UK: Tax Focus – September 2013

Last Updated: 2 October 2013
Article by Richard Mannion, Chris Lallemand and Colin Aylott

THE SUBSTANTIAL SHAREHOLDING EXEMPTION CAN HELP SMES

By Richard Mannion

Vodafone's recent announcement that it has disposed of one its subsidiaries, Verizon Wireless, for £84bn has led to some confusion about whether it has avoided the payment of tax in the UK on the capital gain.

The Verizon Wireless stake is in fact held by a Dutch subsidiary and Vodafone will benefit from a tax exemption on disposals in Dutch legislation, although reports indicate that a tax charge of approximately £5bn will crystallise in USA.

That structure means that no tax is payable in the UK, but even if the stake had been owned by a company resident in the UK, no tax would have been payable on the gain because of what is known as the 'substantial shareholding' exemption.

This exemption was introduced in 2002 specifically to make the UK more competitive with its European neighbours like Germany and Holland who already offered similar exemptions.

This valuable exemption is available to all UK holding companies, whether quoted PLCs or family businesses, and should be borne in mind when considering business structures. For example where an existing company comprises various divisions and anticipates being in a position to sell one of them in future, thereby realising a significant profit, then it should consider transferring that business to a separate subsidiary company.

It's worth noting that small and medium enterprises – not just large PLCs – can benefit from this government sponsored tax exemption if selling a part of their business.

CLOSE COMPANY LOANS TO PARTICIPATORS

By Christopher Lallemand,

Prior to 20 March 2013, subject to some exceptions for acceptable arrangements, a 25% additional tax charge became payable by a close company on any loans/ advances made to a 'relevant person' (usually a shareholder or their associate) that were still outstanding nine months after the accounting period in which the loan was made. The charge was and remains repayable once the loan has been repaid or written off.

These rules were quite prescriptive and it was possible to avoid the charge by routing loans and advances through certain partnerships or trusts.

Changes introduced from 20 March 2013

To deal with perceived avoidance three changes extending the application of the rules were introduced on 20 March 2013.

  1. Loans or advances made on or after 20 March 2013 to any partnership where a partner is a 'relevant person' will be caught, as will similar arrangements routed through trusts with actual or potential beneficiaries who are 'relevant persons'. There is no exclusion for commercial arrangements here.
  2. Tax avoidance arrangements to which a close company became a party on or after 20 March 2013 where value is extracted from it and a benefit conferred on an individual who is a 'relevant person' will be caught. A relief will operate where the recipient of the benefit makes a payment in respect of the benefit and no consideration is given in return for that payment.
  3. For repayments and return payments (amounts redrawn) made on or after 20 March 2013 the relief from the charge available from loan/advance or benefit repayments is restricted in certain instances.

Loans or benefits repaid where the amounts repaid and redrawn each exceed £5,000, amounts redrawn are taken in an accounting period subsequent to the accounting period in which the loans or advances were originally made, and the amounts repaid and redrawn are made within 30 days, are treated as repaying the redrawn amounts in priority to the original loan/advance or benefit.

Even where the 30 day rule does not apply, if the amounts outstanding are £15,000 or more at the time of repayment, and at the time of repayment arrangements have been made for new payments of £5,000 or more to be made, the repayments will be treated as repaying the new amounts drawn in preference to the previous loans/advances or benefits.

However neither of the restrictions applies where an income tax charge arises to the person by reference to which the loan, advance or benefit was a chargeable amount, on the actual repayment.

HMRC CONSULTATION: CONNECTED PARTY LOAN ARRANGEMENTS

By Colin Aylott

HMRC has released a consultation document looking at potential changes to the taxation of company debt and derivatives. Included in the consultation are two options for reforming the tax treatment of connected party debt.

Existing connected party debt tax rules are complex, and are one of the key instances where loan relationships can depart from a 'general rule' of tax following the accounting treatment.

The main complications arise from the requirement to use the amortised cost basis of accounting for assessing the tax treatment of connected party loans. This requires an adjustment if the accounting policy currently uses the fair value method. Subject to certain exceptions impairments of connected party debt using the amortised cost basis will result in debits and credits being ignored for tax purposes. The incidence of these imbalances is likely to become more common under IFRS 9 and FRS102. Credits and debits relating to releases of connected party debt are also generally currently ignored for tax purposes.

There are additional complications where companies using fair value accounting become connected during the period. This arises from the requirement to change the tax treatment from fair value to amortised cost.

Companies newly becoming connected may suffer a 'deemed release' in certain cases, where previous impairments during a period when there was no connection would have been tax deductible. The release is recognised in the debtor company's tax return.

HMRC has proposed two options for adjusting the current the legislation.

Option 1

This consists of a minor adjustment to the wording of the legislation in order to bring the tax definition of 'amortised cost method' in-line with the accounting definition. There are currently some discrepancies regarding the initially recognised value of the loan. This will have a limited impact.

Option 2

This proposes to make the adjustment mentioned above to bring the tax definition of 'amortised cost method' in-line with the accounting definition. But it also recommends that the tax treatment of connected party loan releases should follow the accounting treatment. However connected party impairment debits will still be ignored for tax purposes.

When a UK company is owed money from connected companies which are outside the scope of UK corporation tax, option 2 would suggest that the release of that loan will result in an allowable deduction for the UK company but with corresponding taxable credit being outside the scope of UK corporation tax. If option 2 is implemented, HMRC propose to counteract this mismatch by either:

  • requiring an amount representing the fair value of the loan at the time of the release to be treated as non-taxable for the debtor and non-deductible for the creditor; or
  • reliance on other rules, for example an amended 'unallowable purpose' rule, using the transfer pricing rules, adaptation of the group mismatch rules or a bespoke provision to ensure symmetry between the parties.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2013. NTD141 30/11/2013

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