Category: Corporate Tax
The Taxation of Inter-company Loans
Under the right circumstances, which can of course be shaped, intercompany loans are an effective means of funding further profit or not-for-profit motives. Consider Mr Trader, who is director and sole shareholder of Company T, a trading company. Company T has grown with accumulated profits in excess of £2m, matched by substantial cash balances. Mr Trader has decided to set up a not-for-profit organisation, ReMobly Ltd, aimed at rehabilitating injured athletes back into competitive sport. In addition to Mr Trader, two other directors will be appointed to the board of ReMobly Ltd and each of the three persons will own 33% of the ReMobly Ltd share capital.
ReMobly Ltd is seeking to raise capital to begin its operations and Mr Trader is considering the most apt means of lending money to the not-for-profit organisation. There are three issues which spring to mind…
Loans to participators
In view of the large cash balances that have accumulated in the company, Mr Trader considers lending money from Company T to ReMobly Ltd. CTA10/S455 applies to loans/advances made by a close company to its participator, or an associate of its participator. Broadly, where a close company makes any loan to an individual who is a participator (or an associate of a participator) in the close company, then the close company is due to pay tax under CTA10/S455. The not-for-profit is not classed as an associate of Mr Trader (so far as section 448 of Part 10 of the Corporation Tax Act 2010 is concerned), therefore the loan can be made by Company T without corporation tax implications under CTA10/S455.
It is also important to analyse CTA10/S459, which applies if there are arrangements made by a person whereby a close company makes a loan or advance that is not subject to tax under CTA10/S455, and another person makes a payment to a relevant person who is either a participator of the company or an associate of such a participator. In this case there is a proposed “loan or advance” from a close company. However, there is not then a payment by a person other than Company T to a relevant person who is a participator in Company T or is an associate of such a participator. Indeed ReMobly Ltd is not a relevant person who is an associate of Mr Trader, because a relevant person has to be an individual or a company acting in a fiduciary or representative capacity (CTA10/S455(6)). Therefore the loan can be made without corporation tax implications under CTA10/S459.
Loan write off
There is a possibility that the future activities of ReMobly Ltd will be inadequate to allow for the repayment of the loan made by Company T, under the terms of the loan agreement. If both parties are companies and both are found to be under the common control of another person, company or individual, at any time in the accounting period, then no bad debt relief will be available on the release of the loan, and no taxable credit will arise to the company whose indebtedness is forgiven. Company T and ReMobly Ltd are not under the common control of another person and are therefore not considered to be connected. The debit for the loan write off will be allowable for Company T (most likely as a non-trade loan relationship deficit). The corollary is that a taxable credit will arise to the not-for-profit.
Anti-avoidance
The main anti-avoidance rule will also need to be considered in FA 1996, Sch 9 para 13, the ‘unallowable purposes’ rule. This will deny relief for so much of a debit where the loan or part of the loan is attributable to an unallowable purpose. An unallowable purpose is any purpose which is not amongst the business or other commercial purposes of the company, Company T. If taken literally, this would seem to be cast fairly widely. In general however, if the loan relationship rules are seen to be fairly applied to both parties, HMRC seem content in leaving matters undisturbed.
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Negotiating time to pay with HMRC
HMRC has published details of the specific helpline to contact, but it’s not known whether HMRC will change its usual approach to time to pay, for taxpayers who are having difficulty paying.
The following usually needs to be considered when negotiating time to pay with HMRC.
WHEN TO MAKE CONTACT – In general it is advisable to contact HMRC as soon as difficulty making payment is expected. However, HMRC’s systems do not easily facilitate setting up a payment arrangement too far in advance, so the best time to phone HMRC is usually one to two weeks in advance of the due date for payment.
MAKE SURE RETURNS ARE UP TO DATE – HMRC is more amenable to agreeing time to pay if returns are up to date and the correct liability has been established.
CASH FLOW FORECASTS AND BUDGETS – Before phoning HMRC it is advisable to have financial forecasts and a statement of assets and liabilities available. HMRC will expect the taxpayer to make the best offer they can and will not usually make suggestions about the amount it will accept as a regular payment.
HMRC STAFF AUTHORITY TO AGREE TIME TO PAY – HMRC will usually expect to set up a regular monthly payment plan with collection by direct debit. Most HMRC debt management contact centre staff have authority to agree time to pay over a period of up to 12 months. Longer periods can be arranged but usually need to be escalated to more senior HMRC staff.
EXPECT ROBUST QUESTIONING – We don’t know to what extent HMRC staff will be more sympathetic to requests for time to pay in the current environment but in normal circumstances negotiating time to pay can involve what feels like personal and intrusive questioning. It is important to make HMRC aware of all information which might be relevant to the payment difficulties, as calmly and professionally as is possible in what may well be extremely difficult circumstances.
NO AGREEMENT MAY BE BETTER THAN AN UNAFFORDABLE AGREEMENT – It is often better to conclude a phone call to HMRC having failed to reach an agreement than to agree to an arrangement which the business can’t afford. If a time to pay agreement is not kept to it is difficult to get HMRC to reestablish it and HMRC will be more reluctant to make agreements in the future. If circumstances change it is advisable to contact HMRC, before missing any payments, to renegotiate the arrangement. If a formal time to pay arrangement cannot be reached it is usually advisable for the taxpayer to pay what they can when they can as this shows willingness to pay and may delay further enforcement action by HMRC (this approach may not be appropriate if insolvency is likely and further advice should be sought in this situation).
FUTURE TAX LIABILITIES – A standard term of HMRC time to pay agreements is that future tax liabilities are paid in full as they fall due. Where this is not possible it is necessary to contact HMRC again to renegotiate the arrangement to include the new debt. HMRC is often reluctant to agreed repeated requests for time to pay but may be more amenable in the current situation.
WHICH DEBTS TO PRIORITISE – HMRC is usually more willing to consider agreeing time to pay for profits based taxes such as income tax and corporation tax than for taxes such as VAT and employees’ PAYE and national insurance contributions, which businesses are effectively collecting on behalf of the exchequer. The usual advice is to prioritise paying VAT and employer liabilities as HMRC pursues these more actively. We don’t yet know whether this will change in the current situation; there has been some speculation that the Government may be minded to focus assistance on VAT and employer liabilities but no announcement has been made.
LATE PAYMENT PENALTIES – An advantage of a formal time to pay arrangement is that late payment penalties will not be charged if the arrangement is in place at the trigger date for the penalties. We don’t yet know whether HMRC will be more willing to waive late payment penalties in the current situation but the helpline page suggests that the cancellation of penalties will at least be explored.
INTEREST – In normal circumstances HMRC does not waive interest unless the delay in making payment is somehow directly attributable to HMRC. We don’t yet know whether HMRC will be more willing to waive interest in the current situation but the helpline page suggests that the cancelling of interest will at least be explored.
ALTERNATIVE WAYS TO CONTACT HMRC – As well as the COVID-19 helpline HMRC has regular payment helplines. Large businesses with a customer compliance manager should contact that individual. If the debt is a result of a compliance check any anticipated difficulty with making payment should be discussed with the compliance officer, ideally before reaching final settlement.
We are doing everything we can to help our business community. If you would like to discuss how the changes or the coronavirus pandemic may affect you or your business, please do not hesitate to contact us on 020 8952 7717 or use our online enquiry form.
How to Invest Business Profits
With many entrepreneurs accumulating cash in business accounts, the question of “how to invest business profits?” is a favored topic when planning.
Entrepreneurs work hard for their businesses and this short article explores how business funds can work hard- or most effectively, for entrepreneurs.
Let’s take the following scenario: your business is profitable and has accumulated cash. During the years of trading, you have typically drawn an annual salary and dividends of £45,000, a point at which you are paying the basic rates of tax. Now with a stockpile of cash in the business, there are two options through which to invest. Should you personally draw additional funds from the company to invest, or alternatively should you invest from within the corporate structure?
Assume in both cases there is a £50,000 cash surplus in the company. Assume also that this happens every year for the next 10 years.
Personal investment through your ISA
To take the money out of the company, you would pay dividend tax of 32.5% upfront. You (and perhaps your partner) could then invest your money tax-free, say in an ISA wrapper, in which your combined ISA allowances are currently £40,000.
Investment through your Company
Investing the money within the company would mean no upfront dividend tax of 32.5%. You would instead pay corporation tax on the investment income and gains annually, with the caveat that dividends received from stocks and shares are mostly exempt from corporation tax. This is a considerable advantage.
Let’s see how the two strategies fare:
As you can see, investing the money in a limited company yields approximately £180,000 more over a ten-year time horizon. The cost of paying the dividend tax upfront outweighs the benefit of tax-free personal investments. Why should you lose out?
Compounding evidence
You will notice immediately from the graph above that investing your company’s profits in the corporate vehicle, without paying dividend tax, allows the investment to accumulate, or compound, at a faster rate, even after paying corporation tax on investment income and gains.
Sure, if you do not draw the surplus funds from your company you may need to take a 32.5% dividend tax rate hit at a later date, but in the interim you will have generated greater income through compounding.
Caveats
Here we assume constant tax rates at the points of execution, income and realisation. It would be unwise to speculate on domestic policy, but current political trends and economic philosophy may see a conservative government try to enforce its stronghold on previously labour heartlands. Corporation and dividend tax rates could well rise before they fall.
You may find that transaction costs are slightly higher for corporate accounts, chipping away at annual returns. You will need to shop around harder for a broker. Equally personal brokerage accounts tend to be more insurable than corporate accounts.
Investing through a Limited Company
If the preference for investing through a Limited Company has been established, so should the mechanism through which to do so. Yes, you could simply open an investment account for the existing trading company, however there are several reasons why a designated investment company is superior:
- If the trading company runs into legal issues, the investment company will be protected.
- The trading company can be sold off as a standalone vehicle without the need for complex restructuring.
- An investment company will have minimal expenses and overheads, meaning it will be easier to administer for tax purposes (no VAT or payroll requirements).
- A trading company shouldn’t start investing in activities outside its core functions as it could end up becoming reclassified. This may carry tax implications, especially if Entrepreneurs’ Relief is sought.
Whilst the trading company is often the vehicle in which profits have been generated and accumulated, there are tax neutral ways of shifting funds to an investment company, such as lending the cash surplus. There is no obligation to pay back the loan and one can be the sole director of both companies.
A Holding Company
A holding company structure that owns operating companies and receives dividends is favourable. The holding company can own shares in the subsidiary trading companies and can provide centralised corporate control. Additionally, no taxes would be incurred when the trading company is sold.
Special Purpose Vehicle (SPV) for Property
If you want to invest in property it may be a better idea to set up an SPV. This is often a requirement from buy-to-let lenders. If you are looking to acquire a primary residential residence however, personal ownership is often the best way to go.
Don’t let the tax tail wag the investment dog
Your investment goals will seek a level of risk and return that you are comfortable with, regardless of the structure through which you pursue them. The tax wrapper is the “cherry on the top”, though worth a certain percentage of your annual returns. Contact Mouktaris & Co Chartered Accountants for an accountant who understands your investment strategy and can help you plan accordingly.
Non-resident Taxation of Income from UK Property
Finance Act 2019 has introduced two changes to the taxation of non-resident income from UK property:
- From 6 April 2019, disposals of direct or indirect interests in UK land are brought into the Territorial scope of charge; and
- From 6 April 2020, income from a UK property business is moved out of the charge to income tax and brought into the charge to corporation tax.
Background: the position until 5 April 2020
Non-UK resident companies have been subject to income tax in respect of property income arising in the UK. Tax has been chargeable at the basic rate of 20%. These companies are required to complete a Non-resident Company Income Tax Return (SA700).
Finance Act 2019
Coming into effect from 6 April 2020, income from a non-resident UK property business will now be subject to corporation tax rather than income tax. The corporation tax rate is currently charged at 19%: 1% point lower than the equivalent income tax rate. The details of profits to be charged with corporation tax will be included on a company tax return form CT600, as opposed to the SA700.
From an administrative point of view, the annual company tax return will include details of both UK property business income and any property disposals for the accounting period as a whole, on which corporation tax will be due. The filing deadline is 12 months after the end of the accounting period, though in practice, this will be filed 9 months after the end of the accounting period: the point at which any corporation tax is due.
Property losses and allowable deductions
Profits and losses will accordingly be drawn up under corporation tax principles according to the rules of CTA 2009 Part 4.
Loan relationships or derivative contracts that the non-resident company is party to for the purposes of its UK property business are also brought into the charge to corporation tax.
For companies that have net deductible interest and financing costs of over £2 million per annum, there will be a limit to the amount that the company can deduct: the Corporate Interest Restriction.
Transitional rules
UK property business income tax losses carried forward at the point of transition, 6 April 2020, will be grandfathered and therefore deductible under corporation tax rules against future income of the property business.
Capital allowance balances will transfer between the two regimes in such a way as to produce no balancing allowances or charges.
Notably, if a company’s only source of UK income after 6 April 2020 is expected to be income from the UK property business, no Income Tax payments on account for 2020/2021 and future tax years will be required. Similarly, if a credit balance remains in the company’s Income Tax account after all Income Tax liabilities for 2019/2020 and earlier years have been settled, the credit balance will be repaid to the company.
Annual Tax on Enveloped Dwellings (ATED)
ATED on residential properties owned through a corporate structure with a value of more than £500,000 continues to be unchanged following the Finance Act 2019. As ever, ATED can be relieved in full for residential property that is let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner. Other reliefs can be claimed as per sections 30 to 41 of the ATED technical guidance.
Capital Gains Tax (CGT) on UK property
Non-residents, both individuals and companies, are taxed on almost all gains made on disposals of UK residential properties. Since 6 April 2019, non-UK residents who make an indirect disposal of an interest in UK land will also be brought into the Territorial scope of charge, with the new s1A of TCGA 1992 Part 1. Indirect disposals can for example be disposals of shares in a non-UK entity that derives at least 75% of its value from UK land, provided that the person making the disposal has an investment of at least 25% in that company. The scope of taxation for non-residents has been extended from targeting UK residential property specifically, to now including commercial property and disposals of shares in so-called ‘property rich’ entities. Disposals will be reported in the annual company tax return.
Mouktaris & Co have experience in helping clients navigate the regulatory, accounting and tax matters of property businesses. Our team can review your corporate structure and advise on whether it may be beneficial to de-envelope or restructure in other ways, to take heed of an almost even UK vs non-UK playing field. This will include reviewing potential capital gains tax, stamp duty and inheritance tax liabilities as well as commercial considerations of raising finance and banking relationships in the UK and offshore.
Contact Mouktaris & Co Chartered Accountants to find out how we can help your property rental business.
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