Company distributions
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- Dulcie Butler
- 6 years ago
- Views:
Transcription
1 Company distributions Response to the HMRC consultation document of 9 December February Introduction Overarching objectives 2 2. Executive summary 2 3. General comments 2 4. Responses to consultation questions Do you think that the ways in which a shareholder can receive value from a company in a form that is subject to CGT rather than income tax, as explored above, can lead to unfair outcomes? Do you think such issues will be exacerbated by the changes to dividends rules being proposed for April 2016? Do you agree that changes to the Transaction in Securities rules as proposed will be effective in terms of preventing the conversion of income to capital? Do you think these changes will have any unwanted consequences not identified? How might these be mitigated? Do you agree that the introduction of this new TAAR will be effective in terms of preventing the behaviour outlined in this section, and are there any better alternatives? Do you think that the TAAR will have any unwanted consequences not identified? How might these be mitigated? Do you think that the government should consider making further changes to address the conversion of income to capital? If so what other solutions do you think the government should consider? Are there any particular areas of the wider distributions regime that cause difficulties or complexities? If so, which areas? Do you believe there is any value in extending this consultation to consider the regime as a whole, after the changes proposed for April 2016? 7 5. The firm 7 Company distributions 1
2 1. Introduction We welcome the opportunity to comment on the Company distributions consultation and associated draft legislation published on 9 December 2015 by HMRC. We confirm that we are happy for this response, including any personal information, to be published or disclosed in accordance with the access to information regimes. 1.1 Overarching objectives The overarching objectives set out in the consultation document are to: Seek views on the effects of the draft clauses for the Finance Bill 2016; Seek views on whether a more far reaching review of the distribution rules might be beneficial and if so what might be included. We comment mainly on the practical implications of the draft legislation. Our response has been drafted with these objectives in mind. 2. Executive summary In summary, we accept the need for the direction of the changes proposed in draft Finance Bill 2016 clauses 16 and 17. However, in order to promote certainty and because shareholders often have little or no influence on the timing and extent of distributions once a company has gone into liquidation, we would ask that those companies, that have already received a transaction in securities clearance and gone into liquidation on or before 9 December 2015 be dealt with under the pre-finance Bill 2016 legislation in this area. We think the drafting of clause 18 on the targeted anti-avoidance rule is currently too wide and if its intended target is pheonixism, as explained in the consultation document, we think its target is by and large already caught by the amendments made in clauses 16 and 17. We are therefore of the view that clause 18 is unnecessary. In addition, as drafted, Clause 18 seems to go well beyond tackling common versions of pheonixism. It seems as if HMRC is trying to bring into the income tax net transactions that are currently legitimately taxed as gains. We are not aware of abuse on any meaningful scale and the commercial costs of liquidation, costs of incorporation and complex tax legislation are already a valuable disincentive to the serial phoenixer. There are on the other hand many commercial situations where liquidation is a sensible strategy, in respect of which the draft proposals create a lack of clarity, where there was once clarity. One only has to consider the business man who closes up by way of liquidation thinking at the time that he is retiring only to have a change of mind within 6 months or so (his wife is fed up with him around the house etc). The new rules as proposed prevent him from considering new ventures in a similar line of business within 2 years for fear of picking up an income tax charge. 3. General comments Our general view is that this consultation has not given appropriate consideration to the illustrative examples, which seem to be simplistic, covering extreme ends of the spectrum rather than the majority of cases that we see. In its current form we think the consultation proposals and draft legislation will create uncertainty for business and probably not promote the type of entrepreneurial activity required to help improve the housing, economic and employment conditions of the country. Our more detailed comments on the specific questions are set out in section 4. Company distributions 2
3 4. Responses to consultation questions 4.1 Do you think that the ways in which a shareholder can receive value from a company in a form that is subject to CGT rather than income tax, as explored above, can lead to unfair outcomes? Due to the lack of detail it is extremely difficult to answer this question based on the examples given in discussion between paragraphs 3.1 to 3.17 of the consultation document. The main aim of the transactions in securities legislation is the counteraction of arrangements designed with a main purpose of income tax avoidance. We do not feel that a sale to a third party can be structured with a main purpose of avoiding income tax. A purchaser will generally not be interested in surplus company funds locked into a company, and so will discount their value by the tax cost to the vendor of extracting them - as implied at para 3.6 of the consultation document. To potentially suggest a vendor would be charged income tax on such surplus funds when a purchaser could also well face a similar charge would seem to result in potential double taxation, unless those particular funds were ring fenced with an attaching tax credit. The alternative methods of extracting funds represent a choice for any investors able to influence that decision. We would suggest that the existing transaction in securities provisions, particularly after the proposed amendments, should catch unacceptable pheonixism. We find it more difficult to think of moneyboxing as requiring further legislation. There is already antiavoidance legislation to tackle this sort of problem for: i. professions and vocations (sales of occupational income); and ii. offshore avoidance through the transfer of assets abroad legislation. However, in the context of surplus funds generated from more risky UK trading and investing activities, we would have thought it would be extremely difficult to identify surplus funds that should attract income tax treatment, rather than capital gains tax treatment, unless the target is more clearly defined. Given the rocky road that businesses have had to steer down in recent years, businesses often require what HMRC may perceive to be surplus funds, to ensure survival and continuity. A share for share exchange in the example outlined at 3.12 would mean Sebastian s base cost of shares in SIH Ltd would be equal to the base cost of is previous holding in SI Ltd. If this was regarded as a return of funds with a main purpose of income tax avoidance, the existing transactions in securities rules would catch this. We entirely accept the reasons for the proposed tightening of the transactions in securities rules in clauses 16 and 17 of draft Finance Bill 2016, but under the existing policy of taxation of company profits and distributions, without further information, we do not see there are obvious unfair outcomes from the examples given. 4.2 Do you think such issues will be exacerbated by the changes to dividends rules being proposed for April 2016? We think that the proposed new targeted anti-avoidance rule (TAAR) in clause 18 of draft Finance Bill 2016 is unnecessary as its apparent target would seem to be caught by the amended transactions in securities rules. As currently drafted we see the new TAAR as potentially catching a wide range of ordinary commercial situations one would not expect to be caught. We have further comments on this in the response at 4.5 below. 4.3 Do you agree that changes to the Transaction in Securities rules as proposed will be effective in terms of preventing the conversion of income to capital? In general we think the proposed amendments in clauses 16 and 17 are appropriate. However we have some further comments at 4.4 to clarify their application. It is generally accepted that an ordinary liquidation on its own is not within the scope of the transactions in securities legislation (see HMRC Company distributions 3
4 guidance at CTM36850). We understand this to be the case both before and after any proposed Finance Bill 2016 amendments. However it would be helpful to have confirmation that HMRC is also still of this view. 4.4 Do you think these changes will have any unwanted consequences not identified? How might these be mitigated? We understand the reason for the inclusion of draft clause 16(10), but for those entities already in liquidation on or before 9 December 2015, where distributions (including the final distribution) may be made after 6 April 2016, we propose there should be an exclusion for those who have already received a successful s.701 clearance. This is because they could not have known of the legislation at the time they entered the liquidation process. As the management of the company assets and timing of distributions is outside their control, they cannot see how they would come within the mischief of what is now targeted. Even if it was not clear before, the amendment in clause 16(3) indicates that a distribution in respect of securities in a winding up is a transaction in securities, where, as a result of the payment of a final distribution in a liquidation, a company is wound up. If the company and its shares are struck off after the final distribution, the fundamental change of ownership condition should be met, as the original shareholders will no longer have 25% of the shares of the company. Does HMRC agree? Assuming the liquidator makes only one distribution in respect of securities and that is the final distribution, and that is the only transaction in securities, surely the transactions in securities legislation cannot apply where there may have been a main purpose of obtaining an income tax advantage, because the exclusion in s.686 applies? We note that the legislation prior to the amendments in clause 17 applies where all transactions have occurred before 6 April However, in line with our point for clause 16, we suggest that a transitional rule (ie that legislation pre the clause 17 amendments) should apply for all companies that went into liquidation on or before 9 December Do you agree that the introduction of this new TAAR will be effective in terms of preventing the behaviour outlined in this section, and are there any better alternatives? We understand that the target of the TAAR is pheonixism. We understand pheonixism to be the winding up of a company with the intention of income tax avoidance and recommencement of the same business after the winding up. However, the draft clause 18 has the potential to catch a wide range of circumstances currently considered commercial and inoffensive from a tax perspective and hence create much uncertainty. If this wider area really is the intended target for this TAAR, we wonder how this measure correlates with existing incentives for small entrepreneurial businesses such as the enterprise investment scheme and related investor incentives. Considering the statements at section 3.10 and the drafting of clause 18, how would the following circumstances be treated? Nadejda s company (Nadejda industries Ltd) trades successfully. As an aside, she has either taken a salary above the minimum wage and dividends in prior years, or, having run previous businesses that have been sold at significant profit, she has sufficient personal cash to have no immediate need for a dividend. The business (let s say a pharmacy business) has reached a stage where it is generating profits and in order to take it to the next stage of growth, significant investment is required. Rather than introduce new funds, an alternative strategy is to continue to operate the business at its current level, retaining profits, such that surplus cash is generated. Nadajda s brother lives in the next town, also operating a pharmacy business, though not close enough for the two businesses to be competitors. Company distributions 4
5 In circumstance 1, Nadejda decides to retire from running a business but agrees to help her brother run his pharmacy business. Nadejda s business is wound up and she becomes an employee of her brother s business. Would Nadejda s retained earnings be caught by new clause 18? In circumstance 2, Nadejda is approached by a large pharmacy chain who offers to buy her out. The intention of the buyer is to invest the required working capital to employ extra staff and improve business premises to increase its value more quickly (something Nadejda was unwilling or unable to do). However as there is a buyer who cannot enter the market without buying out Nadejda there is a premium value to the business. The buyer is not interested in taking on Nadejda s company but will purchase the business and assets. As a result of the good offer, Nadejda sells up, winds up the company and goes to help her brother out in his pharmacy business. Would clause 18 charge Nedajda s surplus cash as an income distribution or a capital distribution? In circumstance 3, the large pharmacy chain makes Nadejda an offer for the business she cannot refuse, but again will not purchase the company. Nedejda winds up the company following the sale of the business. As she is an entrepreneur she finds she needs to do more than attending charity events. She sees an opportunity to develop a new pharmacy business in a nearby town, different to her brother s, and an opportunity the large pharmacy chain has not spotted. She knows she can provide a valuable service to the community and in addition provide some jobs to local people. She wants to take advantage of that opportunity, which has arisen within the two year period mentioned in condition B of draft FB2016 clause 18. Is there a tax penalty to her starting this business within the two year period because the distributions from the winding up of her last company would be charged to income tax instead of capital gains tax, unless she delays the start of the new business to beyond the two year period? Also, how would a company be treated under the new rules where its working capital needs were financed through retained earnings? It may have no cash to pay a dividend, but could have significant retained earnings. This might be contrasted with an exactly similar company which finances its working capital with a bank loan, perhaps supported by a valuable asset such as a property interest, or by a financing of the debtors ledger. This externally financed company may have slightly less annual profit due to interest costs, but may have cash to pay dividends would such undistributed reserves used for self-financing purposes be seen as funds that should have been distributed prior to a winding up? We would be interested to hear how HMRC think it would treat the repayment of share capital when a company has sufficient funds to organise its repayment, where the share capital was created by a previous capitalisation of shareholder loans to justify earlier external refinancing now paid off. It seems entirely appropriate to treat this as a capital repayment rather than a distribution of reserves subject to income tax, but the consultation document and draft clauses seem unclear on this. It would also be very helpful to have confirmation that if a liquidation occurs as a result of legislation requiring a liquidation in order to obtain a relief, that such a liquidation would not be caught by the proposed new TAAR (clause 18) if enacted. An example of a situation where this might arise is a holding company with a trading subsidiary where the subsidiary is sold in circumstances which satisfy the substantial shareholdings exemption if the holding company is liquidated within a reasonable timescale (TCGA 1992 SCh7AC para 3). Property development It is typical for property developments (a development trade) to be undertaken through SPVs, with each SPV used for a separate project. Projects may involve the same or different investors/entrepreneurs. Where individuals operate single SPVs by directly owning shares in the SPVs (instead of having a holding company which holds the SPVs), then as each project is completed it may be typical for the SPV to be wound up if the purchaser purchases the asset (the developed property) rather than the company SPV. The key purpose is to ring-fence potential liabilities. This is a typical mode of operation in the property development sector and such entrepreneurs would typically claim entrepreneurs relief on the proceeds of the winding up of the company SPVs. The old SPV Company distributions 5
6 will no longer have a use as the next project may already have been started through a new company SPV, or a new SPV is required because there are different investors. An individual undertaking this activity owning shares directly will be incurring a CGT charge (perhaps at 10%) each time a business is wound up. The proceeds from the winding up may be partially or fully used to finance the next project. An individual undertaking this activity with SPV s held through a holding company, and where the project in the SPV lasts for more than one year, and where the SPV s assets are sold (rather than the completed development being sold via a share sale), will not be paying 10% tax (or CT at the CT rate) on the gains arising from the winding up of the SPV s as the substantial shareholdings exemption will apply. Therefore: For the individual who owns the SPV s directly, will the fact that the SPV on its own has generated surplus cash be viewed as a situation potentially caught by clause 18? Alternatively, will a more holistic view of the individual s business be taken so that it is recognised that the cash on winding up in one SPV is wholly or partly to be used to finance the next SPV (either already started or to be started within the next two years? If the individual running the business through a holding company sells his business to a larger developer, on the understanding (or sale agreement condition) that he continues to work for the acquirer (in which he may now have shares) for a two year period following acquisition, will he be charged to income tax instead of capital gains tax in a situation where the acquirer has bought the business and not the company (so that the original holding company is wound up)? Where funds are reinvested, there is a further strong argument that the amounts received should not be treated as taxable income as effectively the business continues. It would be unfortunate if this measure discouraged property developer entrepreneurs to undertake entrepreneurial activity at a time when the Government has a clear commitment to improve and increase the current stock of housing in the UK. If clause 18 is really aimed at the circumstance described in CTM36850, but is seeking to widen the application to a phoenix situation whether subsequently run in corporate or non-corporate form, we can understand that policy motive. However if this is indeed the target, we suggest the legislation for condition B and C need to be more clearly drafted to identify what the same or similar trade is and when there is an income tax advantage. We do not think that the word activity should be included as this could cover a large range of situations where there is absolutely no intention of tax avoidance. We think the provision should cater for situations that can arise when businesses are taken over with a requirement that the business vendor work for the acquirer for a period after acquisition, which is common for commercial reasons. As mentioned above, a further alternative view is that there is no need for clause 18, as clauses 16 and 17 widen the scope of the transaction in securities legislation to catch the situations targeted by clause 18 in any event. 4.6 Do you think that the TAAR will have any unwanted consequences not identified? How might these be mitigated? We suggest clause 18 is not needed in view of the changes proposed in clauses 16 and 17. If the TAAR is implemented then we think it should be included in the TIS clearance procedure, as any transactions caught by the TAAR would in any case be likely to be caught by the TIS. We cannot therefore see that this would lead to a significant up-front resource issue for HMRC, would increase certainty for business and would be likely to reduce queries at a later stage. 4.7 Do you think that the government should consider making further changes to address the conversion of income to capital? If so what other solutions do you think the government should consider? If the changes as set out in the draft clauses, or an adapted version following consultation, proceed then we recommend that these are monitored for a few years, before further changes are considered. We think Company distributions 6
7 that further changes should only be considered if the currently proposed significant changes are ineffective. We note with great concern the suggestion that close company apportionment could be re-introduced. We would oppose such a measure, which we think would significantly increase uncertainty for business. It is also likely to bring with it large administrative burdens, not only for business and their advisers, but also for HMRC. Other ways of tackling perceived problems should be considered first. 4.8 Are there any particular areas of the wider distributions regime that cause difficulties or complexities? If so, which areas? No comment. 4.9 Do you believe there is any value in extending this consultation to consider the regime as a whole, after the changes proposed for April 2016? No comment. 5. The firm Smith & Williamson is an independently owned professional service group with around 1,500 people across 13 offices in the UK, Channel Islands and Ireland. It is a genuinely unique business, being the only firm in the UK to combine a traditional accountancy firm with an investment management business (circa 15bn under management as at 30 September 2015). Smith & Williamson is ranked amongst the UK s top ten accountancy firms and also ranks in the top ten independently owned private client wealth managers in the UK. On the international front, it is part of the top ten international network Nexia International; over 24,000 professionals, across 576 offices in 110+ countries worldwide, delivering revenues of over US$3bn. It is also part of M&A International, the world s leading alliance of independent M&A advisors since 2010 member firms have carried out 1,400 transactions valued over US$75bn. Clients are wide-ranging, but can be grouped as follows: High Net Worth Individuals, families, business interested and trusts Entrepreneurs and management teams Mid to large Corporates Professional practices Non-profit organisations Company distributions 7
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