Reviewing corporate structure

Corporate residency

If your business has a group structure operating across two or more tax jurisdictions, there may be circumstances when a change in corporate residence would be advantageous.

This is particularly the case when companies within an international group are making a loss. For instance, let’s say that a profitable UK-based group has a loss-making French subsidiary company operating in Paris. If the effective management and control (the day-to-day management) of that company is based in the UK, the company should be regarded as UK resident for corporation tax purposes (even if it is still resident under French domestic tax law). In such a case, the losses of the French company can be set against the profits of UK group members for tax purposes via the process of group relief. The quid pro quo is that when the company makes taxable profits, it will also be subject to UK corporation tax.

Even where a European subsidiary is not UK resident for tax purposes, there is a limited right to surrender its losses by way of group relief against UK group member profits. This follows the European Court of Justice ruling in ‘Marks & Spencer’, which led to a change in UK legislation to permit cross-border group relief claims in certain circumstances. However, the opportunity generally only arises where the European subsidiary is being closed down and there is no prospect of the losses being relieved locally. Where a UK profitable group has loss-making overseas subsidiaries, there may therefore be some scope to access the losses by bringing the effective management and control of the subsidiaries into the UK. However, the decisions on where management and control should be located should be driven principally by commercial considerations. Additionally, there may be other tax ramifications where a company moves its management and control from one territory to another and detailed advice should be taken before any decisions are made.

Entrepreneurs’ relief and substantial shareholders’ relief

An individual whose shareholding qualifies for ‘Entrepreneurs’ relief’ will currently pay capital gains tax of 10% (compared with the standard rate of 18%) on the first £1 million of the gain from the sale of the shares – a figure that applies to transactions made over a lifetime. Meanwhile, trading companies or a member of a trading group that sells a shareholding out of a substantial shareholding (at least 10%) of another trading company are exempt from corporation tax on the capital gain. These are valuable tax breaks for individuals and corporations, but in order to benefit from them it is important to ensure that the businesses in question meet the detailed conditions.

In both cases, it is important that the company or group meet the trading activity test. Broadly, this requires at least 80% of the activities to consist of trading activities. If non-trading activities exceed 20% it may be possible to partition them into a separately owned company in order to protect the group’s trading status. HMRC have been known to argue that the holding of surplus cash can constitute a non-trading activity. However, companies may maintain surplus cash balances for good commercial reasons. In such cases it is important that the reasons are clearly documented in the form of board minutes.

Business Property Relief (BPR)

100% relief from inheritance tax (IHT) is currently available on the transfer of qualifying ‘business property’, which includes unquoted shareholdings in qualifying trading companies or groups. There are a number of important conditions to be satisfied, in particular that the company or group meet the trading test since the existence of non-business assets can lead to a restriction or even an elimination of BPR under the ‘excepted assets’ rules. However, it may be possible to avoid the impact of these rules where the non-trading assets are owned by a subsidiary which is itself wholly or mainly trading. Accordingly, some fairly limited restructuring may solve a potential IHT problem.

Get in touch with your usual Baker Tilly contact if you would like us to review the tax efficiency of your group structure.