Apr 072013
 

A close company is defined in s.439 of the Corporation Tax Act 2010 (CTA/10) as one where one of the following applies:

  • Controlled by 5 or less participators.
  • Controlled by director participators where there are more than 5 participators
  • On winding up more than 50% of the assets would be distributed a) to 5 or fewer than 5 participators or b) to participators who are directors.

Participator is defined under s 454 of CTA/10 to mean a person having a share or interest in the capital or income of the company and includes the following:

  1. A person who possesses, or is entitled to acquire, share capital or voting rights in the company,
  2. A loan creditor of the company,
  3. A person who possesses a right to receive or participate in distributions of the company or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption,
  4. A person who is entitled to acquire such a right as is mentioned in paragraph (c), and
  5. A person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for the person’s benefit.

The following are NOT ‘close’ companies:

  • A company not resident in the UK (s.442)
  • A society registered under the Industrial and Provident Societies Acts (s.442).
  • A building society (s.442).
  • A company controlled by or on behalf of the Crown (s.443)
  • Companies controlled by companies that are open (not close) companies (s.444).
  • Companies whose shares are listed on a recognized stock exchange where the ‘public’ holds 35% or more of the voting power (s.446).

Tax consequences for close companies;

  • Expenses incurred in providing benefits (that ‘fit’ the definition of ‘distributions’) to participators or their associates will not be allowed as a deduction in computing the taxable income of the company (s.1305 CTA/09).
  • Certain loans to directors will attract a charge (s.455 of CTA/10).
  • Close investment-holding companies (s.34 CTA/10) will not be eligible for small profits rate; this will become irrelevant from 2015 when CT rates will be 20% across all the forms of companies.
  • Where a close company is used to transfer value, such transfers may be taxed under s.94 of the Inheritance Tax Act 1984
  • When a person having control of a company exercises his control to transfer value out of the shares in the company he makes a disposal under s 29(2) of the Transfer of Chargeable Gains Act 1992.

  • And finally one sweetener: where a person, subject to meeting certain eligibility conditions, borrows money to buy interest in a close company will be eligible to claim interest relief under s.392 of the Income Tax Act 2007.

Tax Partners

 

 

Mar 262013
 

Whilst there may be a variety of reasons why a company would reduce its capital (for e.g. to increase the future earnings per share, to reward the shareholders in cash etc), the biggest attraction of all remains that a capital reduction could create a reserve that can be distributed as a realised profit. This article deals with the law and procedure for reducing of capital by private companies.

Company law considerations

Capital reduction could be achieved by a) extinguishing or reducing the liability on any of its shares not paid up or b) by cancelling any paid up capital or repaying back any unwanted paid-up capital. Chapter 10 of part 17 of the Companies Act 2006 deals with reduction of capital. S. 641(2) prohibits a company from reducing its capital if it would result in there being no shares other than redeemable shares. That said the company law procedure is fairly straight forward, although it involves some paper work.

a) Pass a special resolution supported by a solvency statement by the directors: If it is a written resolution a copy of the solvency statement should be sent to each eligible member or where a general meeting is held a copy of the solvency statement should be available for inspection.

b) Solvency statement (s.643): This contains an opinion signed by all the directors that:

  1. there is no ground on which the company could be found to be unable to pay its debts as at the date of the statement, and
  2. if a wind up is intended to take place in the next 12 months, then the company will be able to pay its debts in full within 12 months of commencement of the winding up or if there is no wind up coming up in the next 12 months, then the company will be able to pay its debts as they fall due in the year immediately following the date of the statement.

The solvency statement should be prepared within 15 days before the special resolution and be signed by all the directors with their names and the date stated on it. In preparing the statement the directors should consider the financial position of the company, particularly its ability to pay all the debts, within the next 12 months. For this reason it is advisable that suitable financial projections are made using all available information. In forming their opinions, the directors must take in to account the company’s current, contingent and prospective liabilities. If the directors make a solvency statement without having reasonable grounds for the opinions in it, every director in default commits an offence which on conviction may even lead to imprisonment.

c) Filing documents with the companies house:

The company should file the following with the Registrar within 15 days from the date of the special resolution:

  1. The special resolution
  2. The solvency statement,
  3. Statement of capital (form SH19)
  4. A compliance statement by the directors confirming that the solvency statement was made not more than 15 days before date of the special resolution and that a copy of which was provided to all eligible members.

The special resolution takes effect when these documents are registered by the Registrar (s. 644(4) which should be done within 15 days.

Treatment of reserves

S. 3(2) of the Companies (Reduction of Share Capital) Order 2008 provides that where a private company limited by shares reduces its share capital and the reduction is supported by a solvency statement but has not been the subject of an application to the court for an order confirming it then the reserve arising from the reduction is to be treated as distributable as a realised profit.

Tax considerations

According to section 383 of the ITTOIA 2005 distributions received by individuals and non-corporate shareholders are charged to income tax. S. 989 of ITA 2007 defines distribution to mean the same as that provided under section 1000 of the CTA 2010 which includes capital dividend also within the definition of distribution. A payment which is a repayment of share capital (including share premium – s 1025 CTA 2010) following a capital reduction exercise is not distribution and should not be charged to income tax and should be charged under s 122 TCGA1992, as a capital distribution. If, however, share capital (including premium) is reduced and a reserve is created as a realised profit before distribution, such distributions will be taxed as income. Therefore, to ensure a capital gains tax treatment it must be ensured that the payment is a clear return of capital. Oddly, therefore, the accounting treatment will assume considerable significance when it comes to taxation of repayments upon capital reduction. The key to a capital gain treatment is that the capital reduction should be followed by cash leaving the company and the capital getting reduced without touching the reserves!

Tax Partners

Mar 182013
 

Well, let us be frank, dividend waiver has nothing to do with charity! The person waiving the dividend will usually have a financial or tax reason in mind. That said , normally when companies declare dividends, these are paid as a certain sum on ‘per share’ basis to all shareholders entitled to a dividend on a particular date. It could be £50 per share, £100 per share or such similar sums. And tax indeed is one of the most common reasons why a shareholder (often in higher tax bands) would want to have his/her dividend entitlements waived off. Hence the taxman’s interest! So, if not carefully done, dividend waivers have the potential to be classed as an arrangement or a settlement by the taxman. This article briefly examines how dividend waivers could be caught by the settlement legislation in certain circumstances.

Dividend waiver

Let us consider an example of a ‘close company’ having an ordinary share capital £100 divided into 100 shares owned by two shareholders A and B 50 each. The company has a distributable surplus of £10,000 and if it were to declare the whole surplus as dividend both A and B would get £5,000 each. If A were to waive his entitlement, B would get £ 5,000 and the A’s dividend would be retained within the business.

But let us consider a scenario where A waives his entitlement and the company declares £200 per share. That would make B richer than what his original entitlement would have entitled him to (i.e. £ 5,000). This is one situation where settlement legislation kicks in, arguing that the waiver was arrangement to provide an undue advantage to A.

Settlement legislation

Settlement legislation is contained in Chapter 5 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA). This legislation would apply if B in the above example was a spouse or a civil partner. As a result, the settlor will be deemed to have retained an interest in the property (s 624.). Where B is a minor child or a step child (who is neither married nor in a civil partnership of the settlor) the income will be deemed to be that of A (s 629). So normally unless B is the spouse, civil partner or a minor child or a minor step child of A, the settlement legislation shouldn’t apply. But there is hardly anything normal about tax rules. The fact that S 625(1) of the Act refers to situations where ‘that property or any related property is, or will or may become, payable to or applicable for the benefit of the settlor or his spouse or civil partner in any circumstances whatsoever’ make it clear that even where B is not a spouse or a minor child this legislation can apply. One example would where B is a brother and A is likely to benefit from the arrangement.

Impact of settlement legislation

Should settlement legislation apply the income treated as settled will be taxed as the income of the settlor, i.e. in the above example that of A.

Buck v HMRC (Stafford Robert Buck v Revenue & Customs [2008] UKSPC SPC00716

This was a case involving a private company owned by the husband and wife. The husband Mr Buck owned 9999 shares whereas the remaining 1 share was held by his wife. Mr Buck waived his entitlement to dividend so that Mrs Buck could be given a larger dividend than what her 1 share could ordinarily have entitled her to. HMRC successfully argued before the Special Commissioners that a) there was no commercial reason for the waiver as Mr Buck’s entitlement was effectively distributed on to Mrs Buck, and that b) the waiver would not have taken place had the other shareholder not been his spouse. As a result it was treated as a gift of income and therefore, the settlement legislation was applied.

HMRC view

HMRC manual TSEM4225 lists circumstances when the settlement legislation may apply:

• The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.

• Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.

• There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.

• The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.

• The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder

So can a waiver then work?

There are some basic rules that should be followed whilst planning to waive the dividend. These are summarised below:

1. The waiver should be applied before the dividend becomes due. Interim dividends are authorised by the directors so the waiver should be applied before the board meeting authorising payment of the interim dividend is held. If it is about final dividend the waiver should be applied for before the board meeting recommending a dividend is held. In order to make sure that the waiver is outside the scope of the provisions of Inheritance Tax Act 1984 (particularly s.3 – transfer of value) the waiver deed should be executed within 12 months before any right to the dividend accrues (s.15).

2. The waiver should not result in an undue benefit to the other shareholders. In other words the waived dividend should be retained within the business (See this case).

3. There must be a commercial reason behind the waiver – for e.g. leaving funds with the company for expansion etc.

4. Dividend waiver should be used either for a particular period or for a particular occasion. If it is going to be a regular feature then alternative strategies must be adopted – see below.

5. The person waiving the dividend should not gain anything in return either directly or indirectly.

Waiver documentation

Appropriate waiver documentation is essential. It should be a formal document in writing executed as a deed; signed, dated and witnessed. It should be lodged with the company well before the dividend becomes due and as a best practice placed at the meeting of the Board at which either the dividend is approved or recommended.

Setting up alphabet shares

If waiving the dividend is going to be a regular feature then a permanent alternative to distribute the surplus disproportionately to the same class of shareholders is to issue alphabet shares. However, it is important that alphabet shares are not caught by the ‘wholly and substantially’ a right to an income clause of the legislation. This provision can be avoided where all the alphabet shares carry equal voting rights and rights to capital upon winding up etc as such rights greatly outweigh the right to income (Jones v Garnett). To put it differently, don’t right away create alphabet shares just before a dividend is due or as soon as the company has posted huge P & L reserves!

Tax Partners

Mar 092013
 

Liquidation, which could either be a creditors’ liquidation, members’ voluntary liquidation or on the orders of a court, is one of the ways in which a company could end its life lawfully. An alternative to liquidation is an arrangement, whether formal or informal, between the company and the creditors where both parties come to an agreement to settle the dues. The company could also go in to administration before being liquidated. But the most cost-effective of all, to legally put an end to the company’s activities, is by striking it off the public register. Strictly speaking company strike off is not liquidation but is akin to clinical death as opposed to clinical plus brain death.

Nearly over 1000 companies are dissolved on a daily basis of which 95% of them end their life through the voluntary strike-off procedure. This article discusses the law and procedure for voluntarily striking a company off the public register maintained at the Companies’ House, which is permitted by Part 31 of the Companies Act 2006.

Why would you apply for voluntary strike off?

The directors have a duty (s.172) to promote the success of the company and must exercise reasonable care, skill and diligence (s.174). The company on its part is required to produce annual accounts on a going concern basis unless the directors determine that there are significant doubts about the entity’s ability to continue as a going concern. So the directors have a lot of responsibilities when it comes to company management. Logically, when the company can’t trade any more the directors have a duty to take action. Therefore, s1003 gives the directors the power to apply to the companies’ house for strike off where the company has not traded for at least three months.

When you can’t apply for strike off?

S.1004 lists circumstances in which an application for strike off shouldn’t be made. The circumstances are that in the three months preceding the strike off application the company shouldn’t have:

  • Changed its name
  • Traded or otherwise carried on business (paying off any liabilities incurred whilst trading or carrying on the business is allowed though)
  • Made a disposal for value of property or rights that, immediately before ceasing to trade or otherwise carry on business, it held for the purpose of disposal for gain in the normal course of trading or otherwise carrying on business

Carrying on any activity leading to making the striking off application, for concluding the affairs of the company or complying with any statutory requirement is not considered an activity in contravention of this provision.

s.1005 then lists other circumstances when the application can’t be made. These are when:

  1. An application for compromise or arrangement has been made under the Companies Act
  2. A voluntary arrangement has been proposed under the Insolvency Act
  3. The company is in administration
  4. Winding up proceedings are on against the company
  5. A receiver or a manager has been appointed for the company’s property.

When it is not advisable to strike it off?

Assets: The assets of the company at the time of a striking off will vest automatically in the Crown as bona vacantia (s.1012). So if the company has significant assets it is not advisable to strike it off as they can be recovered only by restoring the company to the register.

Liabilities: If the company has liabilities the creditors can object to the strike off within three months of filing for strike off. Also, the company could be restored to the register upon an application to the court within 6 years after it has been struck off. Upon restoration, the liabilities of the company, its members and officers are resurrected.

The procedure for strike off

An application for strike off should be made by the directors; in fact a by a majority of them. So it makes sense to convene a Board meeting to consider the application, as the majority needs to approve it. As the assets and liabilities of the company assume significance upon dissolution it is advisable that a balance sheet of the company is also available at the meeting.

Because any assets upon strike off vests in the Crown it is advisable to have a look at the capital of the company. If the company has a large capital base it may be wise to reduce it and distribute the proceeds to the members before strike off. Click on the link below for a detailed understanding of how capital could be reduced:

Capital reduction

Form DS01

An application for strike off should be submitted in form DS01 (in paper form) to the Companies House with a fee of £10. It should be signed by the sole director or by both the directors where there are two directors. If there are more than two directors then a majority of them should sign the form.

Within seven days of making an application for strike off, a copy of it should be sent to all shareholders, creditors, employees, directors (other than those making the application) and the manager or trustee of any pension fund established for the benefit of employees of the company (s.1006). It is also advisable to serve a copy on the bank even where the bank is not a creditor. A person who fails to provide a copy to the interested parties, with the intention of concealing the making of the application from the person concerned, commits an aggravated offence. Aggravated offence invited fines and imprisonment. It must be noted that a ‘creditor’ for this purpose includes a contingent or prospective creditor (s. 1011). This definition is relevant for companies applying for strike off before the first corporation tax return is due. Even where the corporation tax has not been assessed up until the date of applying for strike off, HMRC could be a contingent or a prospective creditor and a copy of the application for strike off should, therefore, be served on them as well.

The registrar of companies will publish a notice in the Gazette (S.1003(3) inviting objections as to why the company’s name shouldn’t be struck off. Objections should be sent to the registrar in writing providing supporting evidence as to why the company shouldn’t struck off. Reasons could include the directors not informing the interested parties or any fraudulent act on the part of the directors. If no objections are received within three months of publication, a further notice is published confirming that the company’s name has been struck off.

Once a company has been struck off the register, a former director or a former member of the company may apply to the registrar to restore the company to the register within six years after the company has been struck off, using form RT01 (s.1024).

VAT deregistration

Where the company is registered the directors should apply to HMRC for deregistration from VAT within 30 days of filing an application for strike off using form VAT7 (HMRC VAT notice 700/11).

 

Tax Partners

Mar 012013
 

Buying back its own shares is a very common way for a company to reduce capital. It helps situations where shareholders, who want to exit the company, struggle to find outside buyers for their shares. Carefully done, it could also result in some tax advantageous for the exiting shareholders whilst improving shareholder returns for the remaining shareholders. Buyback differs from capital reduction in that capital reduction results in increased reserves where as a buyback involves making payment to the shareholders, final outcome (of reduced capital) being the same for the company though!

Company law considerations

A limited company having a share capital may purchase its own shares (including any redeemable shares) provided there are no restrictions or prohibition in the company’s Articles. The companies Act 2006 (CA2006) lays down various conditions for buy back.

  • The shares being bought back should be fully paid (to protect the interests of creditors).
  • There must be at least one non-redeemable share in issue after the buyback. In other words the buyback should not leave the company with just treasury shares or redeemble shares after the buy back is over.

Authority for share buyback

A special resolution of the shareholders will be required for the buyback which could be obtained through a written resolution. Interested shareholders (i.e. those selling the shares) are not eligible to vote nor be a party to the written resolution.

Financing the buyback

The buyback should be made out of the distributable profits of the company, or out of the proceeds of a fresh issue of shares made for the purpose of financing the purchase. Shares could also be bought out of capital but that would mean having to comply with very complex procedures.

Agreement with the shareholders

Generally the terms of a buyback are agreed in advance with the shareholders before the special resolution is passed. This is because shareholder approval will be subject to unconditional agreement by the shareholders to the terms of buyback. The terms include the price to be paid, number of shares bought back etc. So it makes sense to have the terms agreed before moving a resolution.

After the buyback

  •  The bought back shares must be paid for in full in cash at the time of purchase; it cannot be paid in instalments or at a later date.
  •  Bought back shares are cancelled and the reduction in the share capital is transferred to a capital redemption reserve.
  •  Stamp duty is payable on the transfer @ 0.50% on the consideration where the consideration exceeds £1,000.
  •  There are also various Companies House filing requirements.
  •  Register of members will need to be updated and form SH03 will need to be filed with the companies house within 28 days
  •  The buyback agreement with the shareholders should be available for inspection by shareholders for a period of 10 years from the date of buyback.
  •  The relevant statutory accounts for that year should include appropriate disclosures with regard to the buy back.

Tax considerations

The proceeds of a share buyback are classified as a distribution for an individual shareholder, and a capital distribution (HMRC SP 4/89) for a corporate vendor. However, if some specific conditions are met the distribution could be treated as capital distributions for individuals too. The conditions are discussed below:

Company:

Unquoted company: The company (or if a 51% subsidiary then its holding company) should not be listed on a stock exchange (See HMRC Manual SVM09060 for more on listed companies)

The company should either be a ‘trading company’ or the ‘holding company of a trading group’. ‘Trade’ does not include dealing in shares, securities, land or futures.

The purpose: The buyback should wholly or mainly to benefit a ‘trade’ carried on by the company or any of its 75% subsidiaries. It should not form part of a tax avoidance scheme or arrangement (s1033, CTA2010). Benefiting a ‘trade’ for this purpose has been interpreted to include a disagreement by the vendors over the management of the company (HMRC SP/02) provided the disagreement would have an adverse effect on the running of the trade. If this condition is not met, then alternatively the purpose of buyback should be to meet the payee’s inheritance tax liability on a death which he could not have met otherwise.

Vendor:

The vendor must be UK resident and be ordinarily resident in the tax year in which the buyback takes place

The shares must have been owned by the vendor for at least five years ending with the date of buyback– reduced to three if acquired by will or intestacy. Where the shares were transferred to a spouse or civil partner their ownership counts provided that the transferor is still the spouse or partner living with him/her (s1035 CTA2010).

Post buyback the vendor’s shareholding and interests in profits of the company together with that of his associates must be reduced by at least 25% from the original level held before buyback.

Post buyback the vendor should not be ‘connected’ with the company or any company in the group. Vendor will be ‘connected’ where together with his associates if he holds or is entitled to hold, directly or indirectly, a) more than 30% of the company’s voting power, its issued ordinary share capital, or its issued share capital and loan capital, OR b) rights enabling him to more than 30% of its assets available for distribution to the company’s equity holders OR c) if he has ‘control’ of the company. Control will have the same meaning as provided under s1124 of CTA2010

Advance clearance

A company may apply in writing for clearance from HMRC (s1044, CTA2010) to ensure that the payment made upon buyback is a capital payment. The applications should be addressed to Clearance and Counteraction Team, Anti-Avoidance Group Intelligence, First Floor, 22 Kingsway, London WC2B 6NR. HMRC has to notify its decision within 30 days of receiving the application.

Tax Partners

Small Business Accountants

 Small business accountant, Small business accountants  Comments Off on Small Business Accountants
Feb 262013
 

Small businesses in the UK account for 99% of all businesses. According to the Companies House website 426,500 companies were formed during 2011-12 and some 267200 companies dissolved during the same period. There were just over 3 million companies registered in the UK as of Jan 2013. Over 75% of these are micro businesses with a turnover of less than £ 1 million. Because these businesses do not need to have their accounts audited anyone, literally anyone, can be their accountant. This has opened the floodgates for anyone to practise as accountants as the term ‘accountant’ is not protected in the UK. However, it pays to work with qualified accountants with qualifications such as ACCA, ACA or ACMA to ensure a certain level of quality and standard.

We are qualified accountants and have been dealing with smaller businesses for years. We are able to advise and help small businesses almost on all areas related to tax, accounting and compliance from the start up stage righ up to dissolution.

Incorporation:

  • Advice on business structures like LLPs, sole traders or a limited companies and same day incorporation
  • Advice on the constitution (i.e. Articles of Association) of the company
  • Prepare shareholders agreement for small companies
  • Partnership agreement for LLPs
  • Tax advice on resident and non-resident directors

Accounting 

  • Prepare accounts in accordance with the accounting standards and the company laws
  • Prepare management accounts and reports to suit specific business requirements
  • Help with bookkeeping, advise on an accounting system and cloud accounting

Company laws

  • Advise on inducting and removing directors
  • Advice on changing the capital structure, preparing company secretarial records and filing forms with the companies’ house
  • Be a nominee company secretary
  • Advice and help with buy back of shares and capital reduction
  • Advice and help with further issue of shares, transfers and issues of bonds/debentures
  • Advice on creating or removing charges
  • Advice on strike off and dissoultion

Buying and selling businesses 

  • Advice on asset sale v sale of the company
  • Valuation of businesses
  • Tax advice for the buyer or seller and the company
  • Company law advice on buying or selling the business
  • Drafting sale deeds

VAT (Value Added Tax) 

  • Help with VAT registration and de-registration, for UK established businesses and Non-Established Taxable Persons (NETPs)
  • Advice on concepts like distance sales, acquisitions, exports, place of supply for services
  • Advice on VAT treatment of specific transactions
  • Prepare VAT computations and file VAT returns
  • Advice on Vat implications for cross-border transactions
  • VAT advice on imports and exports
  • Advice on artificial separation of businesses
  • Advice on reverse charge mechanism

Corporation tax

Advice on a variety of corporation tax issues like:

  • Holding company structures
  • Dividend v salary for directors and advice on optimizing extraction
  • Share for share exchange
  • Directors’ loans and inter-company transactions
  • Associate companies and connected companies
  • CFC rules, transfer pricing and thin capitalisation

Corporation tax computation, advice and tax returns 

HMRC

Deal with HMRC on your behalf as your tax advisor whether you’re a company or an individual or any other form of business.

 

Tax Partners

UK VAT registration

 UK VAT Registration, VAT ADVISORS  Comments Off on UK VAT registration
Feb 252013
 

The basic rule that determines whether you need to compulsorily register for VAT in the UK is simple: If you’re a ‘taxable person’ making ‘taxable supplies’ in the UK above the registration threshold you need to register. But that is to over simply what is otherwise considered an extremely complex system of finding out if you need to register for VAT. If you do, then you need to file a certain form, in most cases online and in some cases in paper form, with HMRC. Registration can take anything from one week to six months depending on the nature and level of further information exchanged between you and the HMRC.

‘Taxable person’ can be an individual (sole traders), partnership or a company etc that is in business. But what complicates the most is the definition of ‘taxable supplies’. Clearly exempt supplies (e.g. medicines) are outside the scope of VAT. Or for that matter even supplies of goods are fairly straight forward in that the place of supply could logically be determined to be where the supplier supplies the goods from. But the internet revolution has meant that services could be delivered anywhere online from anywhere. This has lead to the introduction in 2010 of the complicated ‘place of supply rules for services’. So in order to determine whether a supply is taxable one needs to first determine where the place of supply for that service is. If it is considered to be the UK then one needs to register for VAT.

What we have done below is that we have attempted to decode the complicated rules to simplify as to who should register for VAT in the UK. Please do note that this is for information only and under no circumstances constitute advice which should be sought separately considering your specific circumstances.

Businesses established in the UK will need to register for VAT in the UK if the following apply to you:

a) If you make taxable supplies (both goods and services) within the UK on cumulative basis for the last 12 months in excess of £77,000 or if you expect it to go over that limit in the next 30 days.

b) If you make acquisitions of GOODS from other EU countries exceeding £77,000 when counted on a calendar year basis starting Jan 1 or if you expect to acquire more than that value in the next 30 days alone, you must register for VAT.

c) If you’ve acquired a VAT registered business in the UK you need to add your own VAT taxable turnover over the last 12 months to the turnover of the business taken over and if the total exceeds the current registration threshold of £77,000 then you’ll have to register for UK VAT.

d) If you make taxable supplies of SERVICES to customers based outside the EU you need to register if the place of supply is determined to be the UK and the supplies exceed the registration threshold (e.g. if you’re a lawyer advising a client in Australia about a UK property the place of supply is the UK). Supplies of services to a customer based within the EU are zero-rated if the customer is VAT registered in their country of origin. If the supplier is not VAT registered, the place of supply is held to be the UK and the if the registration threshold is breached then you will need to register for VAT.

e) If you are a business established in the UK that receives SERVICES from outside the UK, the place of supply of such services is held to be the UK, and if the value of the services received by you together with the taxable supplies you make exceed the registration threshold you will need to register for VAT. You will account for VAT using the reverse charge mechanism for services received from outside.

Businesses established outside the UK but within the EU

a) If you are a business established within the EU making taxable supplies of GOODS to customers based in the UK and if the taxable supplies of goods to UK customers who are not registered for UK VAT exceed £70,000 you need to register. This is called distance sales. For registration purposes distance sales are counted from on a calendar year basis from 1 January.

b) If you make taxable supplies of SERVICES exceeding the VAT registration threshold to customers not registered for VAT in the UK and where the place of supply of such services is held to be the UK you need to register.

Businesses established outside the EU

a) If you are a business established outside the EU with no place of establishment in the UK and making taxable supplies of GOODS to customers based in the UK then a you’re a Non-Established Taxable Person (NETP). NETPs making taxable supplies of goods of ANY value will need to register for UK VAT.

b) If you make taxable supply of SERVICES of ANY value to customers not registered for VAT in the UK and the place of supply such services is held to be the UK then you need to register.

How we could help?

As a tax practice we deal with all sorts of clients facing all sorts of situations. So we should be able to:

a) Understand your business structure and advise if at all you need to register
b) Advise you if your products or services are VAT chargeable in the UK
c) Advise you on the ‘place of supply’ for your services
d) Advise you when to register and when not to register to optimise on VAT
e) Help you get registered with HMRC
f) Compute your VAT liability on a regular basis and file your VAT returns
g) Advise on VAT accounting
h) Register with HMRC as your tax advisor in the UK

Please contact us for a free initial consultation.

Tax Partners

Feb 172013
 

Basically an anti-avoidance provision, this rule is aimed at preventing avoidance of VAT by the maintenance or creation of any ‘artificial’ separation of business activities carried on by two or more persons. Schedule 1 to Value Added Tax Act 1994 (VATA 1994) deals with disaggregation of businesses as follows:

Para 1A(1): Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

Para 1A(2): In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

Para 2 specifies the impact upon the constituent members of the businesses caught by these rules as follows:

a) The taxable person carrying on the specified business is registrable in such name as the persons named in the direction jointly nominate in writing within 14 days of the direction. Otherwise the taxable person is registrable in such name as may be specified in the direction.

(b) Any supply of goods or services by or to one of the constituent members in the course of the specified business is treated as a supply by or to the taxable person.

(c) Any acquisition of goods from another EU country by one of the constituent members in the course of the specified business is treated as an acquisition by the taxable person.

(d) Each of the constituent members is jointly and severally liable for any VAT due from the taxable person.

(e) Without prejudice to (d) above, any failure by a taxable person to comply with any VAT requirement is treated as a failure by each of the constituent members severally.

(f) Subject to (a)–(e) above, the constituent members are treated as a partnership carrying on the specified business and any question as to the scope of that business at any time is determined accordingly.

That brings us to the question as to what exactly is ‘artificial separation of business’? Well, artificial separation arises where the entities, closely bound to one another by financial, economic and organisational links, disaggregate businesses with a view to avoiding VAT. In order to prove artificial separation generally at least one link needs to be established under each head:

  • Financial Links include providing financial support to one entity by the other, common financial interest in the proceeds of the business or the mere fact that one entity wouldn’t be financially viable without financial support from the other.
  • Economic Links arise where the same economic objective is pursued by the constituent business entities, where the activities of one part benefit the other or where both supply the same circle of customers.
  • Organisational Links could be established by having a common management or common employees

HMRC’s view on what constitutes disaggregation of businesses to avoid VAT is contained in VAT notice 700/1. Generally, HMRC would look at striking at least one link each under financial, organizational and economic heads before proceeding to issue a direction. That said HMRC, as a general rule, would view the following to be a single taxable entity:

  • Two businesses owned by same persons where one VAT-registered entity sells only to VAT-registered customers, and the other entity, not registered for VAT, sells only to customers not registered for VAT.
  • The premises and/or equipment are shared; something common with businesses such as launderettes and takeaway food supplies
  • Splitting up a single supply for e.g. bed and breakfast business where one supplies the bed and another the breakfast.
  • A number of businesses owned by the same person making the same type of supplies.

Here are some examples, where the businesses were held to be artificially separated with a view to avoiding VAT:

  1. Husband and wife acting as tax consultants, operating from the same office (Osman v C & E Commissioners 1989)
  2. A company operating a fitness club and a director and his wife operating a beauty salon in partnership from the same premises (West End Health and Fitness Club)
  3. A company operating a service station and a director’s son running a video club at the same premises (Old Farm Service Station Ltd & L Williams)
  4. Married couple providing computer programming services via a partnership and supplying computer hardware via a limited company (A & S Essex (t/a Essex Associates)).
  5. Bed & Breakfast business carried on by one who is also partner in farm with onther  – Self-catering accommodation part of farm business (Patric and Patric V HMRC [2011] UKFTT 865 (TC)

What this brief discussion aims to convey is that businesses are unlikely to be caught by these rules where employees, premises, equipment are NOT common and where the business and customers are different. It must, however, be noted that the INTENTION where apparent also plays a crucial role in determining whether the disaggregation is artificial or not.

Tax Partners

Controlled Foreign Company (CFC) Rules – Part I

 CFC Rules, UK holding company, UK TAX ADVICE  Comments Off on Controlled Foreign Company (CFC) Rules – Part I
Feb 162013
 

The Finance Act 2012 (FA 2012) – Schedule 20 effectively changed the course for CFC rules by inserting a new Part 9A in to the Taxation (International and Other Provisions) Act (TIOPA) 2010. The new rules apply to accounting periods of a CFC commencing on or after 1 January 2013.

In a series of articles we’ll be examining CFC rules in detail. In this part we provide an overview of the CFC rules followed by explaining what a CFC means. Readers should note that the end impact of CFC rules would be that a CFC charge will apply on the CFC profit, and will be payable by the chargeable company, which will be a UK company holding relevant interest.

Broadly, there are three steps involved in determining if a CFC charge applies. There is no particular order in which these steps need to be followed and if an exemption applies at any stage then there is no need to go any further.

Step 1: Check if the foreign company is a CFC. If it is not then simply the rules don’t apply and no need to go any further.

Step 2: If it is indeed the foreign company is a CFC then check if:

a) Any of the entity-level exemptions apply to the CFC?
b) The CFC has any chargeable profits?
c) There is a chargeable UK company?

Step 3: If the final answer is a ‘YES’ to b) and c), and a ‘No’ to a) above, then work out the chargeable profits and apply CFC charge to the chargeable UK company.

Definition of a CFC

Basically, the CFC rules apply to companies (and by extension to exempt foreign branches of UK resident companies) resident outside the UK but controlled by UK resident(s). So in order to define a “CFC” it is important to know if it is non-UK resident and controlled by a UK resident person or persons {(s.371AA(3)}

Determining the ‘residence’ of a company can be complicated by the operation double tax treaty provisions. Therefore, S371TA provides further insight to what is meant by ‘resident’ in such situations, as outlined below:
(a) A CFC is resident in the territory where it is liable to tax by reason of domicile, residence or place of management. A company’s domicile is usually taken to be the territory where it is incorporated.
(b) Where residence cannot be determined on the basis of (a) above and if the company is a UK incorporated one but non-resident due to the operation of a treaty tie-breaker (s18 of CTA 2009) then will be treated as resident in the territory where it is treated as resident by virtue of the double tax treaty;

(c) In all other cases the CFC is resident in the territory where it is incorporated or formed.

‘Control’ is defined to mean the power to secure that the affairs of a company are conducted in accordance with the wishes of the UK resident person or persons obtained through shares or voting power, or by powers in the articles of association or some other document (s.371RB, 371RE). The definition includes a 50% test, a 40% test and then a new FRS 2 accounting test where there is a need to consolidate accounts. Therefore, as a caution it is advisable that a company having an investment of 25% and above in a non-resident company checks if it is caught by this definition.

Normally to ‘control’, more than 50% of the shares, rights and powers with regard to that company are required. However, the definition is extended to catch joint venture situations involving two shareholders each having at least 40% of the holdings, rights and powers over the company. In other words if a UK-resident person A has at least 40% of the interests, rights and powers and a non-UK resident person B with at least 40% but not more than 55% of the interests, rights and powers with regard to the company, then A and B are considered as controlling the company (s 371RC).
Then finally the FRS 2 accounting test of control means if the person is the (potential) CFC’s ‘parent undertaking’ that is required to prepare consolidated financial statements, whether actually prepared or not, and at least 50% of the CFCs chargeable profits would be apportioned to the parent company, then that person controls the CFC (s371RE).
If the company in question fails the CFC test then the CFC rules do not apply. In the next part we will deal with entity (CFC) level exemptions.

Tax Partners

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