reorganisations).
  • Retirement planning - Shareholders who are considering retirement and wish to realise the value of their investment. A liquidator has the power to accept or reject claims of creditors and can disclaim onerous assets, such as leases, if appropriate.
  • Group reorganisations - The removal of dormant, non-trading or redundant companies in order to reduce costs, group restructuring or the release of capital for use elsewhere within the group.
  • End of specific purpose - The orderly closure of a company which has achieved the specific purpose for which it was incorporated.
    Tax planning

An MVL is not simply a case of passing a resolution and completing the winding up. It is important that the process is planned and the company suitably organised in order to minimise tax liabilities and maximise any commercial advantages. For example, consideration should be given to either making a pre-liquidation "income" distribution or a post-liquidation "capital" distribution.

Pre-appointment planning is particularly important at present, as those anticipating paying CGT
at a certain rate, whether 10% or 40% or some rate between, may find a different rate applying to their capital gain after 6 April 2008. Individuals who do not benefit from the current business asset taper relief provisions are likely to be better off under the new rules unless they have substantial indexation allowance. Other tax related matters to consider prior to liquidation:

A new 12 month accounting period for corporation tax purposes begins at the date a company resolves to wind up.

  • The surrender of trading losses by way of group relief.
  • The realisation of capital gains and their offset.
  • The tax consequences of moving assets between group companies.

Other issues

  • The Companies Act 2006 (http://www.dti.gov.uk/bbf/co-act-2006/index.html) introduces changes to company law that will directly affect directors and shareholders. From 1 October 2009 the time limit for making an application to Court for the restoration of a liquidated company to the register after dissolution will be six years. The time limit is currently two years. The six year time limit will also apply to companies struck off and dissolved by application of the directors (presently 20 years). It remains essential, therefore, that thorough due diligence is undertaken to identify and deal with all actual and contingent liabilities and onerous contracts to avoid any future action against the company and its directors.
  • When a company is struck off owning property, that property vests in the Crown as 'bona vacantia'. As share capital and non-distributable reserves (including the share premium) cannot be repaid otherwise than by liquidation or the buy back of shares, or Court Order, the equivalent assets will pass to the Crown. The Office of the Treasury Solicitor has confirmed
    that where a company has been struck off by application of the directors it will waive the right to recover any unauthorised distribution of less than £4,000.

An MVL can be a tax efficient and cost effective way of bringing a company to a formal end. An alternative may be to make an application to Companies House for striking-off.

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