Corporate Business. Newsletter. Protecting your valuable assets. Spring 2013

Transcription

1 Newsletter Spring 2013 Corporate Business Protecting your valuable assets There is no doubt that the economy is going through some tough times at the moment. Many companies which were previously making respectable profits are now experiencing poor trading conditions and much smaller profits or even losses. Many companies however still have valuable intellectual property and tangible property within the company. This value has been built up over many years, through the accumulation of trading profits. If the company fails then these assets would be available to meet the company s debts. This is a risky situation, as the value of these hard earned assets could be lost. It is not just insolvency procedures that can risk a company s crown jewels. Claims against the company for breaches of health and safety regulations or claims by employees for discrimination are increasing in our ever more litigious world and these too could risk these hard earned assets if they are held within the same company. However many companies do not realise that it is possible, with careful and considered planning, to protect the valuable assets from these business risks. One of the biggest issues when moving property around is tax. Charges can often arise in unexpected places. However, it is possible to separate out this valuable property (both tangible and intangible) into a separate company to protect it from creditors and without incurring immediate tax charges. In the event of an insolvency or claim against the company, the property with value would then be protected from creditors or claimants. There are some further advantages of structuring a company in this way. If the company is family owned then succession planning should be firmly on the agenda. This structure can also be helpful in facilitating succession planning. This does have the disadvantage of creating an additional company for associate company purposes, and potentially exposing the company to a higher marginal rate of corporation tax. However, the marginal rate (and therefore this disadvantage) will disappear in 2015 as the small and large company tax rates are merged.

2 FRS 102: new UK GAAP is coming soon! On the 14th March 2013 the Financial Reporting Council issued FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland providing accounting and financial reporting requirements for unlisted entities and subsidiaries of listed companies as well as public benefit entities such as charities. FRS 102 represents the culmination of the FRC s project of fundamental modernisation of our accounting standards, the two key components of which are: FRS 101: provides a reduced disclosure framework for qualifying entities; in particular it allows subsidiaries of groups preparing consolidated financial statements in accordance with EU adopted IFRS to take advantage of disclosure exemptions. FRS 102: replaces the majority of current UK accounting FRSs, SSAPs and UITF Abstracts, and is a single financial reporting standard that applies to all entities that do not adopt IFRS or, where eligible to do so, the FRSSE. In due course, SORPs will be updated and reissued accordingly. The new framework will be effective from 1 January 2015, but may be adopted early for accounting periods ending on or after 31 December It is important to note, given the need for comparatives in the first set of FRS 102 financial statements, that, for example, those entities with December year-ends, will need to prepare a transition balance sheet as at 1 January 2014, although this will only appear in the year ended 31 December 2015 financial statements. Consequently, the impact of the changes is not far off. Key changes for entities applying FRS 102 The number of areas of difference between FRS 102 and current UK GAAP is smaller than originally feared but there will still be a number of areas where entities will need to consider carefully, for example: Financial instruments Under the new rules, derivatives such as currency options and interest rate swaps, must be carried at their fair value in the annual financial statements. Currently, they are only recognised on eventual settlement. Other financial instruments will be recorded at either fair value or amortised cost, depending on their characteristics. Deferred tax Deferred tax will be recognised on the timing difference plus basis. It will capture all differences arising between accounting profit and taxable profit, including revaluations and rolled over gains. This will lead to increased deferred tax liabilities, with a consequent negative effect on balance sheet totals. Goodwill and intangible assets Unless there is a reliable basis for determining an alternative useful life, goodwill and intangibles must be amortised over 5 years under the new rules. This change will also be applied to entities adopting the FRSSE. There will also be an increased likelihood of other intangibles being identified as part of an acquisition. Investment properties Under the new rules, investment properties are carried at their fair value, with movements in valuation being adjusted through the profit or loss account and not direct to reserves, as happens currently. If fair value cannot be determined reliably without undue cost or effort, investment property will be carried at depreciated cost. This option is not available under current UK GAAP. Defined benefit pensions The multi-employer exemption permitting defined benefit plans to be accounted for as defined contribution plans will no longer be available to entities under common control. Paid holiday and sick leave Entities will be required to provide for paid holiday and paid sick leave entitlement accumulated and not used at the year end. Such provisions cannot be discounted. Related party transactions There no longer appears to be an exemption from disclosing intra-group (wholly owned/common control) transactions as related party transactions. Reduced disclosures - FRS 102 contains disclosure exemptions dependant on equivalent information being presented in publicly available consolidated accounts in which the entity is included and can be summarised as follows: cash flow statement; certain disclosures about financial instruments and hedging arrangements; certain share-based payment disclosures; and; total compensation payable to key management personnel. Beyond the financial statements FRS 102 will not only affect financial statements the potential impact of the following matters will also need to be carefully considered: Tax The impact of certain of the transitional adjustments will be taxed immediately, others will be spread and some will have nil tax effect. On an on-going basis there may be more cash tax volatility in respect of financial assets and liabilities that have to be fair valued (in the absence of compensating tax legislation). Distributable profits The new framework could impact the availability of distributable profits. Banking covenants Covenants on lending agreements should be considered carefully to ensure that the adoption of the new framework and any resulting adjustments will not cause a breach. Remuneration and earnouts Any such arrangements that are based upon pre-defined financial measures may be impacted by the new framework and could therefore require renegotiation of terms. Reporting systems Accounting and financial reporting systems and the staff who use them may need preparing for the new framework. For some entities this may represent an opportunity to improve reporting processes. How can Francis Clark help? Our corporate services team can assist your business in managing the impact of the adoption of FRS 102. If you would like further information or advice please speak to your usual Francis Clark contact.

3 Employee Shares Many company owners provide shares to key employees by way of reward for a job well done in the past but also as an incentive for future performance and continued commitment. The grant of an option over shares (typically exercisable on a sale or other takeover event ) might be considered and invariably this will be under a tax approved arrangement such as the Enterprise Management Incentive ( EMI ) scheme. Such a scheme needs careful consideration and implementation costs lead some family or owner-managed companies to instead prefer an issue of shares to selected employees instead. Issue of Shares In most cases, an issue of shares to an employee will result in a tax charge on the employee with income tax due on the difference between the market value of the shares and what the employee pays. The tax charge may not be very much if a discounted minority valuation can be agreed for the shares. As part of the arrangement for providing shares to employees, the company may decide to pay the income tax arising on the employee s behalf. In the majority of cases, the acquisition of the shares would be reportable on the personal tax return with income tax payable on 31 January 2015, assuming an issue or gift of shares in the current year to 5 April To ensure any future growth in value falls to be taxed within the (more beneficial) capital gains tax ( CGT ) regime rather than income tax (and potentially NIC), it is prudent for both employer and employee to sign an election under s.431 ITEPA This is because fairly complex rules apply for shares received by employees where these shares are restricted securities. Employees will normally pay CGT on the sale of their shares at 28% but an 18% tax rate is possible where sufficient basic rate band capacity is available. Entrepreneurs Relief and a CGT rate of 10% is only available where a selling employee owns at least 5% of the ordinary voting shares for at least one year before the date of sale. EMI Share Options EMI options are the most popular type of tax advantaged share scheme with the major benefit being no income tax or NIC charge on the gain in value of the shares between the date of grant and the date of exercise of the option. Effectively the gain arising is deferred until the shares are actually sold. CGT at a maximum 28% rate is clearly much better than income tax at potentially 40-55% and the popularity of EMI was much enhanced recently by a relaxation in the Entrepreneurs Relief rules. For a higher rate tax-payer, the sale of shares acquired under EMI before 6 April 2013 results in CGT at 28% as typically a less than 5% equity stake is held. Recent changes mean that shares acquired after 6 April 2013 under the exercise of EMI options will qualify for Entrepreneurs Relief and a CGT rate of 10% on sale. The requirement for a 5% holding is removed and the 12 month holding period will run from the grant of the option, rather than exercise. This is a welcome change. Corporation Tax Relief Companies can claim a corporation tax deduction for shares provided to employees with relief due on the amount charged to income tax in the hands of the recipient employee. Such a deduction is still available even where the legislation specifically exempts the shares from an income tax charge, such as the case of options exercised under an EMI scheme. Relief is claimed in the accounting period in which the recipient beneficially acquires the shares or exercises their share option. For exit-based EMI options the impact of the enhancement in the company s net asset value as a result of the corporation tax relief available, should always be considered. Other Discretionary Share Plans There are instances where, for a variety of reasons, it will not be possible for companies to grant HMRC approved share options. Where the value of shares ear-marked for employees is relatively high, the payment of income tax without sale proceeds at or around the same time can be a practical problem. Nil and Partly-Paid Shares Under this arrangement, an employee would enter into a legally binding agreement with their employing company to subscribe for newly issued shares at market value. Beneficial ownership of the shares passes to the employee immediately but the subscription price remains outstanding. The employee will only pay for the shares when the holding is sold and as there is an agreement to pay market value for the shares, no income tax arises on acquisition. In reality, employees bear the economic risk attached to the shares from the date of acquisition and there is therefore a real risk in acquiring shares which is not the case where employees are granted share options. Many employers view this as an upside because the employee s interests are truly aligned with shareholders. From a taxation perspective, no income tax is due on the acquisition of the shares. However, the deferral of the subscription price gives rise to an annual beneficial loan tax charge based on the amount outstanding. Such a charge is not prohibitive and it may be possible to avoid the liability where the shares acquired afford the owner 5% or more of the voting rights in the company. Entrepreneurs Relief may also be available to reduce the effective rate of tax on a subsequent sale of the shares to as low as 10%. Flowering Shares Here, relevant employees are awarded a special class of shares whose value is based only on future increases in the value of the company. An issue of shares might be considered on a conditional basis (e.g. share rights arise on satisfying certain events, or rights disappear if certain targets are not met). The aim of such schemes is to deliver capital gains tax treatment for employees on any gain on sale of those shares for a minimal upfront cost on subscription for the shares. In recent years an opportunity to share in the equity of a company has become much more of a standard feature and is seen as important in a company s ability to attract and keep hold of key employees.

4 Changes to Annual Investment Allowance The annual investment allowance for capital allowance purposes enables the first 250,000 worth of expenditure to be written off against profits in year one. This increased in January 2013 from 25,000 and was a surprise measure coming out of the Chancellor s Autumn statement. As a headline, this sounds like a really good deal. However, as with all things tax related it is not as simple as it seems. Only when an accounting period falls entirely after January 2013 will the full 250,000 allowance be available. Where a period straddles the change of rules, time apportionment calculations will need to be undertaken to calculate the annual investment allowance available. There will then be further caps on the actual expenditure that can be made in each period. If you are considering capital expenditure in the period straddling January 2013, then do not assume that you will get relief on the full amount. Please take some advice on the annual investment allowance available to you. The new annual investment allowance limit of 250,000 will be in place until 31 December At this point further transitional rules will kick in to reduce the benefit again. However, despite the complexities of the transitional rules, the AIA increase is excellent news for companies and if the company is considering investing in capital assets then they should take advantage of the ability to purchase capital assets up to the value of 500k (ie 250k in each year) and receive full tax relief in the year of purchase before the rate is reduced again in 18 months time.

5 Changes to the tax position on loans from companies Where a company is owned by its directors and the directors take a loan from the company there are special tax rules which apply to the loan. Unless it is repaid within nine months of the year end the company must pay a tax charge of 25% of the value of the loan to HMRC. This is repayable (eventually) when the loan is repaid and is generally known as section 455 tax (or section 419 tax). HMRC have always been concerned that many participators repay the loan shortly before the nine month deadline to clear the year end balance and then withdraw the cash again shortly afterwards, thus avoiding the tax charge. The budget introduced two new rules relating to these repayments. No repayment of the charge will be available if either of these rules apply. Firstly, the 30 day rule. If within any period of 30 days a repayment of more than 5,000 is made to the company and then the director takes a loan of more than 5,000 from the company no repayment of the tax charge will be made to the extent of the lower amount. The second rule is the intention or arrangements rule. This states that if a loan account has a balance of at least 15,000 and a repayment is made, if there is an intention or any arrangement to withdraw the cash again then there will be no repayment of the section 455 tax to the extent of the lower amount. These rules are subject to an exemption where the repayment results in a tax charge on the participator (eg on a bonus or dividend). Particular care will need to be taken where amounts are recycled or where amounts are paid directly to the participator by the company before being repaid to the company. Some mixing of funds in these circumstances may mean that it may not be clear that the repayment had suffered a tax charge. The second rule could cause particular problems. Intention is a very broad concept and intention would easily be demonstrated by a pattern spanning a couple of years. We await further guidance from HMRC on these points, but they may affect how directors use their current accounts in future.

6 Greenhouse Gas Reporting: Update on current obligations for companies and our service offering For accounting periods ending on or after 6 April 2013, all UK companies listed on the Main Market of the London Stock Exchange will have to measure and report greenhouse gas (GHG) emissions. It excludes non-uk registered companies, companies listed on AIM and privately owned companies. However, it is widely expected that GHG reporting will become mandatory for all companies in the longer term, and suppliers to listed companies will have to report up the chain for inclusion in their GHG emissions. Companies will have to disclose their annual emissions (in tonnes of carbon dioxide equivalent) resulting from: Scope 1 Scope 2 Combustion of fuels Consumption of purchased electricity, (boilers, furnices or turbines) heat, steam and cooling Owned transport Process emissions (cement, aluminium, waste processing) Fugitive emissions (air conditioning and refrigeration leaks) In addition, companies will have to disclose the methodology used to calculate the emissions (currently there is no standard guidance), the use of data from specified schemes, and a ratio expressing the annual emissions in relation to a quantifiable factor associated with the entity s activities (for example emissions per of turnover). Emissions should be reported in the Director s Report of the Annual Accounts. There is no requirement for emissions to be assured or verified, however the company s auditors must ensure that statements made in the Director s Report are not inconsistent with the rest of the report. Therefore a level of verification will be required. We see this as an increasing area of importance for our clients, not just as a mandatory reporting requirement but as a pro-active strategy in reducing costs, improving the company s reputation and better enabling the management of risk. We are therefore developing a service for the calculation and verification of greenhouse gas emissions, working closely with a partner to provide practical and proactive advice on reducing emissions and therefore costs. Please visit our website for your local office expert FRANCISCLARK.CO.UK If you would like to be added to, or deleted from our mailing list, please contact Martin Anderson martin.anderson@francisclark.co.uk or sign up online at: Francis Clark has seven offices in the South West: Exeter Plymouth Salisbury Taunton Tavistock Torquay Truro Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at The term Partner is used to refer to a member of Francis Clark LLP or to an employee or consultant with equivalent standing and qualification. This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of publication), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.