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On Top of Tax - preparing for the upturn: debt restructuring, anti-avoidance attitude of the courts and the 50 per cent tax rate
 

On Top of Tax - preparing for the upturn: debt restructuring, anti-avoidance attitude of the courts and the 50 per cent tax rate

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    On Top of Tax - preparing for the upturn: debt restructuring, anti-avoidance attitude of the courts and the 50 per cent tax rate On Top of Tax - preparing for the upturn: debt restructuring, anti-avoidance attitude of the courts and the 50 per cent tax rate Presentation Transcript

    • ON TOP OF TAX Preparing for the upturn: debt restructuring, anti-avoidance attitude of the courts and the 50 per cent tax rate 2 March 2010 Copyright © March 10 BDO LLP. All rights reserved.
    • Agenda 8.55am Chairman’s welcome by Paul Eagland 9.05am Company taxation and the courts: the Ramsay principle post Barclays Mercantile by Rex Bretten, QC 9.40am Restructuring your debt and escaping unexpected tax charges – the opportunities and pitfalls by Angela Foyle 10.15am 50 per cent tax rate and planning techniques for companies to tackle the tax increase by Amanda Flint 10.40am Q&A/Coffee and informal chat
    • DEBT RESTRUCTURING Angela Foyle Tax Partner Copyright © March 10 BDO LLP. All rights reserved.
    • DEBT RESTRUCTURING Overview • Background • Why restructure? • Issues to consider • Further help
    • DEBT RESTRUCTURING Background Shareholder Bank debt Loan £2m £10m UK Plc Intercompany I/co Loan Loan Account £1m £1m £5m €5m Overseas UKCo 1 UKCo 2 Co UKCo 3 £500k supplier loan • UK Plc has borrowed £10m from the banks. In addition, it has borrowed £2m from a shareholder. There are intercompany balances with UKCo 1 (£1m asset) and UKCo 2 (£0.5m liability) • It has loaned €5m to its overseas subsidiary at a 2 per cent interest rate • It has loaned £6m to UKCo 2) • Interest of £100k has rolled up on the shareholder loans and £500k rolled up on the bank loans. UK Plc has suffered adverse trading and needs to restructure
    • DEBT RESTRUCTURING Building blocks • Sources of debt - External - Connected party • Types of debt - Interest bearing - Non-interest bearing - Convertible
    • DEBT RESTRUCTURING Outline proposals • The shareholder loan is to be formalised in a loan document and the interest rolled up is to be settled by increasing the amount of this loan. Half of this loan is to be exchanged for shares • The intercompany account with UKCo 1 is to be waived • UKCo 2 is currently trading profitably after a period of losses and agrees to set off its intercompany balance against the loan from its parent (which has been interest-free) • The supplier agrees to sell its loan in UKCo 2 to UK Plc for £250k • UK Plc issues new shares equivalent to 51 per cent of its enlarged share capital to a new investor for £2.5m. The investor also subscribes for £7.5m of convertible debt. The bank is repaid, but waives a proportion of the accrued interest
    • DEBT RESTRUCTURING Tax issues • Debt waiver - External - Connected party • Funding bond legislation • Debt arising from trading transactions rather than financing • Connected party rules - Interest - Sales of impaired debt - Other anti-avoidance - Transfer pricing • Forex • Anything else?
    • DEBT RESTRUCTURING Tax implications – shareholder loan • Shareholder loan - Formalisation should not cause any tax problems - But consider interest rate - Connected party loan: thin capitalisation? • Rolled up interest - Late paid interest rules? - When “capitalised” as part of new debt – is this a “bond, stock, shares, securities or certificate of indebtedness”? - Funding bond rules • Debt/equity swap - Connected party - Ordinary shares
    • DEBT RESTRUCTURING Bank debt • Repayment of bank debt - No tax issues • Waiver of bank debt - Will give potential tax charge in UK Plc
    • DEBT RESTRUCTURING Intercompany Account • The waiver of an intercompany account used to cause problems • New loan relationship treatment has been extended to waiver/release of items which were deductible for trading purposes • Waiver between connected parties is not taxable
    • DEBT RESTRUCTURING Supplier Loan • Sale by supplier will create a loss in the supplier – tax deductible • Sale is to UK Plc so no waiver • But …..
    • DEBT RESTRUCTURING Supplier Loan • Anti avoidance – s361 CTA 2009 - If a debt is purchased by a group member at an “undervalue” taxable on deemed “profit” - Used to have a useful exclusion - FB 2010 changes – exclusion only if - Change in ownership in 12 months prior to debt purchase - Debt purchase intrinsic to change in ownership - Debtor in severe financial difficulty prior to repurchase; but - Future cancellation of debt gives rise to taxable income
    • DEBT RESTRUCTURING Intercompany offset • Offset of intercompany against UK Plc loan - No specific tax issues - Interest? - Thin capitalisation/transfer pricing?
    • DEBT RESTRUCTURING Overseas issues • Loan to overseas company - Forex exposure - Hedging? - Transfer pricing - Thin capitalisation - Quasi-equity?
    • DEBT RESTRUCTURING Equity issue • Share issue - As this is an issue of new shares there should be no disposal - Looks like there could be a change of control – any implications? • Convertible debt - Accounting treatment – bifurcated or not? - Interest - Any additional finance cost? - Distribution rules? - Withholding tax - Quoted Eurobond exception - SDRT?
    • DEBT RESTRUCTURING Group reorganisations • Can be transferred at book value • Degrouping provisions – one way only
    • DEBT RESTRUCTURING Conclusions • Debt restructuring may be crucial to a business • Tax rules are complex • Early advice
    • BEATING THE 50 PER CENT RATE – THE HUMAN CAPITAL ANGLE Amanda Flint Human Capital Partner
    • SETTING THE CONTEXT How will the 50 per cent tax rate affect your people? 1. Salary } 2. Bonus 3. Share Incentives 4. Pensions
    • 1. SALARY – SOME PARTICULAR ISSUES Salary levels over £150,000 • Subject to 51 per cent tax rate • Don’t forget the uncapped National Insurance Contributions Salary levels from £100,000 - £113,000 • Not subject to 51 per cent tax rate but if income over £100k, for every £1, lose £2 personal allowance – 60 per cent tax rate • Salary sacrifice does work!
    • 1. SALARY – ADVANCE PAYMENT Pay salary before 6 April 2010 Idea • Advance a pay rise – pay in a lump sum before 6 April 2010 • Pay salary in advance How it works • Unconditional entitlement essential! Issues • Employment contract – will need to be changed • What if the recipient ceases employment? • What if the Company needs cash?
    • 1. SALARY – SALARY SACRIFICE Salary sacrifice arrangements Idea • Reduce tax payable by sacrificing pay for certain tax and/or NIC efficient benefits How it works 1. Employees sacrifice a portion of their income in exchange for lower pay and benefits/allowances 2. Certain benefits can be provided tax and/or NIC free Company even to the highest earners 3. For those earning between £100,000 and £113,000 could save >60 per cent tax Benefits Salary 4. Reduces taxable income and therefore tax rates 5. Employees get degree of choice over the package 6. Savings can be shared between employer and employee Issues • HMRC approval/agreement for certain benefits. Employees • Implementation. • Does not work in reducing the £150k limit for pension contribution higher rate relief restriction purposes
    • 1. SALARY - EMIGRATION Emigration Idea – Emigration - The ultimate 50 per cent planning How it works Need - become not resident and not ordinarily resident in the UK. HMRC view leaving the UK for a settled purpose as being for at least three tax years/one year if you leave the UK for a complete tax year to work on a full time contract abroad • Additional benefits arise for Non UK domiciliaries. After four full tax years of non UK residence the IHT (17 out of 20 year deemed domicile) clock is reset Overseas Issues • Is it practical? • Now harder to argue that a long term UK resident has effectively left the UK for tax purposes - move needs to be permanent and dramatically reduce ties with the UK • If return to the UK within five tax years - subject to tax on capital gains arising on assets held prior to your departure and disposed of whilst away
    • 1. SALARY – EXPATRIATES – IS THE UK THE BEST PLACE? Mobile employees could work in lower tax jurisdiction Idea • Employees relocate to a lower tax OR jurisdiction/send them home! How it works Company 1. Employee moves overseas to perform Offshore duties subsidiary 2. Can transfer or assign employment to or parent overseas branch, to overseas subsidiary or parent Overseas Issues branch • Commercial needs – where are they? • Need to identify appropriate territory – home territory may not be better • Allocation of time spent in UK and in new location • Employment contracts – how flexible are they?
    • 1. SALARY – EXPATRIATES – 50 PER CENT = 100 PER CENT FOR TAX EQUALISED Review remuneration packages for individuals assigned to the UK Idea • Review structure of remuneration for employees assigned to UK How it works Coming to 1. Overseas employee moves to the UK to perform duties Assignee UK 2. Can structure assignment length, employer and payment location to reduce tax and NIC Issues • Need to review tax and NIC impact in UK and home country • Employment law issues in UK and overseas territory • Potential payroll/withholding implications.
    • 2. BONUSES – ADVANCE PAYMENT Pay bonus before 6 April 2010 Idea • Advance a bonus – before 6 April 2010 How it works • Unconditional entitlement essential! Issues • Pay before year end? • Pay for performance before your people have performed • What if the recipient ceases employment? • What if the Company needs cash?
    • 2. BONUSES – DEFERRAL AND LOAN Bonus deferral with linked loans Idea Defer bonuses until tax rates return to a more reasonable level How it works Subsidiary • As bonuses are not paid they will not be subject to the new rate • Loan funds to employees to make up the Loans Waive bonus temporary shortfall • Declare bonuses to clear loans once rates are reduced Issues • BIK charge on the loans. • Longer term approach – what happens to Employees leavers? • Potential s419 charge for close companies • Material – impact on accounts? • Waiver needs to be effective
    • 2. BONUSES – CLAW BACK Clawing back bonuses Idea 1. Enables the company to claw back Bonus paid bonuses in the event of executive poor into a trust performance. and deferred Group Trust How it works 1. Group establishes an employee benefit trust (‘EBT’). 2. An executive’s earned bonus is transferred by Group to the EBT. 3. Subject to further conditions the bonus is Claw back for Payment at paid out at a later date by the EBT. poor a future Issues performance point 1. Deferral only – wait and see! 2. Can manage tax charge
    • 2. BONUSES - LOANS FROM AN EBT Use Employee Benefit trusts to make loans to employees/shareholders Idea • An EBT is established making loans to higher paid employees/shareholders Loans How it works 1. Group funds EBT by way of contribution or loan to provide benefits to employees/shareholders 2. EBT then makes interest-free loans to employees/shareholders 3. Employee/shareholder is only taxed on the Group EBT ‘interest’ benefit Issues • HMRC may challenge • Close company issues – funding trust; Inheritance Tax issues • Loan – when will it be repaid? • Residence change possible?
    • 3. SHARE INCENTIVES – ACCELERATE OPTION VESTING Allow early vesting of share options Normal vesting Idea • If unapproved share options (or EMI options which were granted at a discount to MV on grant) are exercised post 5 April 2010, income tax plus NIC of 50 per cent + may be suffered on exercise ? How it works 1. Company and employee agree to amend the terms of the option to provide for early exercise of the options 2. Employee exercises their options pre 6 April 2010 thus accelerating the tax point and accessing the 40 per cent rate. Issues • Have performance conditions been met? • Attitude of shareholders? • Setting a precedent…. • Accounting implications of the change to the option require careful scrutiny
    • 3. SHARE INCENTIVES – APPROVED PLANS HMRC approved share option schemes Idea • Share awards – boost pay without cash Group • Employees should be subject to 18 per cent (ie CGT rates) rather than 50 per cent+ (ie PAYE and NIC rates) Share • The company may be entitled to a corporation options/share tax deduction even if no income tax purchase/share How it works awards 1. Group gets approval for plans & makes awards 2. The employee sells the shares and uplift in value from the date of award of the options should be subject to CGT Issues • Can the company qualify for approved plans? • Low level awards • Is there a market for shares? • Administration
    • 3. SHARE INCENTIVES – PARTLY PAID SHARES Partly-paid shares Idea • Buy now, pay later! • Growth in value of the shares should be subject to CGT at 18 per cent and not PAYE and NIC at 50 per cent + • Usually an annual tax charge based on the value of the shares at acquisition – currently low Capital Gains Tax on growth How it works 1. Issue/transfer shares – at current market value 2. Defer payment 3. Pay later – time controlled by company Issues • Risk – biggest issue - must pay up shares Income tax • Fund with bonuses? Income tax exposure • Share price drives exposure exposure • Must NOT transfer before payment • Works well with low value shares • Works well where want ‘skin in the game’ but executive is ‘cash poor’
    • 3. SHARE INCENTIVES – GROWTH SHARES Growth shares Idea • Create a new class of share and issue to employees giving Group them value if the business grows in value over and above a pre-determined ‘hurdle rate’ • Tax on the vesting of the awards ie the value which the employees receive • Growth should be subject to CGT at 18 per cent and not PAYE/NIC at 50 per cent +. How it works Growth in 1. A new class of share is created and subscribed for by key value = employees share value 2. The employees acquire the shares at day one to 3. Growth in value linked to future performance of company employees 4. The growth in value should be subject only to CGT Issues • Subject to performance – forfeit if don’t achieve • Not suitable for listed companies • No corporate tax relief
    • 3. SHARE INCENTIVES – GROWTH SHARES IN A SUBSIDIARY Freezer scheme in a subsidiary Idea • Create a new class of share in a subsidiary carrying rights Group to the future value only and award the ‘B’ shares to key individuals • The individuals should be subject to CGT at 18 per cent per cent rather than PAYE and NIC at 50 per cent Subsidiary How it works 1. Subsidiary creates a new class of ‘B’ share New class of 2. These shares carry only the right to the future value of the share subsidiary 3. Subject to achieving performance conditions, the ‘B’ shareholders exchange their shares for shares in the parent. On sale of the shares- should be subject only to CGT at 18 per cent 4. Can potentially use with HMRC approved plans Issues • Is dilution in subsidiary acceptable to shareholders? • Accommodating new joiners – gets more difficult as share value grows • Subject to performance
    • 3. SHARE INCENTIVES – SPLIT INTEREST SHARES Idea ‘Split Interest’ share incentive scheme • A shared ownership of shares – between employees and trust – growth in value in hands of employee • Tax on the sale of shares should be subject to CGT Share at 18 per cent and not PAYE and NIC at 50 per cent + How it works Current value Future value 1. Company funds ESOT & it subscribes/purchases for shares 2. EBT splits the beneficial interest of shares - transfers the future interest to employee and retains the historic interest 3. Subject to achieving performance conditions (the ESOT employee is subject only to CGT on growth in value of his interest Issues • Unapproved options – can deliver whole value of the shares (analogous to an LTIP) • Not considered aggressive BDO has received HMRC’s ‘sign off’ • Up front tax charge • Can fit with current share plan
    • 4. PENSIONS – POSITION UNTIL APRIL 2011 Pension Contribution Planning Idea - Maximising higher rate tax relief on contributions in 2009/2010 and 2010/11 How it works • If your income is generally below £130,0000 - can pay the maximum pension contributions • If your income exceeds £130,000 and you are subject to the anti-forestalling rules: £ - Can continue regular (monthly or quarterly) pension contributions - If historically made irregular contributions can contribute up to £30,000 in both 2008/9 and Pension 2009/2010 - If current contributions are below the £20,000 can increase your contributions to this level Issues • Government limits on drawdown • Lack of flexibility
    • 4. PENSIONS – POST APRIL 2011- EFURBS Use EFURBS for pension provision Idea • An Employer Funded Unapproved Retirement More flexible Benefits Trust (“EFURBS”) is established by Pension provision Group • It funds retirement benefits How it works Group EFURBS 1. Group funds EFURBS by way of contribution to provide retirement benefits to employees 2. EFURBS establishes funds for relevant individuals 3. More flexible investment and benefits Issues • Tax certainty on funding • IHT issues for close companies • Delay in corporation tax deduction • Portable retirement provision • Alternative to ‘extra cash’
    • WHAT HAPPENS NEXT? The next 12 months…. 1. Budget – a damp squib – but fat Finance Bill 2. Second Budget – the real rules 3. But – how long will it take to ‘unscramble the current rules’? 4. Will capital gains tax rates go up? If so, by how much? 5. Anti-avoidance – not a vote-catcher! Likely to continue and increase in scope? Corporate strategy – flexible and cost effective
    • Thank you Questions for the panel?