| HMRC are running a free webinar Tuesday 7 February 2017 midday to 1pm entitled ‘Guidance to insolvency professionals: Recognising and dealing with potential tax avoidance’ This webinar has been produced with the assistance of R3 and we would urge all of our members to register and hear first hand HMRC’s views on recognising tax avoidance schemes and dealing with APNs and follower notices within insolvency procedures. The link for registering can be found here on Gov.uk website: https://www.gov.uk/government/news/webinars-e-learning-and-videos-if-youre-a-tax-agent-or-adviser HMRC consulted over the summer regarding proposed restrictions to the use of brought forward tax losses and published the results, along with the draft legislation, in early December 2016. R3 was among the 79 respondees to the consultation, but although some amendments to the proposals were made it is clear that our representations were not fully taken on board. What is planned? Currently, if a business makes a loss in an accounting period it has several options as to what to do with that loss. One of those options is to carry it forward to a future accounting period and it is these carried forward losses which are subject to the proposed changes. Under the proposed new rules, carried forward losses can only be used in future accounting periods to shelter up to 50% of taxable profits above £5 million. However, companies may (subject to various restrictions) surrender losses brought forward to other group companies. You will not be surprised to hear that the last two sentences are set out in nearly 40 pages of tax legislation and so are not as simple as they sound. What it means for distress and insolvency The proposal to restrict the use of brought forward losses against current period profits is not good news for distressed businesses. On the face of it, only large businesses should be affected by the changes as they are the only ones who make profits of more than £5 million; HMRC itself says that “the £5 million annual allowance will ensure99% of companies are unaffected by the restriction.” However, that may not always be the case. For a start, the £5 million allowance is for a group and therefore may be spread very thinly in a large group. The definition of group for the purposes of the £5 million allowance seems to include companies in administration, meaning that Administrators will have to negotiate with other solvent members of a group as to how much of the £5 million allowance they can use to shelter post-insolvency profits, thereby increasing costs and potentially reducing returns to creditors. HMRC has proposed a ‘terminal carried-forward loss relief’ whereby a company with unrelieved carried forward trading losses which ceases to trade, can carry those losses back to relieve profits in the previous three years which had been subject to the 50% restriction. In effect, disapplying the new rules in the last three years of trading. While this relief is welcomed, it does not go far enough in insolvencies and may be of little value, e.g. in cases where trading continues post insolvency for more than three years, or for non-trading businesses (e.g. property investors) as the relief only applies to trading losses. However, what is more worrying and more applicable for those of us dealing with businesses in distress, is the impact on companies who have a one-off event arising from a rescue process which results in their having a spike in profits. Take, for example, a business which leases properties, e.g. a care home operator. Some of these leases may have been agreed years ago, in more favourable economic times, but subsequently became uneconomical. The business is required to recognise a loss for the uneconomical part of the lease and this loss gives rise to a tax deduction, often generating excess tax losses which it carries forward. However, things take a turn for the worse and the business enters into a company voluntary arrangement (CVA). As part of the CVA, the leases are re-negotiated and therefore the onerous lease provision is reversed, resulting in a large, one-off, taxable profit. Prior to 1 April 2017 the losses brought forward should be available to shelter the profits, but not under the new rules. Profits above £5 million (or less if other group companies have used some/all of the allowance) will be taxable in full. As a result, an already cash strapped business will have to find sufficient funds to pay HMRC, something the lenders are unlikely to be willing to finance. Having taken into account the additional tax cost of a restructuring process it is possible that more rescues will not get off the ground, leading to more business failures, loss of jobs and, in this example, elderly and vulnerable people being made homeless. While currently tax is rarely a barrier to a business rescue, with the new rules it will become increasingly so as HMRC seems to be preferring itself to other creditors. R3 is responding to the draft legislation, raising our concerns and proposing to meet with HMRC to talk them through. We are requesting that, in order to address the points mentioned above, HMRC considers: i Removing the 50% restriction when a company is subject to an insolvency ii Adopting a form of corporate rescue exemption, akin to that for debt restructuring, If you have any concerns about these proposed changes and would like to add your support to our representations then, we urge you to contact HMRC directly by 23 February 2017. Questions/comments can be raised with Claire White at claire.white@hmrc.gsi.gov.uk or 03000 545 597, or Clare Dunne at clare.e.dunne@hmrc.gsi.go.uk or 03000 585 961. |
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| HMRC have advised that incorrect contact details were included in the Technical Alert issued last week. Correct details are as follows: Member voluntary liquidation Team eisw.mvl.team@hmrc.gsi.gov.uk Corporation tax office: Corporation Tax Services HM Revenue and Customs BX9 1AX We apologise for any confusion caused. |