Whatever the driver for business reorganisation, tax implications abound and should be considered from the outset.
Following recent legislative changes and a number of new cases, the tax implications of reorganisation are becoming increasingly intricate and complex.
There are many reasons why an organisation might undergo a reorganisation. Corporate simplification or rationalisation; preparation for the sale of whole or part of a group; post- acquisition transfer to meet the needs of the new ownership.
Whatever the commercial objective, the tax treatment of any transfer of business or assets should be considered from the early stages of the process, taking short, medium and long term consequences into account.
A reorganisation may trigger tax liability such as Stamp Duty Land Tax, capital gains or impact the availability of tax relief. The practical application of QCBs and non-QCBs raises significant technical complexities, and solvency and cash reserves will come under scrutiny. VAT will require consideration, as well as the taxable status of the assets, VAT group arrangements, and the possibility of going concern treatment. Employee pensions schemes may also be affected.
It is clear that careful tax planning is critical to navigating the technical complexity of business reorganisation.
Here to help
As experienced tax advisers, ETC offers specialist advice and guidance across all types of reorganisation – including deemed reorganisation, reconstruction, merger, (liquidation) demerger and branch incorporation.
We work both directly with businesses of all sizes and with professional advisers such as lawyers and accountants to support their clients in providing a complete tax planning service relating to asset transfer.
We are experienced in dealing with businesses with entities outside the UK and the additional issues and opportunities this might present.
Operating as part of the reorganisation project team, we provide highly specialist tax advice at every stage, from initial planning and due diligence through to approved transfer and strike off/liquidation.
Our experience extends to all size of transaction or company, from the reduction of capital rules and using them for tax structuring, to EU cross-border transactions.
Our expertise also involves advice on the practical application of QCBs and non-QCBs, and the wider context of anti-avoidance provisions such as the Disclosure of Tax Avoidance Scheme (“DOTAS”) rules and the General Anti-Abuse Rule (“GAAR”) regime. We can also advise where clearance may be required from HMRC if there is uncertainty surrounding the tax treatment of a capital contribution.
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What are the tax implications of a reorganisation?
The tax implications of a business reorganisation are many and varied, and will be dictated by the specific circumstances at hand.
For instance, the transfer of shares in a reorganisation can give rise to a stamp duty charge, SDRT or SDLT where property is involved. However, transactions involving shares or securities will be exempt for VAT purposes.
A charge to corporation tax will arise on the disposal of business assets by a company but relief may be available under the substantial shareholding exemption or under other reliefs.
Generally speaking, the reorganisation of a company’s share capital will not be a chargeable event for capital gains tax purposes. The new shares are substituted for the original shares with a base cost equivalent to the original shares. A tax charge will only arise on a disposal of the new shares (subject to the SSE exemption).
Inter-group transfer of shares or assets within the same chargeable gains group will usually take place on a no gain/no loss basis.
We can advise on the tax position, including liabilities arising and reliefs available, of any reorganisation project to ensure favourable treatment.
Take for example a family group looking to sell their trading businesses. Over the years the holding company, as well as holding shares in the trading subsidiaries, had acquired a number of commercial properties, utilised both internally within the group and let externally.
From a commercial perspective it is necessary to find a way to restructure the group to separate the properties from the trading businesses. In these circumstances, a liquidation demerger could be used to achieve the desired result.
This would require the necessary clearances from HMRC which means that the restructuring can be undertaken without crystallising any tax charges.
The final position will be that the shareholders will hold shares in a new property company and shares in a new holding company of the trading subsidiaries. This will achieve their objectives and allow them to seek a buyer for the shares in the holding company of the trading group.
What is the current tax position in relation to Qualifying Corporate Bonds (QCBs) and non-QCBs?
Often, rather than a vendor receiving cash for its shares, will receive consideration wholly or partly in the form of paper. Loan note consideration is a common form of consideration in corporate disposals.
Loan notes may be structured as qualifying corporate bonds (QCBs) or non-qualifying corporate bonds (non-QCBs).
• When a seller exchanges his shares for QCBs or non-QCBs providing that the right conditions are met, he may be able to defer his capital gain until the disposal of the loan note.
• The company reorganisation rules allow the loan note to be treated as a security so you have in effect a share for share exchange.
The tax treatment of QCBs and non-QCBs has become is a path well trodden by vendors over the years with individuals choosing to acquire one or the other on the basis of the clear UK tax implications.
It is important to distinguish between a QCB – a ‘qualifying corporate bond’- and a non-QCB. Capital gains tax treatment differs between the two, in some parts greatly.
• QCBs are exempt from CGT.
• Under special rules for reoganisations when shares are sold in exchange for QCBs a capital gain is calculated as if it is chargeable at the time of the exchange. The gain is deferred and becomes chargeable when the QCB is redeemed, disposed of, or ceases to qualify as a QCB.
• If the QCBs become worthless before they can be redeemed the QCB holder is changed to CGT on the deferred gain as if the QCB is redeemed. This means that it may not be desirable to hold QCBs.
• For QCB exchanges, ER will no longer apply to deferred gains. To avoiding losing ER the individual can make an election to treat the date of exchange as if it were a disposal. This will mean paying CGT before the QCB is redeemed.
• A gain can be deferred on a share for non-QCB exchange so that it will crystalise when the security is redeemed or disposed of or ceases to qualify as a security.
• A gain so deferred is reduced or eliminated if the loan note turns bad (unlike the position for a QCB).
• A further roll-over can be possible if non-QCB loan notes are exchanged on a subsequent take-over.
• There is no ER when a non-QCB is disposed of, however, you may elect to crystalise your gain in the year of the exchange – as for QCBs.
What is the position of capital gains tax on conversion of corporate bonds?
The case of Hancock and another v CRC  STC 1433 has thrown doubt on this subject for taxpayers, following the Court of Appeal’s decision to rule against the taxpayers.
The case involved qualifying corporate bonds (QCBs). One tranche of loan notes had been structured as a non-QCB and another as a QCB.
The CA held that s132 TCGA treated the taxpayer’s arrangements as two separate conversions of loan notes.
This provided legislative support for treating the arrangements as two transactions for the purposes of s116. Consequently s116 was met and the accrued gains on the original non-QCB were taxable.
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Essential information about business reorganisation.
There are many reasons why you might consider a reorganisation – corporate simplification or efficiency for example; preparation for the sale of whole or part of your company or business or one of the companies within a group; or post- acquisition – for example the transfer of an asset or the whole of a business to meet the needs of the new ownership.
Whatever the commercial objective, the tax treatment of any transfer of business or assets should be considered from the early stages of the process, taking short, medium and long term tax consequences of that reorganisation into account.