Thankfully, there are things that you can do to protect yourself and your business to ensure that you weather the latest financial storm.
Our Tax Director, Michael Burgess, explains how business owners can maximise the structure of their organisation to safeguard assets and decrease their liabilities.
Better safe than sorry
Many businesses trade from a single company which also holds all of the company assets. This arrangement places the company’s future at risk should the latest financial uncertainty squeeze too hard or the unexpected happens. It is pretty easy for a business to find itself with a large bad debt, or an un-insurable incident. If a company is unable to survive such events and the company goes into administration, then the liquidator will dispose of the assets, often at a “fire sale” value to pay the creditors.
It can also be sensible to ring-fence certain trading activities by putting them into different entities. For example, you may be expanding into new markets or geographical locations and need to protect your core business.
Protect yourself
If you have valuable assets on your balance sheet, you should consider a re-organisation of your business. In simple terms, this is separating the valuable assets in the business from the trade itself. This way, the trading company takes all of the risks of the trade whilst the assets are ring-fenced in a separate entity.
There are tax implications of a re-organisation but they can be mitigated if a number of conditions are met.
If you’re expanding into new markets or products, you should definitely consider doing the same, by placing your new venture into a separate entity to protect your existing trade and safeguard your assets. If the new venture gets into difficulties, it won’t take your core business with it.
You’ll also make significant tax savings by putting a new operation into a separate entity – both for the business and you personally.
NewCo, CurrentCo– what the co?
Let’s assume we have a single company but want to safeguard the assets by separating them from the trade.
In this example, there are two distinct transactions to undertake:
- Share exchange to create the group structure
- Sale of assets inter-group
Here you’d set up NewCo. You would own the shares in NewCo Limited which in turn owns 100% of the shares in CurrentCo Limited.
NewCo Limited can then purchase the assets from CurrentCo Limited which moves them away from the trading company.
It’s worth noting that this re-organisation shouldn’t be left until your business actually experiences problems, as an insolvency practitioner would have cause to reverse the transaction, as it would be seen to be done purely to avoid paying liabilities in the CurrentCo Ltd.
All sounds a bit taxing
When it comes to restructures, there’s a lot to consider tax-wise. Also, every scenario is unique, so it’s really important to take advice before you do anything. There are few key areas that need to be considered.
Income tax
There are specific rules relating to “transactions in securities”. These rules aim to charge a taxpayer income tax on any potential gain when dealing with shares and could result in significant tax liabilities.
These can be avoided if you can demonstrate that the transaction was undertaken for commercial reasons rather than for tax avoidance.
The good news is that if you work with us, we’ll liaise with HM Revenue and Customs (HMRC) on your behalf to get tax clearance on the transaction before you undertake it. That way, you know for sure that there will be no negative tax consequences before you go ahead.
Capital gains tax
A share exchange like this is known as ”paper for paper” transaction.
Technically, you have sold the shares in your company for market value, which may result in a capital gains tax liability.
You avoid this tax charge by exchanging your shares in CurrentCo Limited for new shares in NewCo Limited.
Again, we’ll get tax clearance from HMRC before the transaction goes ahead.
Stamp duty
Once the transaction is complete and the shares are transferred, the transfer document must be “stamped” by HMRC and any duties paid.
The normal duties payable in this scenario is 0.5% of the market value of CurrentCo Limited.
However, the stamp duty can also be avoided if you meet a number of conditions. The main condition being that the current owners of CurrentCo Limited then own exactly the same percentage and proportions of shareholdings in NewCo Limited.
Business tax regarding the sale of the trading assets
There are generally two types of assets that you’ll sell to NewCo Limited – trading assets (e.g. plant and machinery) and capital assets (e.g. land and buildings), and both of these have different tax consequences.
Trading assets
You can sell the assets to NewCo Limited for whatever price you wish.
That means that you can attribute a low value to avoid any corporation tax on the disposal in CurrentCo Limited. But, you need to balance this against showing a paper “loss on disposal” in CurrentCo Limited’s accounts which might possibly affect your credit ratings.
This needs careful planning so that we get the best of both worlds.
Capital assets
A capital asset (such as a building) can be transferred within a group at a value which is tax neutral – giving the company neither a tax charge nor tax deduction.
As the asset is being transferred within a group, stamp duty can also be avoided.
Take your first steps to safeguard
With an inevitable recession for most of 2023, it looks like for much of this year things will be tight for a lot of people and businesses. There’s never been a more crucial time to safeguard your business and make sure you’ve got the best possible structure in place.
We’d love to talk you through the process, all that we need is just an hour of each other’s time to see how we might work together. We’ll take the rest from there.
To arrange a one-to-one session with a Senior Tax Advisor at DJH Mitten Clarke, get in touch with our Specialist Corporate Tax Team by emailing info@djhmittenclarke.co.uk.
