A Q&A guide to tax on corporate transactions in the UK (England and Wales).
This Q&A provides a high level overview of tax in the UK (England and Wales) and looks at key practical issues including, for example, the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.
To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to tax. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.
Her Majesty's Revenue & Customs (HMRC) is the sole authority responsible for enforcing all taxes in the UK.
It is possible to apply for statutory or non-statutory clearances from HMRC.
Statutory clearances are available from HMRC in relation to specific transactions or areas of law involving a particular statutory provision. For example, statutory clearances can be given by HMRC in respect of paper for paper exchanges, demergers and share buybacks.
An Advance Pricing Agreement (APA) is a written agreement between a taxpayer and HMRC setting out a methodology for proactively resolving transfer-pricing issues. Generally, HMRC will only consider a taxpayer's application for an APA in complex cases.
A non-statutory clearance is a written confirmation from HMRC of its view on how the legislation will apply in a particular situation, and is usually appropriate where there is a degree of uncertainty. HMRC will provide non-statutory clearances in relation to all business taxes provided that it can be shown both that:
There is a material uncertainty.
The issue is commercially significant.
Non-statutory clearances can be provided irrespective of whether a transaction has taken place or not. HMRC will normally respond to a query within 28 days of its submission.
A clearance provided by HMRC is usually binding on HMRC, provided that the taxpayer sets out all the relevant facts and draws attention to all the relevant issues in its correspondence with HMRC. In some cases this can involve providing information on related transactions.
Even if HMRC provides information or advice that is incorrect in law, it will be bound by the advice that it gives provided that the advice is clear, unequivocal and explicit and the taxpayer can demonstrate that:
It reasonably relied on the advice.
It made full disclosure of all the relevant facts (where appropriate).
Application of the correct tax treatment would be to its financial detriment.
Stamp duty is chargeable on documents relating to the transfer of shares or marketable securities. In practice, it only applies to the acquisition of UK stock or marketable securities.
If there is no document of transfer (such as a stock transfer form), there will generally be no charge to stamp duty (but stamp duty reserve tax (SDRT) is likely to be payable (see below, SDRT)).
Stamp duty is charged at 0.5% of the chargeable consideration (rounded up to the nearest GB£5). There is no stamp duty on transfers where the consideration does not exceed GB£1,000. Chargeable consideration for stamp duty purposes is:
The issue or transfer of shares or marketable securities.
The release or assumption of a liability.
The stamp duty legislation does not expressly make one person primarily liable to pay but, in practice, stamp duty is paid by the purchaser so that it can register the transfer of ownership. In addition, an unstamped document cannot be relied upon as evidence in a UK court.
SDRT is payable where there is an agreement to transfer chargeable securities for consideration in money or money's worth. "Chargeable securities" includes all rights and interests in UK shares. Units in unit trusts can also be chargeable securities (for example, where there is a register kept in the UK).
The liability to pay SDRT arises when the agreement to transfer becomes unconditional. It can, therefore, apply where uncertificated securities are transferred electronically, such as through CREST. If the agreement results in a transfer on sale upon which stamp duty is paid (or is exempt), then there is no additional charge to SDRT. If SDRT has already been paid, it can be repaid or set off against the stamp duty payable.
The transferee is liable to pay SDRT, but it is usually collected by the accountable person (such as a stockbroker) or through CREST.
SDRT is payable at 0.5% of the chargeable consideration, which for SDRT purposes is anything given in money or money's worth. SDRT is not rounded up.
Transfers and issues of chargeable securities into depository receipt schemes or clearance systems were also subject to SDRT at 1.5% of the consideration, but following the ECJ decision in HSBC and Vidacos Nominees v HMRC (Case C-569/07). Subsequently, in HSBC Holdings PLC and The Bank of New York Mellon Corporation v HMRC  UKFTT 163 (TC) the First Tier Tribunal found that the 1.5% entry charge on share and securities issues by an EU issuer to a non-EU depository receipt issuer was unlawful. HMRC accepts that its previous 1.5% charge on issues of shares to depository receipt schemes and clearance systems within or outside the EU is contrary to EU law.
SDLT arises on land transactions. A land transaction involves the acquisition of a chargeable interest in UK land and can include not only the transfer of a freehold interest or the assignment or grant of a leasehold interest in land, but also the grant of other interests, as well as the surrender and assignment of certain interests. SDLT is chargeable on consideration given in money or money's worth.
The triggering event is the "effective date" of the transaction. This is normally completion, but can be earlier in some cases where there is a contract which is to be completed and the purchaser takes possession of the property or pays substantially all of the consideration for the transaction.
A land transaction return must be filed and any SDLT paid within 30 days of the effective date of any notifiable transaction. Transactions below a certain value (broadly, under GB£40,000 for non-lease transactions, or GB£40,000 plus rent of GB£1,000 per annum for leases of seven years or more, or the 1% threshold below for leases of less than seven years) will not be notifiable transactions.
The purchaser in the transaction is liable to pay the SDLT. "Purchaser" for SDLT purposes can be:
The tenant in the grant of a lease.
The assignee in the assignment of a land interest.
The landlord where a lease is surrendered.
The rate of SDLT payable will depend upon whether the property is residential or not and on the amount of chargeable consideration being paid for the land transaction.
Residential property. The rates of SDLT payable on residential property are charged according to the following amounts of chargeable consideration:
Not more than GB£125,000 = 0%.
More than GB£125,000 but not more than GB£250,000 = 1%.
More than GB£250,000 but not more than GB£500,000 = 3%.
More than GB£500,000 but not more than GB£1,000,000 = 4%.
More than GB£1,000,000 but not more than GB£2,000,000 = 5%.
More than GB£2,000,000 = 7%, unless the purchaser is a "non-natural person" (that is, broadly, a company, a partnership with at least one corporate member or a collective investment scheme), to which a rate of 15% will apply.
There are exemptions from the 15% rate of SDLT for certain non-natural persons (for example, existing property developers and companies acting as trustees of a settlement). These exemptions are to be extended in the Finance Act 2013 when it receives Royal Assent (which is likely to be in July 2013).
Non-residential property. The rates of SDLT payable on non-residential or mixed property are charged according to the following amounts of chargeable consideration:
Not more than GB£150,000 = 0%.
More than GB£150,000 but not more than GB£250,000 = 1%.
More than GB£250,000 but not more than GB£500,000 = 3%.
More than GB£500,000 = 4%.
SDLT will be charged at the applicable rate on the whole amount of any non-rent consideration. Where the consideration consists of rent, SDLT will be charged at 1% of the net present value of the rent over the term of the lease (applying a discount for rent in later years of 3.5%) to the extent the net present value exceeds:
GB£125,000 for residential property.
GB£150,000 for non-residential property.
From 1 April 2013, a new tax (the annual tax on enveloped dwellings (the ATED)) will be payable by certain "non-natural persons" (that is, broadly, a company, a partnership with at least one corporate member or a collective investment scheme) who hold residential property with a value of more than GB£2,000,000. The ATED will be payable annually with the rate varying between 0.3% and 0.7% of the property value, depending on the value of the property.
A company resident in the UK for tax purposes is, prima facie, subject to corporation tax on its worldwide income and gains. However, a company can make an irrevocable election to exempt from corporation tax any profits (including chargeable gains) made by its overseas branches.
A company is resident in the UK if it is incorporated in the UK or has its place of effective management in the UK and is not treated as resident in another jurisdiction under a double tax treaty.
A company not resident in the UK is chargeable to corporation tax only to the extent that it carries on a trade in the UK through a permanent establishment (PE). Broadly, such a company is chargeable only on the profits attributable to that PE.
Where a UK-resident company pays tax overseas on its profits (for example, by reason of carrying on a trade in an overseas jurisdiction through a PE), it can generally claim credit for that overseas tax against its UK corporation tax liability, provided that it has not elected to exempt from corporation tax its overseas branch profits.
Corporation tax is imposed for a financial year (1 April to 31 March) but is charged by reference to "accounting periods". If a company's accounting period is not the same as the financial year, the profits arising in the accounting period are apportioned (on a time basis) between the financial years in which the accounting period falls.
Corporation tax is due and payable nine months and one day from the end of an accounting period. However, companies paying tax at the main rate must pay corporation tax in quarterly instalments.
From 1 April 2013, the main corporation tax rate is 23% for companies whose taxable profits exceed GB£1.5 million per annum. This will reduce to 21% from 1 April 2014 and 20% from 1 April 2015.
For companies whose taxable profits do not exceed GB£300,000 per annum, corporation tax is charged at the "small profits rate" of 20%. Companies whose taxable profits are between GB£300,000 and GB£1.5 million are entitled to "marginal relief", which is effectively a sliding rate of corporation tax from 23% to 20% for companies whose taxable profits are between these amounts.
If a company is associated with other companies, the small profits rate and marginal relief are reduced proportionately. A company is "associated" with another if one controls the other or both are controlled by the same person or persons.
Value added tax (VAT) is chargeable on:
The supply of goods and services made in the UK.
The importation of goods to the UK from outside the EU.
The acquisition in the UK of goods from other EU member states.
A supplier with a place of business in the UK must register for UK VAT if its UK taxable supplies exceed the VAT threshold (currently GB£79,000 per annum). Since 1 December 2012, the VAT threshold no longer applies to suppliers without a place of business in the UK.
A supplier of goods or services who is liable to account to HMRC for VAT (output VAT) will generally pass on the amount of VAT to the recipient of the service.
The recipient may be able to obtain a credit for all or part of the VAT paid to the supplier from HMRC (input VAT). If the recipient uses the supply in connection with its onward exempt supplies, it will not generally be able to obtain a credit for the VAT.
If there is a sale of business assets, the sale may qualify as a transfer of a going concern (TOGC). To qualify, there must be a transfer of the business by a seller, and the buyer must intend to carry on that same business. If the sale is a TOGC, it will not be treated as a supply for VAT purposes and there will be no VAT liability on the transfer.
The standard rate of VAT is 20%. Lower rates of 5% or 0% apply to certain goods and services (for example, the supply of energy to domestic consumers (5%) and children's clothes (0%)). Other goods and services are exempt from VAT (for example, most financial services).
In addition to the taxes described above, certain taxes may be chargeable depending on the type of business carried on by the relevant parties to the transaction, such as climate change levy or insurance premium tax.
Where a non-UK resident company acquires shares in a UK-resident company, stamp duty will be payable on the instrument of transfer (in the same way as if the purchaser was a UK-resident company) or, if there is no instrument of transfer, SDRT will be payable on the agreement to transfer shares.
UK stamp duty and SDRT can also apply to the acquisition of non-UK resident companies where a share register is held in the UK or where the instrument of transfer is executed in the UK.
When a non-UK resident company acquires UK land or property, SDLT is charged on the value of the chargeable consideration for the transaction, broadly, everything of economic value which is given in exchange for the transaction.
Subject to certain exemptions, a non-UK resident company which owns UK residential property worth more than GB£2,000,000 will be subject to the ATED, payable annually from 1 April 2013 on a percentage of the property's value.
Non-UK resident companies will be subject to UK corporation tax to the extent that they are carrying on a trade in the UK through a PE. A company has a PE if it has either:
A fixed place of business (for example, a branch, office or factory) in the UK through which the business is wholly or partly carried on.
An agent acting on its behalf which habitually carries on business activities as authorised for, and on behalf of, the company.
A company will not be regarded as having a PE if it carries on its business through an independent agent acting in the ordinary course of its business, or if the activities are of a preparatory or auxiliary nature (for example, they relate to the use of storage facilities).
A double tax treaty may determine that a non-resident company does not have a PE even if under UK domestic law it would be treated as having one.
Corporation tax will be chargeable on both:
Profits attributable to a UK PE, wherever arising.
Gains on the disposal of assets situated in the UK, which are held for the purposes of the trade of the PE.
Conversely, a UK-resident company can be subject to a charge by reference to the profits of a controlled foreign company (CFC). A CFC is, broadly speaking, a non-UK resident company that is controlled by persons resident in the UK. There are a number of tests that can apply to exempt the UK company from a CFC charge.
Supplies made by non-UK resident companies can be subject to UK VAT depending, broadly, on whether a supply of goods or services is treated as made in the UK.
There are no UK withholding taxes on a dividend paid or other distribution made from a UK company. However, the payment of a dividend from a real estate investment trust (REIT) is subject to withholding tax at 20%.
Subject to any applicable exemptions or reliefs, a company selling shares which it holds as a capital asset (for example, as an investment) will be subject to corporation tax on any chargeable gain that it makes on the disposal of the shares. If shares are sold by a company which holds the shares on revenue account (for example, a trader in shares), then it will be subject to corporation tax on the profit arising on the disposal.
Stamp duty and SDRT can arise on the transfer of shares (see Question 3).
A disposal of shares is exempt from VAT.
For a corporate seller, SSE may be available so that any chargeable gain arising on the sale of shares is exempt from corporation tax. Broadly, SSE applies where:
The shareholding is substantial, that is, 10% or more of the target company's ordinary share capital.
The seller has held shares in the target company for a period of at least 12 months in the two-year period ending on the date of disposal.
Before and immediately after the disposal, the seller is a trading company or a member of a trading group.
Before and immediately after the disposal, the target company is a trading company or the holding company of a trading group.
Where SSE does not apply, the seller can generally:
Offset current year losses (trading or capital) against the gain.
Offset the gain against any carry forward capital losses in the seller.
Where the seller is in a UK tax group, it can also elect to transfer the gain to another group company. It is most likely to do this where the other group company has carry forward capital losses.
If the seller receives shares in consideration for its disposal of shares in the target, it may be able to rollover any gain on its disposal into those consideration shares. Broadly, the buyer will be able to do this where it holds more than 25% of the ordinary shares in the target company (after acquisition) and the exchange is for bona fide commercial reasons and not part of a tax avoidance scheme. Companies can apply for statutory clearance that the commercial reasons are bona fide and that the tax avoidance provisions are not contravened.
Trading losses in the target company may be able to be carried forward and set off against future profits.
Where the target is a property rich company, buying the shares of the target is generally preferable to an asset acquisition, as stamp duty on the purchase of the shares will be at 0.5% of the consideration, contrasted with an asset purchase, where SDLT will be at 4% (or, if residential property, possibly more) on the value attributable to UK property. If the target holds residential property worth more than GB£2,000,000, it may be subject to the ATED on an annual basis.
A degrouping charge (on capital assets and/or intangibles previously transferred intra group) can be triggered as a result of the target company leaving the seller's group.
The buyer will not be able to claim capital allowances on its expenditure on shares, even if the target holds capital assets.
The buyer will acquire an existing taxpaying entity and, therefore, will need to ensure that it has appropriate warranty/indemnity protection in the event of unknown tax liabilities arising in the target.
There will be a significant advantage to the seller realising a gain if it is eligible for SSE.
The application of SSE is automatic and disallows what would otherwise be an allowable loss.
Where SSE does not apply, it may be possible to reduce the chargeable gain arising on the sale by way of the target company paying a pre-sale dividend to its shareholders. UK corporate shareholders will generally be exempt from tax on the receipt of a dividend. The target would normally apply for pre-transaction clearance from HMRC that certain anti-avoidance provisions do not apply. The value shifting rules may also apply to prevent the chargeable gain from being reduced, if the pre-sale dividend is carried out alongside other arrangements to reduce the value of the shares.
A seller may be liable to corporation tax on any chargeable gains it makes on the sale of any capital assets to a buyer.
A seller will also be subject to corporation tax on trading income on the sale of any trading stock to a buyer.
The sale of any intangible fixed assets (for example, goodwill or intellectual property) can be subject to corporation tax as profit under the intangible assets regime (this regime applies, broadly, to any intangible fixed assets acquired or generated after April 2002 and broadly follows the accounting treatment for those assets).
If a seller has claimed capital allowances on any plant and machinery, the disposal of those assets can give rise to a balancing charge for that seller for corporation tax purposes. A balancing charge will arise if the sales proceeds attributable to those assets is greater than the tax written down value of the assets. A seller will obtain a balancing allowance on the disposal of plant and machinery if the sales proceeds for those assets is less than the tax written down value.
A buyer will be able to claim capital allowances on any expenditure incurred on plant and machinery. The rate of capital allowances is 18% and, for long life assets (broadly, assets with a useful economic life of more than 25 years), 8%. Allowances are available on a reducing balance basis.
If any of the assets purchased by a buyer are intangible fixed assets, a buyer can claim tax relief for accounting amortisation on the amounts paid for those assets. Alternatively, a buyer can elect for a 4% straight amortisation rate.
A company acquiring assets other than shares or marketable securities will not be subject to stamp duty or SDRT. However, if any of the assets include land, the acquisition of the land will be subject to SDLT. This is the purchaser's liability and is payable at up to 4% of the amount paid for non-residential land (see Question 3).
The sale of assets can be subject to VAT as a taxable supply of goods in the UK. However, it may qualify as a transfer of a going concern (TOGC) (see Question 5). If this is the case, the sale will not be treated as a supply for VAT purposes and there will be no VAT liability.
A seller can use current year, or previous years', capital losses to offset against any corporation tax on chargeable gains arising from the sale. It is also possible to use current year trading losses to offset against a capital gain.
If a seller has no such losses and is within a UK chargeable gains group, it can elect to treat the sale (and, therefore, the gain) as arising in another group company. It would do this where that other group company has capital losses to offset against the gain.
It is also possible for a seller to defer any chargeable gain on an asset sale through business asset rollover relief, if it re-invests the proceeds in qualifying assets (which include land, plant and machinery) within the qualifying time period. The qualifying time period runs from 12 months before the disposal of the asset to three years after that disposal. Any profits on the sale of intangible assets can also be rolled over into expenditure in new intangibles on a broadly similar basis.
A buyer can claim tax deductions if it purchases intangible fixed assets (see Question 14).
A buyer can claim capital allowances on its expenditure on plant and machinery (see Question 14).
A buyer purchasing business assets does not inherit the historic tax liabilities of that business.
If the assets include land, a buyer would have an SDLT liability of up to 4% (compared to 0.5% stamp duty for share sales) (see Question 3).
Any trading losses of a seller's business would be lost, as these cannot be transferred to a buyer on an asset sale.
A seller can obtain a balancing allowance on the sale of assets for capital allowance purposes (see Question 14).
A seller may be able to shelter any chargeable gain from the sale if it has sufficient capital losses (or current year trading losses). Any loss on the asset sale may be available for offset against future gains.
A seller can have a balancing charge on the sale of assets for capital allowance purposes (see Question 14).
A chargeable gain can arise which is subject to corporation tax (see Question 14).
Where the seller's shareholders are UK-resident individuals and the profits will be returned to those shareholders, a double tax charge can arise:
Once on the company disposing of the assets.
Once on the receipt, by the individual shareholders, of the distributed profits.
There are no commonly used transaction structures to minimise the tax burden on an asset disposal.
Any losses arising on an asset disposal will remain with the seller and are not transferred with the business. It has, therefore, become common where there are historic losses associated with that business, for the business to be transferred (hived down) to a new company, with the buyer then acquiring this company. The buyer can then use the losses in the company acquired, provided that the same trade as was carried on before the sale continues to be carried on after the sale. While there is a danger that the transfer of capital assets to the new company may give rise to a degrouping charge, it may be possible to hive out any business or assets to be retained and sell the existing trading company.
While it is possible to effect a "merger" between UK companies by a series of transactions, a true merger between UK companies (that is, where the assets of one company are transferred to another, with the transferor company "disappearing" without going into liquidation) is not possible under English law.
However, UK tax legislation does implement the provisions of Directive 2005/56/EC on cross-border mergers of limited liability companies (Cross-border Mergers Directive), which applies to certain transfers of all or part of a business by a company incorporated and resident in one member state, to a company incorporated and resident in another member state.
In practice, it is rare for a UK transaction to fall within these provisions.
The broad effect of the legislative provisions is to ensure that a transaction falling within the Cross-border Mergers Directive is on a no gain/no loss basis at the asset level and on a rollover basis at the shareholder level.
It is possible to obtain clearance from HMRC in respect of the application of the bona fide commercial reason/no tax avoidance provision.
As the concept of a legal merger is both new and rare, there are few structures in existence.
No tax will arise on the establishment of a JVC. However, once established, certain taxes can arise if either of the joint venture parties transfer assets to the JVC (see below, Stamp duty, SDRT and SDLT, Corporation tax and VAT).
The JVC may be liable for stamp duty or SDRT on the transfer of shares by a joint venture party to the JVC (see Question 3).
SDLT can arise if land is transferred to the JVC (see Question 3).
A transfer of assets to the JVC can attract corporation tax on any chargeable gains for the joint venture party.
Non-arm's length transactions between a joint venture party and the JVC can be subject to the transfer pricing rules where both joint venture partners have at least a 40% interest in the JVC.
No VAT arises on the transfer of shares (see Question 9). However, VAT can arise on the transfer of assets to the JVC unless it qualifies as a transfer of all or part of a joint venture party's business as a going concern (see Question 5).
If the JVC is a trading company, losses that arise may be surrendered (in either direction) between a joint venture party and the JVC in proportion to the joint venture party's shareholding in the JVC.
The following structure is sometimes used to minimise the tax burden where a joint venture party is transferring a trade to the JVC:
The joint venture party with the trade forms a JVC as a 100% subsidiary and subsequently hives down the relevant trade to the JVC.
The other members of the JVC then acquire shares in the JVC.
The effect of this is that the JVC can continue to use the losses of the trade provided that there is no major change in the nature or conduct of the trade within three years of the acquisition of an interest in the JVC by the other JVC members.
A degrouping charge can arise as a result of the issue of shares to the other members of the JVC, although this can be avoided if the JVC is initially set up through a reconstruction and substantially the same shareholders own the business both before and after the reconstruction.
Stamp duty or SDLT can arise on a reorganisation involving the transfer of shares and SDLT on a group reorganisation involving UK land.
Depending on the nature of the reorganisation, a company reorganisation can give rise to:
Corporation tax on chargeable gains in respect of the disposal by a shareholder of its shares.
Corporation tax on chargeable gains on cash or assets receivable by a shareholder in respect of its shareholding.
Tax (including but not limited to corporation tax on chargeable gains) on the disposal by a company of its business assets.
Transactions involving shares or securities are exempt for VAT purposes.
On a reorganisation of a company's share capital, there is no disposal of the original shares for tax purposes and the new shares are treated as taking the place of the original shares with a base cost equivalent to that of the original shares. A tax charge will only arise on the eventual disposal of the new shares.
A similar tax treatment will apply where a company issues shares or securities to a person in exchange for shares or securities in another company, provided that certain conditions are met. If the conditions are satisfied, there will be no disposal of the original shares or securities for tax purposes and the new shares are deemed to take the place of the original shares (that is, acquired at the same time and for the same cost as the original shares). For a summary of the main conditions, see Question 10.
The transfer of shares or assets between members of a chargeable gains group takes place on a no gain/no loss basis; the buyer will therefore have the same base cost in the assets acquired as the seller. However, a degrouping charge can arise if the buyer leaves the seller's group within six years of the transfer.
The desire to minimise the tax burden is often a key consideration on a company reorganisation. UK legislative provisions have been introduced that catch tax advantages arising from certain transactions in securities. However, broadly such anti-avoidance provisions will not apply if the transaction was carried out for bona fide commercial reasons and obtaining a tax advantage was not one of the main objects of the transaction.
It is possible to apply to HMRC for advance clearance in this regard.
Generally, companies which are under a restructuring process or subject to an insolvency procedure are taxed in the same way as companies that are not.
The main question for a company subject to an insolvency procedure is whether that procedure results in it ceasing to be part of a tax group.
A company in liquidation ceases to have beneficial ownership of its assets, which can impact on a number of group reliefs which require beneficial ownership. A company in administration, receivership or subject to a company voluntary arrangement, will not lose beneficial ownership of its assets.
Very broadly, companies in liquidation, administration or administrative receivership may find themselves falling outside a chargeable gains and stamp duty/SDLT group and unable to make surrenders of group relief to other members of the group. Companies under an LPA receivership or company voluntary arrangement should remain unaffected.
Insolvency procedures do not impact the continuing existence of a VAT group.
A company subject to an insolvency procedure may find its ability to carry forward its tax losses hindered, particularly if there is a change of ownership. A company that ceases to trade will be treated as disposing of its trading stock and capital allowance assets.
Shareholders of a company in liquidation or administration are treated as having ceased to have control of its assets, as may the shareholders of a company in administrative receivership (but not an LPA receivership or voluntary arrangement).
The grouping issues discussed above (see above, Tax implications for the business) are relevant for the owners, who may wish, for example, to take a surrender of losses from the company.
Tax liabilities arising before an insolvency rank as unsecured claims against the company.
HMRC, which ranks as an unsecured creditor, is generally entitled to set off tax repayments against tax owed, even where a number of different taxes are involved. However, it may not set a tax credit arising after the start of the insolvency against a tax liability arising beforehand.
An unconnected corporate lender releasing a company from a debt should generally obtain tax relief in respect of the release. The company will be correspondingly subject to tax on the release, although, in many cases an insolvency-related exception will apply to avoid such tax.
Share buybacks can be effected either on-market (usually through an intermediary acting as principal) or off-market (direct by the company).
There are generally no direct tax consequences for a company in connection with buying back its shares on-market or off-market.
The amount paid by a company buying back its shares is not subject to VAT.
There is generally a 0.5% stamp duty or SDRT charge payable by reference to the price paid by the company on buying back its shares. Where the buyback is effected through an intermediary, there is generally no double charge to stamp duty.
The corporate shareholder is liable for corporation tax on the excess of the total purchase price paid by the company on the buyback of shares over its base cost in the shares.
SSE can apply to exempt the corporate shareholder from any such gain.
A share buyback potentially falls within the "transactions in securities" anti-avoidance provisions although, in practice, it is unlikely to apply on a share buyback from a corporate shareholder.
While individual shareholders, particularly those with high incomes, will have a preference for structuring buybacks in a certain way (for example, as an on-market purchase, so that the consideration is capital rather than income in nature), corporate shareholders are generally indifferent as to how share buyback transactions are structured.
Stamp duty can be avoided by cancelling instead of buying back shares under a scheme of arrangement.
SSE can apply if certain conditions are met (see Question 10), broadly:
Both the company disposing of the shares and the company whose shares are being sold must be trading companies or members of a trading group both before and after the disposal.
The company disposing of the shares must have held at least a 10% stake for 12 out of the last 24 months of ownership.
If SSE applies, gains on shares held by companies are exempt from corporation tax and losses are not allowable.
The capital treatment always applies when shares are bought from a corporate shareholder on a buyback. However, this is not the case for individual shareholders. It is, therefore, quite common for a broker to buy the shares in the company and then for the company to repurchase those shares from the dealer, as this allows the selling shareholders to get capital treatment.
Another way to obtain capital treatment is for a company to issue a separate class of bonus shares fully paid up out of its share premium account and then to repurchase those shares. This ensures that there is no distribution element but instead a return of capital.
An MBO involves the acquisition of a company by its management. The management usually makes its purchase through a newly incorporated company (Newco) which is funded by a combination of private equity and bank debt financing. As MBOs are similar to the straightforward acquisition of a company, the same tax issues tend to apply. Interest expense on debt taken out to fund the acquisition will, broadly, be tax deductible if the debt was on arm's length terms. As Newco is unlikely to have taxable profits, it would be common to surrender the losses arising as a result of the tax deduction down to the target.
The managers involved in an MBO may be liable to an income tax charge on the shares that they acquire. This may be the case where the full unrestricted market value of the shares is not paid and they are deemed to have been received by reason of employment.
As part of the memorandum of understanding between HMRC and the British Venture Capital Association, HMRC introduced "safe harbour" arrangements for managers' equity and ratchet arrangements. These provide a guarantee to managers that no income tax liability will arise on the shares that they acquire, subject to the satisfaction of certain conditions.
Managers wishing to take a prudent approach can also enter into an election that, if they acquired shares for less than market value, they will be subject to income tax on the difference in the value of the shares at the time of the acquisition, rather than at a later date. It is common practice to do so.
To avoid having to surrender by way of group relief the losses for Newco down to the target, the target's business can generally be hived up on a tax-neutral basis.
Legislation was introduced in the Finance Act 2012 to repeal the previous CFC legislation and replace it with a new CFC regime. The new rules apply to accounting periods of CFCs beginning on or after 1 January 2013.
Under the new regime, the business profits of a foreign subsidiary will be outside the scope of the CFC regime if they meet the specified conditions set out in a "gateway". This gateway should ensure that only profits of the CFC which are artificially diverted from the UK will potentially be caught.
"Safe harbours" are provided in the gateway tests covering general commercial business and incidental finance income, together with some sector specific rules.
In addition to the gateway, the regime provides exemptions for foreign subsidiaries which are CFCs, including an excluded territory exemption and a low profits exemption.
Rules for foreign finance subsidiaries that are CFCs will generally give rise to an effective tax rate on intra-group finance income equal to one-quarter of the main corporation tax rate. There is a full exemption in certain circumstances.
A GAAR will come into effect from 1 April 2013, based on the recommendations of an Advising Committee led by leading Tax Counsel Graham Aaronson QC, which was established to consider whether the UK tax system would benefit from a GAAR, and reported its views (the Report) on 21 November 2011.
The "moderate" GAAR works by identifying arrangements which are abnormal arrangements included for the purposes of achieving an "abusive tax result" and which cannot reasonably be regarded as a reasonable exercise of choices afforded by the relevant legislation (the "double reasonableness test"). An "abusive tax result" is an advantageous tax result which would be achieved by an arrangement that is neither reasonable tax planning nor an arrangement without tax intent. The Report suggests that the thresholds of "abnormal arrangements" and "abusive tax results" should be set high, so as not to catch "responsible" tax planning.
It would be for HMRC to prove that it is more likely than not that:
The arrangement is an abnormal arrangement.
The advantageous tax result of the arrangement would be an abusive tax result (so it is not reasonable tax planning).
Where HMRC succeeds in proving such arrangements exist, it will be able to counteract them under the GAAR by either:
Adjusting computations or assessments as is reasonable and just.
Adjusting them by reference to a hypothetical arrangement which would achieve the same non-tax result as the actual arrangement, without the abusive tax result which the actual arrangement sought to achieve.
The GAAR is included within the self-assessment regime so that taxpayers, in completing tax returns, will be required to consider whether to make adjustments in their calculations based on the provisions of the GAAR.
A new patent box regime taxes qualifying patent income at a reduced 10% rate of corporation tax. The regime is being phased in over five years from 1 April 2013.
The Chancellor announced in his Budget speech on Wednesday 20 March 2013 that from 1 April 2014, stamp duty and SDRT would no longer be payable on transfers of shares on AIM and other growth markets. In addition, SDRT would be abolished on the redemption of units in a unit trust (the "Schedule 19" tax).
Qualified. England and Wales, 1996
Areas of practice. International mergers and acquisitions; reorganisations and restructurings; fund transactions and real estate transactions.
Qualified. England and Wales, 1999
Areas of practice. Finance; mergers and acquisitions; restructuring and insolvency; outsourcing and funds.