Winter 2010 Newsletter

Download the Winter 2009/2010 Newsletter.

Structures for new business projects

Business advisors often extol the merits of diversification, however, when entering into a new area of trade the structure of the new business, be it: stand alone company, division, subsidiary or joint venture, must be considered. The structure chosen will depend upon a number of key criteria:

Investors. Who are the investors? Are they to share: control equally via votes, short term rewards via rights to dividends, and long term rewards via capital on winding up? If not various classes of shares need to be created. This is easy at the outset for a start up company but can be problematic for an established business. This is because of the issue of taxation on value shifting. Whatever the share structure, it is also necessary to consider longer term needs, such as the possible need to attract additional investors or attract or retain key staff, via share capital.

Asset Protection. Assets held by a company secure the liabilities of the company as a whole. However, subsidiaries are only supported by parent companies to the extent of their shares, plus any intercompany accounts or guarantees. A new stand alone limited company may be used as a way of protecting previously acquired assets from the risks and creditors ofthe new venture.

Taxation.The number of associated companies reduces a group’s entitlement to small rate corporation tax, by sharing the limit of the rate between world trading members. This puts companies into the marginal rate, which is higher still than the full company’s rate.
Parent company’s with 75% or more of shares in subsidiaries can move trading losses around the group. They can also move assets without charge to capital gains tax. Divisions should be able to share losses if trades are not too disparate and can of course use assets where wished.

Entrepreneur’s relief is only available on the sale by an individual of a company. This can reduce capital gains tax paid on the sale to below 10%.

Parent companies with substantial shareholding (10% or more) are also exempt from capital gains tax on sales of shares; however the problem of getting funds out of the parent company remains.

Exit strategy. It is arguably easier to sell a limited company than a division. Ultimately two parts of a business can be split, but there is more scope for uncertainty as to assets and liabilities and this increases the legal costs of the sale. As stated above, currently, Entrepreneur’s Relief on sale of shares in a company, rather than a division, can increase the amount of post tax cash retained by the seller.

Income Tax Increases

 This has been covered before by us, but its impact is so important that we are including a reminder, so that you take action early enough. From 6 April 2010, those earning more than £100,000 will pay more tax by losing their personal allowance and those earning more than £150,000 by paying tax at 50% rather than 40%. From 6 April 2011, those earning more than £150,000 will receive less tax relief on pension contributions.

Careful planning will be required to navigate the proposed rules and making the right decisions early enough is vital. For owner-managed companies, one of the key issues is extracting funds tax-efficiently and these changes to the tax rules have made this issue more complex.

New Service

Recently Silbury have been particularly successful in introducing business sellers with would be buyers, from amongst its clients and contacts. We would like to extend this service to other would be buyers or sellers. If you would like more details of this service then please contact Christopher Baylis via our website or on 01249 891440.

VAT & EU - Are you ready?

The 1st January 2010 sees not only the reversion to the 17.5% standard-rate, but also the introduction of the “VAT Package”, the first significant change in intra-EU VAT activity since the removal of the fiscal boundaries in the early ‘90’s.

Designed to make intra-EU VAT easier to understand, control and recover, the Package primarily deals with business-to-business services, but does also pick up on other issues. For UK businesses, the practical points to consider are:

Place of supply of services
The new ‘basic’ place of supply will be where the recipient belongs – meaning that for nearly all services supplied to customers in other EU countries, NO UK VAT will be chargeable and there will be NO requirement to register in that country. The customer must, though, be VAT registered in their own country or have other proof of being ‘in business’. Exceptions to the basic rule include land & property related services (wherever the site is), events, conferences, restaurants etc. (location) and non-business customers (where the supplier belongs).

However UK businesses need to be alert – as recipients of services from other EU countries, where VAT is not charged, there will be a requirement to account for VAT, at the rate as if it had been supplied in the UK, as output tax in box 2 and additionally to account for the VAT as an input. Input VAT can only be recovered in accordance with their normal entitlement. This could result in a significant extra VAT burden for partiallyexempt or non-business organisations, such as banks, insurance companies and charities.

From January, services supplied to business customers in other EU countries will have to be reported, along with goods, on the quarterly EU Sales Lists. Further, where the value of goods despatched to other EU countries exceeds £70,000 per quarter, the Sales List is required on a monthly basis. Submission must be made within 14 days (paper) or 21 days (electronic). Further guidance can be gained by talking to our VAT consultant Simon Anslow.

Alternative Sources for Loans

In these times of restricted bank credit, families and friends often turn to each other to bridge funding gaps. When one is asked to step into this breach it is important to bear in mind that a certain degree of legal formality can prevent significant social fallout if all does not go according to plan.

Everyone would accept that if they were borrowing moneyfrom a bank or other financial institution, that bank would insist upon some form of security. This would include a mortgage over the borrower’s property or where the borrower is a corporate entity sometimes a personal guarantee from the owner of the incorporated business. Where thelending is to be a family member, such formalities should also be adopted. It is a relatively straight forward matter for a loan document to be drawn up, which will then provide the defined debt which can then be made the subject of a standard form of security.

The purpose of such security is to ensure that if there is a default, the lender does not find himself at the back of the creditor’s queue. Without such security, if there is a failure by the borrower then the connected person making the advance stands along side all other general creditors and in certain circumstances, actually ranks behind that class of creditors. The taking of security lifts the lender out of this general pool and ensures that in so far as there are realisations from the assets which are the subject matter of the security those proceeds go to the lender before any other creditor is paid.

Certainly the banks when dealing with corporate entities now insist that security is taken even where there are guarantees. This is equally a sensible course of action for any connected lender to adopt.

Whilst there is often a reluctance on the part of the lender to impose the costs associated with the formalisation of the lending arrangement on the borrower, it should be borne in mind that banks have and will always insist upon such a degree of formality and will pass the cost on to the borrower. Lenders therefore should not be embarrassed by introducing the concept of the borrower paying for this exercise which is something which would in reality have been a cost which the borrower would had to have carried had bank funding been available.