We are in the thick of tax return season for 2020. It’s the final countdown to the 17th of this month. The Beyonce song “Irreplaceable” comes to mind. “To the left, to the left. Everything you own in a box to the left” We use a Kanban flow chart to organise all the clients. We are trying to do the opposite of Beyonce and move everything for a client in a box to the right. The last box to the right has the simple title of “Done” There will always be stragglers. But thanks to a super team in here we will get the work done where we have all the information.
I was out spinning again this morning. That is the 3rd Friday in a row that I have engaged in this form of torture. Getting tortured at half 6 in the morning to the screams of “quicker”, “turn it up”, and “hover” doesn’t make sense. The trainer is sneaking in the odd Irish dancing tune. We had Riverdance last week and another one this week. Think Michael Flatley on a spinning bike! I’ll stop there, much like earlier when the resistance got too high.
Last week we looked at why we do marketing. This is vital for any small business looking to grow. In case you missed it see here
This week we are going to look at a problem a client came to us with back in 2016. It was a very interesting case, and the final result happened this year. We will look at
- The Problem
- The Solution
- Tax point of view
- The Outcome
The main goal is to pass on a successful trading company to a son [Billy]. Let’s call the company Cash Rich Ltd. The issues are a few
- The company has a large number of investment assets in cash, shares, and investment bonds
- The owners [Mike & Brenda] want to pass on the trade but not the investment assets. Those assets are to go to other family members
- Mike, the largest shareholder, is over 66. Mike owns 70%.
The Solution – First Part
There are two main solutions in this type of situation
- Hive out the investment assets into another company
- Hive out the trade into another company
Having discussed the pros and cons of both options, Mike & Brenda decided on option 2. So, the trade of Cash Rich Ltd would transfer into a new company. Let’s call this new company Working Hard Ltd. So, Working Hard Ltd was set up and the practicalities of this included
- A new bank account
- A new tax number for Corporation Tax, Vat & PAYE, etc
- Informing customers and suppliers of new bank details
- Informing staff of the change and complying with TUPE regulations. This is to ensure terms and conditions of employment carry over such as years of service
- Informing regulatory bodies
- Updating contracts and agreements to the new company name
- Registering the business name
Tax Point of view
From a tax perspective, the main issue is to do this at no tax cost to the company or the shareholders. The concerns are
- Corporation Tax for Cash Rich Ltd on the trade transfer
- Capital Gains Tax for Mike & Brenda
- Vat costs of transferring the trade
- Stamp Duty
Where a resident company takes over all or part of the business of another resident company there is tax relief. This is where the reorganisation is for bona fide commercial purposes. Once this works Cash Rich Ltd won’t have to pay corporation tax on the gains on the transfer of trade assets. Working Hard Ltd steps into the shoes of Cash Rich Ltd. It is treated as it had acquired the assets at the time and cost as acquired by Cash Rich Ltd. An important condition is that Cash Rich Ltd doesn’t receive payment for the transfer.
To ensure no CGT for the shareholder again the bona fide commercial reasons test applies. The clients in our case meet the bona fides. They want to transfer the trade to their son so that the company can continue and prosper in the years ahead. This will protect jobs and ensure a healthy return to the exchequer through taxes. The key is that Mike & Brenda own the shares in the same proportion in Working Hard Ltd as they do in Cash Rich Ltd. So, Mike owns 70% of Working Hard Ltd and Brenda owns 30%. Mike and Brenda are not treated as if they had disposed of their old shares and acquired new shares. Instead, the new shares are treated as if they had been acquired at the same time and cost as the old shares.
From a Vat perspective, there is Vat relief on the transfer of a business. Where the assets of a business transfer to another company this relief will apply. The trading assets of a business can be
In our case, all these assets transferred to the new company so there were no Vat implications. For further information see here
Stamp Duty relief also applied in our case. Working Hard Ltd acquired the business of Cash Rich Ltd in exchange for new shares in Working Hard Ltd. There are some conditions to ensure relief from stamp duty. These include bona fide commercial reasons and that the acquiring company is an LTD.
If you have managed to stay awake and with us after the Tax bit well done. You are resilient. Mike and Brenda now own two companies in the exact same proportion 70:30. They have hived out the trade of Cash Rich Ltd to Working Hard Ltd. Cash Rich is now a pure investment company. It was the first hurdle on the road to a successful business transfer. And why was this successful?
- Use of the tax reliefs available ensured there was no tax cost to transfer
- All staff, including directors, transferred to the new company. They retained their years of service and terms and conditions of employment
- The transfer of customers and suppliers worked out. This can be tedious with letters, phone calls and banking but all doable.
- The new trading company has no investment assets, and this is important for tax reliefs
This was all done in 2017. We never thought that the final part would only happen in 2021. Stay tuned for next week where we will look at the transfer to Billy.
The above is a case in point that business transfers don’t happen overnight. What is important is to explore your options. Business people and circumstances are all different. It takes time to tease out exactly what the business owner wants. This can change as circumstances change. One thing is clear and that is always good to have a long-term plan in place. This shouldn’t be in your head but discussed often with your advisors. Get something written. It doesn’t have to be perfect as ideas now will evolve into concrete plans over time. Failure to do this can result in missed opportunities and higher taxes.
Interested in talking to us? Call Deirdre on 051 396703 or start here. Tell us a bit about you and your business and we will see if we can help