A demerger is a series of transactions which have the effect and purpose of dividing the trading activities carried on by a single company or group of companies between two or more companies or groups of companies. CTA10/S1075 and TCGA92/S192 provide special tax treatment if certain conditions are met. Companies may seek advance clearance under CTA10/S1091 that proposed transactions will be an exempt demerger. CTM17200 onwards gives further guidance on the action to be taken by local offices in dealing with demergers.
The current dividend tax credit system is a bit confusing and works as follows
You want to pay a dividend of £900. Divide £900 by 9, which gives you a dividend tax credit of £100. Pay £900 to the shareholder – but add the £100 tax credit and record a total of £1,000 on the dividend voucher. The dividend is then shown gross on the tax return and then the 10% tax credit is deducted rates of tax are then applied as noted below.
Dividend tax rates before April 2016
Tax band
Effective dividend tax rate
Basic rate (20%) (and non-taxpayers)
0%
Higher rate (40%)
25%
Additional rate (45%)
30.56%
This will change from April 2016, see the table below
Dividend tax rates after April 2016
Tax band
Effective dividend tax rate
Tax Free £5,000
0%
Basic Rate Tax Payers (20%)
7.5%
Higher Rate Tax Payers (40%)
32.5%
Additional Rate Tax Payers (45%)
38.1%
But be warned!
While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.
These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019‑20. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of Corporation Tax. (HM Treasury Summer Budget 2015)
We all like getting something for free, well now you can get free access to 170 million company records.
In line with the government’s commitment to free data, Companies House announced on 22nd June 2015 that all public digital data held on the UK register of companies is now accessible free of charge, on its new public beta search service.
This provides access to over 170 million digital records on companies and directors including financial accounts, company filings and details on directors and secretaries throughout the life of the company.
As a result, it will be easier for businesses and members of the public to research and scrutinise the activities and ownership of companies and connected individuals. Last year (2013/14), customers searching the Companies House website spent £8.7 million accessing company information on the register.
Corporate Directors have been particularly useful to Groups, its easier and more flexible to show the parent company as the director than to name a specific person, but as a result of the Small Business, Enterprise and Employment Act 2015, companies will no longer be allowed to have corporate directors.
The ban will come into effect in October 2015 and companies that have Corporate Directors have until October 2016 to remove their corporate directors.
However, the government may have a change of heart following its consultation on whether Corporate Directors could be allowed if the Corporate Director Company has a board of fully disclosed individual directors.
What happens in the event of serious illness or death of a controlling shareholder?
Every business should have a plan in place. Normally illness and capacity will not change the voting rights but death will.
Usually the companies articles of association will contain rules which authorise the executors of a deceased shareholder to register as the share owners until they transfer them to the beneficiaries. This is often not the best solution.
A better way is to prepare a shareholders agreement which sets out what will happen.
Its worth considering:
pre-emption rights – these arrange automatic transfer to named shareholders
purchase rights – these will allow the company to buy back the shares from the beneficiaries
If you haven’t got a plan, make one before its too late
Most residential flats are owned on Long Leasholds but this creates tax issues – Stamp Duty, Capital Gains, Income Tax/Corporation Tax.
Take a look at HMRC Helpsheet 292 and CG70700 to get an idea of Capital Gains Tax issues!
Fortunately ESC/D39 can be applied to Lease Extentions
In practice, the surrender of an existing lease and the grant of a new lease should not be treated as a disposal for Capital Gains Tax purposes if the taxpayer so wishes and all of the following conditions are satisfied:
the transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arms length;
the transaction is not part of or connected with a larger scheme or series of transactions;
a capital sum is not received by the tenant;
the extent of the property under the new lease is the same as that under the old lease;
the terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences should be ignored.
The terms of a particular lease may provide for its extension if the tenant so requests. If such a request is made, the extension of the lease does not have any immediate Capital Gains Tax consequences.
In 2002, Commonhold was introduced in the Commonhold and Leasehold Reform Act 2002 (CLRA 2002). Commonhold can be applied to both Commercial and Residential buildings.
The advantage of commonhold is that it gets rid of the concept of the declining asset – sellers and purchasers of commonhold properties will no longer have to worry about how many years are left on the lease.
Under the commonhold system, all flat owners will automatically be members of a company – the Commonhold Association – that owns the freehold and thus the block.
This means that it should be easier to run the building for the benefit of the flat owners.
However, blocks of flats will still need to be managed.
And as a form of community ownership, commonhold brings with it various tensions.
To alleviate any possible problems, members will have to sign up to a “Commonhold Community Statement”.
This statement will set out all the rules and regulations you normally find in a lease, for example rules about subletting, pets, noise and use of gardens.
Dormant is a term that HMRC and Companies House use for a company or organisation that is not active, trading or carrying on business activity. But HMRC and Companies House use the term dormant in slightly different ways.
For Corporation Tax purposes, HMRC views a dormant company as a company that’s not active, not liable for Corporation Tax or not within the charge to Corporation Tax.
A dormant company can be, for example:
a new company that’s not yet trading
an ‘off-the-shelf’ or ‘shell’ company held by a company formation agent intending to sell it on
a company that will never be trading because it has been formed to own an asset such as land or intellectual property
an existing company that has been – but is not currently – trading
a company that’s no longer trading and destined to be removed from the Companies Register
Generally your company or organisation is considered to be active for Corporation Tax purposes when it is, for example:
carrying on a business activity such as a trade or professional activity
buying and selling goods with a view to making a profit or surplus
providing services
earning interest
managing investments
receiving any other income
This definition of being active for Corporation Tax purposes is not necessarily the same as that used by HMRC in relation to other tax areas such as VAT, or by other government agencies such as Companies House.
If your limited company has been dormant but is now active, you must tell HMRC within three months of starting your tax accounting period. The best way to do this is to use HMRC’s online registration service.
To contact HMRC you will need your Company UTR number and the 3 digit tax office number, then you can use this link to find out contact details for you Corporation Tax Office
When you call, Option 3 is for Dormant Companies and Option 4 is for Active Companies.
Then you will need to write to HMRC to advise them of the change in activity status.
Companies House still require Annual Returns and Annual Accounts even if the company is dormant, but these are obviously easy as there are no changes from the previous year.
6. (1) Every company shall disclose its registered name on—
(a)its business letters, notices and other official publications;
(b)its bills of exchange, promissory notes, endorsements and order forms;
(c)cheques purporting to be signed by or on behalf of the company;
(d)orders for money, goods or services purporting to be signed by or on behalf of the company;
(e)its bills of parcels, invoices and other demands for payment, receipts and letters of credit;
(f)its applications for licences to carry on a trade or activity; and
(g)all other forms of its business correspondence and documentation.
(2) Every company shall disclose its registered name on its websites.
Companies House enforce the regulations and can levy penalties of £1000 for non compliance.
Sole Traders can trade under their own name or a “trading as” name provided its not offensive, contains sensitive or resticted words, includes PLC, Limited Company, LLP or is similar to another business (check the internet for potential conflicts).
Partnerships should show all the partners names or if there are more than 20 partners it may keep a list of names at its principle place of business.
Discorporation Relief is new, it came in to effect from 1st April 2013 and is currently available until 31st March 2018.
HMRC estimate that 610,000 businesses are eligible to use the Disincorporation Relief.
Here is the HMRC example from the Consultation document:
Window Cleaners Ltd a one man company that incorporated on 1 April 2004 and the shareholder, Mr Smith, had previously carried on the business as a self employed individual before 1 April 2002. Turnover is below the VAT threshold. The business has an established repeat customer base. The only significant business assets are a van, equipment and goodwill. The van and equipment are worth around £3,000 and the goodwill is valued at £15,000, together worth £18,000. The goodwill was acquired from Mr Smith for £5,000 on 1 April 2004. The Capital Gains rules apply and Corporation Tax is payable @ 20 per cent.
Tax chargeable on goodwill:
If the assets are distributed back to the shareholder (Mr Smith) on 1 February 2012 the following charge would arise on the goodwill:
· Corporation Tax on goodwill gain £8,540 (£15,000 – £5,000 less indexation £1,460 (£5,000 x 0.292)) @ 20 per cent = £1,708
There is no Corporation Tax to pay on any gains made on the transfer of the van and equipment because these are chattels worth no more than £6,000.
Shareholder charges:
Mr Smith will also have to consider what tax he will have to pay on the value of the distributed assets of £18,000. The amount of charge will depend on whether the assets are treated as income or capital.
If distributed as capital, the actual amount of Capital Gains Tax that Mr Smith will have to pay will depend on a number of factors, including how much was paid for the shares, whether incorporation relief was claimed, whether Entrepreneurs’ Relief conditions are satisfied and availability of capital loss relief.
Assuming £100 was paid for the shares, that Mr Smith has no other gains in the tax year (and so the annual exempt amount of £10,600 can be used against the gain) and that he is entitled to Entrepreneurs’ Relief, then the amount of Capital Gains Tax to pay would be:
· (£18,000 – £100 – £10,600) x 10 per cent = £730
If the assets are distributed as income (i.e. a dividend) Mr Smith will only have to pay Income Tax if any part of the dividend is liable to Higher Rate Tax.
Criteria to qualify for disincorporation relief
Below is a basic summary of the main qualifying criteria:
The company must have been operational for 12 months and the shareholders must have held their shares for 12 months
The business must be transferred as a going concern to the existing company shareholders
The transfer must become effective before 31st March 2018
All assets, including goodwill, capital assets, trading stock and cash, must be included in the transfer. The value of those assets must be no greater than £100,000
Recipients of the new “disincorporated” entity must either be individuals or partnership members (not members of an LLP)
Mr Smith has been running a small garage for a few years
he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
at the time of incorporation, the goodwill of the business is valued at £100,000
Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £100,000 which, after deducting the annual CGT exemption (£10,900 2013-14), will be taxable at 10% due to the availability of entrepreneur’s relief(note rules changed 3rd December 2014 and ER is no longer available normal rates of CGT now apply)
the company will pay Mr Smith £100,000 for the acquisition of goodwill and this is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.
In addition Mr Smith started his Sole Trader business after the 1st April 2002 so he can claim a corporation tax deduction for amortisation of the goodwill in the company accounts. Small Companies pay Corporation Tax at 20%, so being able to deduct Goodwill on £100,000 will save £20,000 in Corporation Tax. (note rules changed 3rd December 2014 and Section 849C CTA2009 prevents this on related party goodwill)
Where a trader transfers his business to a limited company of which he is a ‘substantial shareholder’, the parties are treated as ‘related parties’ and the transfer must be at market value, but you can ask HMRC to carryout a post transaction valuation check by submitting form CG34
Goodwill relating to personal services is not normally considered to have a market value as it can not be transferred
In general it is expected that intangibles will have a useful life of no more than 20 years (note new rules – FRS102 states
“If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed five years.”)
Get professional advice to help you to prepare the valuation, disclose the capital gain and claim the tax relief
