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TaxationWeb by James Darmon BA ACA

Companies would appear to be receiving more and more tax concessions. James Darmon BA ACA, an Associate of Forbes Dawson discusses the budget corporation tax changes and highlights a potential area of conflict between the buyer and seller of businesses.The 2002 Budget confirmed two important Corporation Tax changes, designed to improve the UK Economy’s international competitiveness. They are:

· No tax on sales of substantial shareholdings; and
· Tax relief for goodwill and intangible assets.

Gains on Substantial Shareholdings

From 1 April 2002, where one company sells shares in another, both companies are trading, and the sale is of part of a substantial (more than 10%) shareholding, any gain on that sale is free of CGT. The Government has introduced this change to compete with other European countries, many of which have exemptions of this type.

However, the UK Government has gone one better. Many other countries which allow the exemption do not give tax relief for related borrowing. The Revenue has made it clear that interest tax relief is not under threat.

The business of both the group and the company being sold must be trading, and in the case of the vendor company, the group must be carrying on a trade immediately after the sale.

What should companies do now?

Most corporate groups intending to sell trading subsidiaries will have delayed the sale to take advantage of the new rules. All companies now need to look at their corporate structure, particularly where the group carries out a mixture of trading and investment activities (for example property groups, which carry out a mixture of development – trading – and investment activities).

Under the current rules, this group would not qualify for exemption. However, if the group is reorganised, and split into trading and investment groups, the trading side would qualify. In addition, this split gives the owner the opportunity to claim the beneficial rates of business asset taper relief on his shares: a “win win” situation.

Goodwill and Intangible Assets

Where a company buys goodwill or other intangible assets on or after 1 April 2002, he can write that goodwill off against his profits. Up to now, goodwill has been a “nothing”: no corporation tax relief has been available for expenditure on it.

You cannot create goodwill by transferring businesses and assets between related parties. So, for example, the incorporation of a business on or after 1 April 2002 does not lead to goodwill available for tax relief, even though you may pay capital gains tax on the transfer of that goodwill.

For those businesses, which hold their intellectual property rights outside the United Kingdom, there is a “sting in the tail”. Since sales of intellectual property rights are now treated as income, they are within the scope of the control foreign companies regime where these assets are held low tax jurisdictions. In other words the Revenue can now claim their “slice” of the profit.

The changes mean that it is more important than ever that the costs of buying a business are properly apportioned in a sale agreement, to ensure the best position for both the buyer and the seller. There may be a conflict with the seller’s tax needs here, as discussed below.

We can liaise with your accountants to ensure that the best and most appropriate tax treatment is adopted for each type of intangible asset. This includes research and development expenditure, where we have already worked with clients to ensure they get the maximum benefit of the new 150% tax deduction for small companies.

A Conflict of Interest?

A company selling a substantial shareholding will often pay no corporation tax on that sale. An individual who sells shares in his trading company will normally be able to claim full business asset taper relief, leading to a 10% tax rate on the sale. In other words, both the company and the individual will generally want to sell shares.

However, the new relief for goodwill, coupled with new stamp duty exemptions for both goodwill and debtors, mean that in most cases, the purchaser will want to buy assets to get tax relief on the costs.

This means the tax effects of a business sale become even more important, to ensure the best deal for both parties.

Foreign Exchange and Derivative Contracts

There are a number of important technical changes to the tax treatment of foreign exchange and derivative contracts. The broad thrust of these is to bring them within the scope of the existing loan relationships legislation and tax or relieve them on an accounting basis.

Please contact James Darmon, an Associate at Forbes Dawson, to discuss the changes, and how they affect your business. James can also be contacted by e-mail on james@forbesdawson.co.uk.