How do you create a Group using Share Exchange/Swap? Why is it done?

photo of man holding pen

Share for Share exchange is often used when you are re-organising or creating a group and benefits from tax relief.

Basically if you don’t do a share exchange you would need to sell the shares at market value creating both Capital Gains and Stamp Duty costs.

In order to do a Share exchange you must have bona fide commercial reasons for doing it and it can’t be just to avoid tax. So for example you might want to create a group in order to separate trading and investment activities and enable an investment company to obtain mortgage finance (most lenders probably would not lend to a single company doing both trading and investment in the same company as it puts the investment at risk).

Why?

Here is a common scenario, a developer buys a commercial property to develop into residential and sell, but when the project completes the market conditions have changed they want to keep the residential properties and rent them out.

During the development they will have reclaimed VAT and the first grant of residential is Zero Rated, so they get full recovery. An investor would not get this.

So to avoid partial exemption for VAT its best to move to a new company and there are bona fide Commercial Reasons too as previously noted.

Although the reclassification to investment will create a profit and tax charge a group structure will provide Group SDLT relief. See these blogs for details.

What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction – Steve J Bicknell Tel 01202 025252

Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

How?

The process basically has 4 stages.

Stage 1 – Form the new companies

Assuming you are now creating a new Holding Company with a New Investment Company, these need to be formed first.

Stage 2 – HMRC Clearance

Its not mandatory but it is best practice How to apply for clearance or approval of a transaction from HMRC – GOV.UK (www.gov.uk)

To get clearance you need to write a letter to HMRC setting out all the facts, the group structure and the commercial reasons, typically the letter is 6 to 10 pages long.

You can request advance clearances by sending an email to reconstructions@hmrc.gov.uk. You do not need to send a paper copy.

Attachments should be no larger than 2MB. Do not send self-extracting zip files as HMRC software will block them.

If possible we would like to reply by email, but we need your permission to do so by including the following statement:

‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)….’

If you’re making the application on behalf of yourself or your company adapt this wording as necessary.

Stage 3 – The Contract

This is normally done by a solicitor.

The contract deals with the acquiring company and the shareholders of the target company under which the shares are to be acquired with the consideration being shares in the acquiring company.

Stage 4 – Stamp Duty Relief

As the acquiring company is paying consideration for the shares (the issue of its own shares), then the transaction is subject to Stamp Duty. However, relief can be claimed under s77 FA 1986 if the conditions are met and the anti-avoidance rule of s77A FA 1986 does not apply. HMRC guidance is at STSM042000 starting at STSM042410. After the conditions have been checked and a claim prepared, see “How to Claim Relief” on GOV.UK. The claim needs to be made within 30 days of the contract date and, as HMRC outline, various information will need to be attached to the e-mail claim including the stock transfer form.

steve@bicknells.net

How are HMRC attacking the use of TOMS for serviced accommodation?

The Tour Operators Margin Scheme (TOMS) was created for holiday companies.

Accommodation that is bought in and sold without material alteration, falls within TOMS. However, where there is material alteration the accommodation becomes an in-house supply and TOMS can not be used.

Further details are in Notice 709/5

7.6 How an in-house supply of accommodation is made

If you own a hotel and supply accommodation within it, you are making an in-house supply of accommodation.

If you hire, lease or rent accommodation under an agreement whereby you take responsibility for the upkeep of the property and you are required to undertake any maintenance to the fabric of the building (that is, not just cleaning and changing towels or bed linen and so on), you are making an in-house supply of accommodation.

Also, if you buy in accommodation and provide catering staff from separate sources, for example a ski chalet with a chalet-maid, you are making an in-house supply, commonly referred to as ‘catered accommodation’.

HMRC are attacking the use of TOMS for Rent to SA

  • Rent to SA is not a tour operator and the services being supplied are not designated travel services – tour operators organise travel in their own name and entrust others with the supply
  • The supply made by the landlord is not a ‘designated travel service’ – taking a lease of residential premises, whether furnished or unfurnished for a term of years is not a relevant service for TOMS
  • The landlord is not supplying hotel accommodation or short-let accommodation
  • If the SA operator furnishes the property that is a material alteration which means TOMS can’t be used
  • If the contract requires the SA operator to replace broken glass or deal with condensation or do maintenance that would go beyond routine cleaning and minor repairs
  • If the SA operator is responsible for utilities and Council Tax these constitute a material alteration to supply

What about the Landlord?

The landlord is not supplying a Furnished Holiday Let unless they meet the Occupancy Conditions set out in HS253 this will not be the case in Rent to SA as they are not doing short lets they are simply renting out residential property on a long let. They will not be able to claim capital allowances and the they will not avoid section 24 interest restrictions.

steve@bicknells.net

Spring Statement 2022

A summary of the Spring Statement 2022 is now available – click here

We have produced this newsletter to cover the main issues that are most likely to be of interest to you. You will also find useful commentaries to help you understand how the proposed changes may affect you personally. In addition, we have included a detailed calendar of the most important dates for 2022/23 that will help you with tax planning ahead of time. If you have any questions concerning the issues covered in this summary, or would like advice on the best possible course of action in a particular area, please contact us – click here

Have you remortgaged? will that restrict the recovery of interest beyond the Section 24 rules?

Many Buy To Let properties were purchased in individual names, that was norm before, then from 2017/18 we saw the introduction of clause 24 (section 24).

Essentially Section 24 removes Interest from the property expenses and gives you tax relief (finance allowance) at 20% (basic rate). So Higher rate tax payers will pay more tax.

Historically, its been common for BTL owners to regularly remortgage and with draw capital, basically cashing in on house price rises.

But what many owners seem to have overlooked is that if the mortgage exceeds the original property value (including SDLT and related costs) plus any improvement costs, then the mortgage interest is further restricted.

Increasing a mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Examples of how to work out Income Tax when you rent out a property – GOV.UK (www.gov.uk)

steve@bicknells.net

The Tax Issues of Hire Purchase (HP), PCP and Leases for assets – Capital Allowances

When businesses purchase assets they normally use finance, it makes sense to conserve your cash and spread the purchase cost over the life of the asset, but how will you choice impact on whether you can claim Capital Allowances, Annual Investment Allowance or Enhanced Capital Allowances.

You can claim capital allowances when you buy assets that you keep to use in your business, for example:

  • equipment
  • machinery
  • business vehicles, for example cars, vans or lorries

These are known as plant and machinery.

You can deduct some or all of the value of the item from your profits before you pay tax.

So clearly buying assets without finance or with a business loan is fine as you will definitely own the asset.

Hire Purchase

The normal assumption is that a vehicle bought under a HP agreement will become the property of the hirer once the final payment is made at the end of the lease period.

Section 67 Capital Allowances Act 2001 (CAA 2001) allows the capitalisation of the entire expenditure on the vehicle from delivery, providing the asset was in business use at the end of the chargeable period.

However, if a payment is not made and the vehicle is not acquired then it is treated as having been disposed of by s67(4).

Q&A: hire purchase contract and capital allowances | Accountancy Daily

PCP – Contract Purchase

Under any other finance arrangement it will depend on whether the vehicle is owned or not, usually the documentation will confirm the position but a PCP is considered to be an HP arrangement with a balloon payment. If the end payment is not paid and the option to purchase not taken then that is a disposal and thus a clawback of the allowances claimed.

Contract Hire and Leases

Contract Hire will not pass ownership to hirer so they are not eligible for Capital Allowances.

But the hire costs will normally be tax deductible and generally 50% of car hire VAT can be reclaimed.

steve@bicknells.net

HMRC Post-transaction valuation checks (CG34) and why you need one

Post transactions checks are used in relation to capital gains, they can be used by individuals or companies.

Its a free service offered by HMRC.

HMRC state

If we agree your valuations we’ll not question your use of those valuations in your return, unless there are any important facts affecting the valuations that you’ve not told us about.

But HMRC say it could take at least 3 months to check the valuation.

You can only request a Post Transaction Valuation Check:

  • after disposals relevant to Capital Gains Tax
  • before the date you must file your Self Assessment tax return

Here is a link to the form

CG34 Post-transaction valuation checks for capital gains (publishing.service.gov.uk)

Why are they needed?

There are situation where transactions are not ‘arms length’ in other words they are between connected parties.

For example if you have a development company and sell property to related company.

You can use the CG34 for

  • Shares
  • Goodwill
  • Land
  • Other Assets

The CG34 is not mandatory, you don’t have to get a post valuation check, but if you do, you will gain protection against HMRC questioning your valuation (assuming they agree with you CG34 submission).

You will need to submit supporting documents for example a independent valuation report to justify the value.

For Land valuations you will also need

  • Copy leases
  • Tenancy Agreements
  • Plans of undeveloped land

Where do you send the form?

Taxpayers dealt with by HMRC’s High Net Worth Units, or Public Department 1 should send the completed CG34 to those offices.

Those dealt with by Specialist Trust Offices should send their forms to:

Specialist PT Trusts and Estates Trusts
SO842
Ferrers House
Castle Meadow
Nottingham
NG2 1BB

Other individuals, partnerships and personal representatives should send the completed form direct to:

PAYE and Self Assessment
HM Revenue and Customs
BX9 1AS

Companies should send to the office dealing with the company corporation tax affairs or if they do not have one, to:

Corporation Tax Services
HM Revenue and Customs
BX9 1AX

steve@bicknells.net

New Multiple Penalties for MTD ITSA and VAT!

The new HMRC penalties cover late submission, late payment and interest harmonisation and unlike the old penalties you will now get points and penalties even if you owe no tax or are due a refund! there will be no soft landing period.

The new penalties take effect:

  • for VAT taxpayers for their first VAT return period starting on or after 1st April 2022
  • for ITSA (Income tax and self assessment) taxpayers within income over £10k subject to Making Tax Digital (MTD) for their first tax year or accounting period starting on or after 6th April 2023
  • for ITSA taxpayers with income below £10k starting 6th April 2024

In theory the penalties are fairer but they can work out more expensive than the current penalties.

The new system is based on points, each late return gets a penalty point which expire after 24 months.

The points only apply to VAT and ITSA (not to other taxes at the moment)

Once the penalty threshold is reached there is a fixed penalty of £200 for each missed return, there is an appeals process.

Submission FrequencyPenalty Theshold
Annual2 points
Quarterly 4 points
Monthly 5 points

Total points will only be reset to zero once when the following 2 conditions are met

  1. A period of compliance based on their submission frequency
  2. All submissions that were due within the preceding 24 months have been submitted
Submission FrequencyPeriod of Compliance
Annual24 months
Quarterly12 months
Monthly6 months

Late Payment Penalty

Late Payment could potentially mean you get two penalties depending on when you pay!

The first penalty will be levied 31 days after the payemnt due date and will be based on a set percentage of the balance outstanding.

The second penalty will be calculated on amounts outstanding from day 31 until the principle balance is paid in full or a payment plan agreed.

Time to Pay Payment plans suspend penalties.

HMRC will notify the penalties separately.

PenaltyDays after payment due datePenalty charge
First Penalty0 to 15No penalty payable
16 to 29Penalty calculated at 2% of what was outstanding at day 15
30Penalty calculated at 2% of what was outstanding at day 15

Plus 2% of what is still outstanding at day 30
Second PenaltyDay 31 plusPenalty calculated as a daily rate of 4% on APR for the duration of the outstanding balance

There will be a ‘period of familiarisation’ for the first year which is based on 30 days.

Interest Harmonisation

The VAT interest rules will change to be inline with ITSA

  • When an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the tax becomes overdue until the date payment is received
  • VAT Repayment Supplement will be replaced with Repayment Interest. Repayment Interest will be paid from the later of:
    • the due date of the return
    • the date the return is submitted

If HMRC owe you interest it will be paid at the Bank of England Base Rate -1% but if you owe HMRC interest its at the Bank of England base rate +2%.

Other things to note

  • The Gateway will tell you how many points you have
  • The Gateway will tell how penalties have been calculated
  • Agents will not be able to pay the penalties
  • When appealing you will need to say who was to blame for missing the deadline
  • When claiming the deadline was missed due to a health issue a declaration of honesty is required

steve@bicknells.net