Will a 3rd party loan ensure successor tax relief?

Will a 3rd party loan ensure successor tax relief?

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Company A and Company B are owned by the same person. Different trades. Company A is loss-making. In fact, it hasn't made a bean yet, although the director is confident it will one day, so we are treating it (for now) as a commercial trade carried on with a view to making profits. Company B makes healthy profits.

Director wants to merge both companies in order to a) claim future losses in one trade against profits in the other in the same year, and b) reduce accountancy fees, but doesn't want to lose the tax losses. Not a problem normally as CTA 2010 s944(3) would apply allowing the successor company to inherit them and claim against future income from that trade (if there ever is any). However, there's a fly in the ointment. Company B paid all the expenses for Company A and hasn't been re-paid yet. Hence, there's a large balance on the inter-company loan account, which would restrict losses under the anti-avoidance provisions in s945.

I can't see an exemption from s945 for liabilities owed to the successor company. Obviously it can't take over a debt owed to itself and if it waives them they'll cease being tax deductible anyway. Paying Company A for the transfer of the business won't work as it will create a taxable gain which can't be offset against losses from previous accounting periods. We can mitigate that by shortening the previous year end so as to cram as many expenses as possible into the current accounting period. Unfortunately, it won't work anyway because amortisation can no longer be claimed on the goodwill by Company B, so effectively the tax losses will be lost.

A reverse takeover of Company B by Company A would preserve the tax losses but is impractical for many reasons, not least the fact there would be no retained profits to pay dividends out of for quite a while.

The only other solution I can think of is for a 3rd party to lend money to Company A, so it can pay Company B, and for Company B to then take on that debt with the transfer of the business, thus removing the restriction on the losses. I'm wary of this 3rd party being the director herself or a member of her family in case it still falls foul of s945 under the connected party rules, but her unmarried partner could presumably do so. He could stump up the cash for Company A to reimburse Company B and be reimbursed in due course by Company B. He could even borrow the money from Company B first, although that might be pushing our luck a bit as the transactions would obviously be linked.

2 questions:

a) Would it work from a tax planning point of view?

b) How do we reflect the new liability in the Company B books? Where would the opposing debit go?

The simplest way would be to put the debit on the director's loan account, in effect substituting the original inter-company account, so it doesn't touch P&L. The new liability would then disappear when Company B repays the 3rd party out of the cash paid by Company A. The only way I can debit her loan account though is if she formally indemnifies Company B for the debt owed to the 3rd party.

Am I achieving my objective here of preserving the tax losses or just going round and round in circles and ending up back at Square One? Thoughts welcome.

Replies (6)

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Portia profile image
By Portia Nina Levin
28th Oct 2015 13:13

1st clue

The companies are connected parties, and so for chargeable gains purposes (which probably is not relevant) and for the purposes of the intangibles regime any transfer is deemed to take place at market value, irrespective of any actual consideration (or a lack of it).

Where a credit arises on the disposal of an intangible that was used for the purposes of the trade, it is part of your overall trading result, meaning that losses brought forward can be set against it.

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By cfield
28th Oct 2015 13:55

No MV so no goodwill

HMRC always used to try and argue that these one-person businesses were worthless for the purpose of CG34 valuations, even when they were profitable, so they can't really have their cake and eat it by claiming there's goodwill in a loss-making business. We won't be fixing a price.

Hence, the losses inherited from the predecessor company will only be claimed against future income from that trade. No intangibles to write off.

All I'm concerned about is whether the loan a/c treatment will stand up. We don't want to debit P&L as it will restrict funds available for dividend.

Pretty sure unmarried partners aren't classified as connected persons yet so no worries there.

 

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Portia profile image
By Portia Nina Levin
28th Oct 2015 14:15

B paid expenses of £100K on

B paid expenses of £100K on behalf of A. Hence A owes B £100K. B has a £100K debtor on its balance sheet and (assume for argument's sake nothing else), resulting in net assets of £100K.

C lends A £100K. A repays B £100K. The debtor is extinguished and B now has an £100K cash on its balance sheet. Net assets still £100K.

A's business and the £100K that A owes to C are transferred to B, with no other consideration passing between A and B. B's net assets are now nil (£100K cash minus £100K liabiilty).

B repays A's debt to C. Apparently no assets.

So either the assumption by B of A's £100K debt to C is £100K consideration for the acquisition of A's business, which is worthless and immediately needs to be impaired (£100K debit to P&L). Or A is worth £100K and B now has goodwill of £100K on its balance sheet. You say not.

Either you have a taxable credit in A, which you use up some of the losses against, meaning that £100K less of losses pass to A, or you have £100K loss of net assets in B that needs to go through P&L.

So why not just write the frigging loan off before the transfer, and stop trying to [***] around.

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By cfield
28th Oct 2015 15:12

Because then there wouldn't be any losses left

If B writes off the debt owed by A, they would have to be written back in the P&L and there would be no losses left for B to inherit. Also, B would be denied relief on the loan write-off due to the connected company rules.

Having said that, I understand it may be possible to preserve the losses in A by executing a Deed of Waiver before the write-off. This apparently ensures that the friggin credit to the debtor company's P&L is treated as non-taxable.

So there may be something in what you say. However, I'm not sure it will work if there never was an actual loan as such and all that happened was that B paid A's expenses as they came along.

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Portia profile image
By Portia Nina Levin
28th Oct 2015 15:27

So now you are saying that A does not have any liability to repay B, meaning that your concern at the outset was completely misplaced?

If B releases A from liability, you have an accounting credit in A (which is not taxable, so no losses get offset) and an accounting debit in B (which is not tax deductible). All of the losses transfer.

If you go with your (complicated) scheme, either:

you have an impairment debit in B (in relation to the consideration given for the transfer - the assumption of a liability to C) and all of the losses, oryou have an intangibles credit in A that uses up losses.

If you want all of the losses available to B, there must be an accounting debit in B, reducing reserves. If you do not want your reserves depleted, you will lose losses and will need to justify the consideration (the assumption of debt). On way is straightforward, and the other is both artificial and complex.

KISS.

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By cfield
28th Oct 2015 16:15

Yes it does have a liability

The director made it quite plain the business was being run by Company A otherwise she wouldn't have set it up, so it must repay all the expenses paid on its behalf by Company B.

My only concern is that it is not a formal loan arrangement, so if Company B waives the debt, the non-taxable credit may not extend to the expenses giving rise to the tax losses. No CT600 has  been filed yet so officially these losses don't even exist at the moment. If they're written off in the same year the loan is waived, I don't see how we can claim them in the first place.

I take your point about the impairment debit reducing reserves, but if the director indemnifies Company B, there would be nothing to impair and the debit can go straight to her loan a/c. That should hopefully get round s945 and preserve the tax losses whilst not reducing her ability to declare dividends, which would be a major ball-ache (especially before the new tax kicks in).

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