A case study a day, keeps the taxman at bay

Another busy week, dear reader.  Here is a taster of some the things that have been occurring in my world:-

Case 1

A complex reorganisation of a client company, coupled with the proposed acquisition of large and expensive commercial property continues to make (albeit slow) progress.  Stamp duty land tax (“SDLT”) is an issue, both in respect of the acquisition of the new property and in respect of its leasing on to the main trading company, if the acquisition is to be made by a newly created property-owning company.

The potential SDLT on the proposed lease is a matter that can be side-stepped with a bit a non-contentious planning.  In essence, the property needs to be acquired when there is a suitable group structure in place between the lessor and lessee companies, so that the granting of the lease is exempt from SDLT because of group relief.  Then the reconstruction of the lessor company can be undertaken without triggering SDLT (or other tax) liabilities.

A more contentious issue is whether the SDLT (of some £500k!) on the acquisition of the new property can be avoided.  Schemes do exist which purport to give access to exemptions from SDLT, particularly those aimed at Sharia law compliant arrangements.

A promoter of such schemes is contacted and invited to advise the directors in this area.  Certain practical issues (not least whether the scheme will actually work) are of concern, such as the bank’s reaction to the rather convoluted proposals and their impact on the VAT aspects of the property’s acquisition.

Negotiations are ongoing…

Case 2

A long drawn-out PAYE enquiry is being dragged to a conclusion.  A sticking point is the issue of pool-cars and pool-vans.

HMRC say the vehicles in question do not satisfy the definition of such “pool” vehicles, whereas it seems clear to us and our client that they do (or should) qualify, even though no records of usage have been retained.  We are at an impasse.

Should we take the matter to the Tax Tribunal?  Some vital ammunition arrives in the form of a Tax Tribunal case heard in Scotland, where HMRC’s arguments about the necessity for detailed usage records to have been maintained are dismissed.

This new evidence is put to HMRC, but they continue to resist saying that the Scottish case can be distinguished from that of our client (even thought the two cases have striking similarities).

The Board will be advised to seek Counsel’s Opinion on the merits of litigation; we believe their case to be very strong and the sums at stake are large.

Again, negotiations are ongoing…

Case 3

A high-tech manufacturing client (yes, they do exist!) has developed two distinct and separate trading activities and believes that long-term value will be maximised if the two trades are formally separated and run as separate companies.

There will be better focus, better ability to target incentive schemes at the correct employees, greater incentives for growth and easier and more flexible exit strategies available.  The obvious way to proceed is by way of statutory demerger, under which the existing company can make an exempt distribution of the demerged trade to a new company, under arrangements so that the shareholders are issued new shares in the new company as consideration.

Providing we can convince HMRC that the transaction will be effected for bona fide commercial purposes and not for tax avoidance reasons, HMRC will give advance clearance to the tax-free nature of the arrangements.

The directors give us the green light to proceed and a clearance application to HMRC is drafted.

There is plenty of detailed work to be done, as the assets and liabilities of the demerging trade need accurately to be quantified and all contractual relationships (including those with employees) will have to be assigned/novated to the new company.

More on this in due course…

Case 4

A client with a passion for the outdoor life (and the good-life) wants to acquire some farm land and raise live-stock.  What started as a bit of a hobby is rapidly turning into a real business.

What is the best structure to buy the land?  An LLP is suggested as this gives a good deal of flexibility.  The client’s main trading company can be a member of the LLP and can make capital contributions to it, meaning that the client does not have to tie-up her own tax-paid money into the new venture.

However, she can receive revenue and capital profit shares from the LLP in consideration of the time and effort that she will put in.  The land itself is VAT-free, but it will need fencing and a barn will have to be erected, which costs will inevitably come with added VAT.

Can this VAT be recovered?  In a word, yes.

The LLP will be an “intending trader” and the supplies to be made (of lambs, pigs and possibly cattle for consumption as food) will be a zero-rated supply.

Thus, VAT can be recovered, even though VAT will not have to be charged.  An on-line application for VAT registration is made, and the client looks forward to recovering any VAT charged on the LLP’s initial capital expenditure.

Case 5

Difficulties, difficulties.  The current economic conditions are not ideal for certain manufacturing businesses and a long-standing client needs help with its cash-flow management and its relations with its bankers and creditors (especially HMRC).

We assist in getting agreed payment terms from HMRC and the bankers agree to provide more financial support based on regular and accurate management information, which our team goes in to help produce.

Unfortunately, we cannot assist the client in securing more contracts (profitable ones), nor can we really assist the client in getting cash out of its debtors.

The client soldiers on but it is very much a hand-to-mouth existence, which seems not to be sustainable.  Costs need to be reduced further, and surplus assets need to be disposed of, but the pressing need is for new work, and it is far from clear from where this might be obtained.  Very depressing…

The weekend arrives; I have a couple of young adults (no longer children!) to take back to University in Newcastle, so some time spent exploring the Northumberland coast and countryside is in the offing, which should be really nice.

And so to bed…

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