ON TOP OF TAXPreparing for the upturn: debt restructuring, anti-avoidance attitude

of the courts and the 50 per cent tax rate

2 March 2010

Copyright © March 10 BDO LLP. All rights reserved.

Agenda

8.55am Chairman’s welcome

by Paul Eagland

9.05am Company taxation and the courts: the Ramsay principle post Barclays Mercantile

by Rex Bretten, QC

9.40am Restructuring your debt and escaping unexpected tax charges – the opportunities and pitfalls

by Angela Foyle

10.15am 50 per cent tax rate and planning techniques for companies to tackle the tax increase

by Amanda Flint

10.40am Q&A/Coffee and informal chat

DEBT RESTRUCTURING

Angela Foyle

Tax Partner

Copyright © March 10 BDO LLP. All rights reserved.

DEBT RESTRUCTURINGOverview

• Background

• Why restructure?

• Issues to consider

• Further help

DEBT RESTRUCTURINGBackground

• UK Plc has borrowed £10m from the banks. In addition, it has borrowed £2m from a shareholder.

There are intercompany balances with UKCo 1 (£1m asset) and UKCo 2 (£0.5m liability)

• It has loaned €5m to its overseas subsidiary at a 2 per cent interest rate

• It has loaned £6m to UKCo 2)

• Interest of £100k has rolled up on the shareholder loans and £500k rolled up on the bank loans. UK Plc

has suffered adverse trading and needs to restructure

UK Plc

UKCo 2UKCo 1Overseas

Co

UKCo 3

Bank debt

£10mShareholder

Loan £2m

Intercompany

Account £1m

I/co

£1m

Loan

£5mLoan

€5m

£500k

supplier loan

DEBT RESTRUCTURINGBuilding blocks

• Sources of debt

- External

- Connected party

• Types of debt

- Interest bearing

- Non-interest bearing

- Convertible

DEBT RESTRUCTURINGOutline proposals

• The shareholder loan is to be formalised in a loan document and the

interest rolled up is to be settled by increasing the amount of this loan.

Half of this loan is to be exchanged for shares

• The intercompany account with UKCo 1 is to be waived

• UKCo 2 is currently trading profitably after a period of losses and agrees

to set off its intercompany balance against the loan from its parent

(which has been interest-free)

• The supplier agrees to sell its loan in UKCo 2 to UK Plc for £250k

• UK Plc issues new shares equivalent to 51 per cent of its enlarged share

capital to a new investor for £2.5m. The investor also subscribes for

£7.5m of convertible debt. The bank is repaid, but waives a proportion

of the accrued interest

DEBT RESTRUCTURINGTax issues

• Debt waiver

- External

- Connected party

• Funding bond legislation

• Debt arising from trading transactions rather than financing

• Connected party rules

- Interest

- Sales of impaired debt

- Other anti-avoidance

- Transfer pricing

• Forex

• Anything else?

DEBT RESTRUCTURINGTax implications – shareholder loan

• Shareholder loan

- Formalisation should not cause any tax problems

- But consider interest rate

- Connected party loan: thin capitalisation?

• Rolled up interest

- Late paid interest rules?

- When “capitalised” as part of new debt – is this a “bond, stock, shares, securities or

certificate of indebtedness”?

- Funding bond rules

• Debt/equity swap

- Connected party

- Ordinary shares

DEBT RESTRUCTURINGBank debt

• Repayment of bank debt

- No tax issues

• Waiver of bank debt

- Will give potential tax charge in UK Plc

DEBT RESTRUCTURINGIntercompany Account

• The waiver of an intercompany account used to cause problems

• New loan relationship treatment has been extended to waiver/release

of items which were deductible for trading purposes

• Waiver between connected parties is not taxable

DEBT RESTRUCTURINGSupplier Loan

• Sale by supplier will create a loss in the supplier – tax deductible

• Sale is to UK Plc so no waiver

• But …..

DEBT RESTRUCTURINGSupplier Loan

• Anti avoidance – s361 CTA 2009

- If a debt is purchased by a group member at an “undervalue” taxable on deemed

“profit”

- Used to have a useful exclusion

- FB 2010 changes – exclusion only if

- Change in ownership in 12 months prior to debt purchase

- Debt purchase intrinsic to change in ownership

- Debtor in severe financial difficulty prior to repurchase; but

- Future cancellation of debt gives rise to taxable income

DEBT RESTRUCTURINGIntercompany offset

• Offset of intercompany against UK Plc loan

- No specific tax issues

- Interest?

- Thin capitalisation/transfer pricing?

DEBT RESTRUCTURINGOverseas issues

• Loan to overseas company

- Forex exposure

- Hedging?

- Transfer pricing

- Thin capitalisation

- Quasi-equity?

DEBT RESTRUCTURINGEquity issue

• Share issue

- As this is an issue of new shares there should be no disposal

- Looks like there could be a change of control – any implications?

• Convertible debt

- Accounting treatment – bifurcated or not?

- Interest

- Any additional finance cost?

- Distribution rules?

- Withholding tax

- Quoted Eurobond exception

- SDRT?

DEBT RESTRUCTURINGGroup reorganisations

• Can be transferred at book value

• Degrouping provisions – one way only

DEBT RESTRUCTURINGConclusions

• Debt restructuring may be crucial to a business

• Tax rules are complex

• Early advice

BEATING THE 50 PER CENT RATE – THE

HUMAN CAPITAL ANGLE

Amanda Flint

Human Capital Partner

SETTING THE CONTEXT

How will the 50 per cent tax rate affect your people?

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1. Salary

2. Bonus

3. Share

Incentives

4. Pensions

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1. SALARY – SOME PARTICULAR ISSUES

Salary levels over £150,000

Salary levels from £100,000 - £113,000

• Subject to 51 per cent tax rate

• Don’t forget the uncapped National Insurance Contributions

• Not subject to 51 per cent tax rate but if income over £100k, for every £1,

lose £2 personal allowance – 60 per cent tax rate

• Salary sacrifice does work!

1. SALARY – ADVANCE PAYMENT

Pay salary before 6 April 2010 Idea

• Advance a pay rise – pay in a lump sum before 6

April 2010

• Pay salary in advance

How it works

• Unconditional entitlement essential!

Issues

• Employment contract – will need to be changed

• What if the recipient ceases employment?

• What if the Company needs cash?

1. SALARY – SALARY SACRIFICE

Salary sacrifice arrangements Idea

• Reduce tax payable by sacrificing pay for certain tax

and/or NIC efficient benefits

How it works

1. Employees sacrifice a portion of their income in

exchange for lower pay and benefits/allowances

2. Certain benefits can be provided tax and/or NIC free

even to the highest earners

3. For those earning between £100,000 and £113,000

could save >60 per cent tax

4. Reduces taxable income and therefore tax rates

5. Employees get degree of choice over the package

6. Savings can be shared between employer and

employee

Issues

• HMRC approval/agreement for certain benefits.

• Implementation.

• Does not work in reducing the £150k limit for pension

contribution higher rate relief restriction purposes

����

Company

Benefits Salary

Employees

1. SALARY - EMIGRATION

Emigration

Idea – Emigration - The ultimate 50 per cent planning

How it works

Need - become not resident and not ordinarily resident in the UK.

HMRC view leaving the UK for a settled purpose as being for at

least three tax years/one year if you leave the UK for a

complete tax year to work on a full time contract abroad

• Additional benefits arise for Non UK domiciliaries. After four full

tax years of non UK residence the IHT (17 out of 20 year deemed

domicile) clock is reset

Issues

• Is it practical?

• Now harder to argue that a long term UK resident has effectively

left the UK for tax purposes - move needs to be permanent and

dramatically reduce ties with the UK

• If return to the UK within five tax years - subject to tax on

capital gains arising on assets held prior to your departure and

disposed of whilst away

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Overseas

1. SALARY – EXPATRIATES – IS THE UK THE BEST PLACE?

Mobile employees could work in lower tax jurisdiction

Idea

• Employees relocate to a lower tax

jurisdiction/send them home!

How it works

1. Employee moves overseas to perform

duties

2. Can transfer or assign employment to

overseas branch, to overseas subsidiary or

parent

Issues

• Commercial needs – where are they?

• Need to identify appropriate territory –

home territory may not be better

• Allocation of time spent in UK and in new

location

• Employment contracts – how flexible are

they?

Company

����

Offshore

subsidiary

or parent

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�

Overseas

branch

OR

1. SALARY – EXPATRIATES – 50 PER CENT = 100 PER CENT

FOR TAX EQUALISED Review remuneration packages for individuals assigned to the UK

Idea

• Review structure of remuneration for employees

assigned to UK

How it works

1. Overseas employee moves to the UK to perform duties

2. Can structure assignment length, employer and

payment location to reduce tax and NIC

Issues

• Need to review tax and NIC impact in UK and home

country

• Employment law issues in UK and overseas territory

• Potential payroll/withholding implications.

Assignee

�

Coming to

UK

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2. BONUSES – ADVANCE PAYMENT

Pay bonus before 6 April 2010 Idea

• Advance a bonus – before 6 April 2010

How it works

• Unconditional entitlement essential!

Issues

• Pay before year end?

• Pay for performance before your people have

performed

• What if the recipient ceases employment?

• What if the Company needs cash?

����

2. BONUSES – DEFERRAL AND LOAN

Bonus deferral with linked loans Idea

Defer bonuses until tax rates return to a more

reasonable level

How it works

• As bonuses are not paid they will not be subject

to the new rate

• Loan funds to employees to make up the

temporary shortfall

• Declare bonuses to clear loans once rates are

reduced

Issues

• BIK charge on the loans.

• Longer term approach – what happens to

leavers?

• Potential s419 charge for close companies

• Material – impact on accounts?

• Waiver needs to be effective

Subsidiary

Loans Waive bonus

Employees

2. BONUSES – CLAW BACK

Clawing back bonusesIdea

1. Enables the company to claw back

bonuses in the event of executive poor

performance.

How it works

1. Group establishes an employee benefit

trust (‘EBT’).

2. An executive’s earned bonus is

transferred by Group to the EBT.

3. Subject to further conditions the bonus is

paid out at a later date by the EBT.

Issues

1. Deferral only – wait and see!

2. Can manage tax charge

Group

����

Trust

Bonus paid

into a trust

and deferred

Claw back for

poor

performance

Payment at

a future

point

2. BONUSES - LOANS FROM AN EBT

Use Employee Benefit trusts to make loans to employees/shareholders

Idea

• An EBT is established making loans to higher

paid employees/shareholders

How it works

1. Group funds EBT by way of contribution or

loan to provide benefits to

employees/shareholders

2. EBT then makes interest-free loans to

employees/shareholders

3. Employee/shareholder is only taxed on the

‘interest’ benefit

Issues

• HMRC may challenge

• Close company issues – funding trust;

Inheritance Tax issues

• Loan – when will it be repaid?

• Residence change possible?

Group

����

EBT

Loans

Allow early vesting of share options

Idea

• If unapproved share options (or EMI options which were

granted at a discount to MV on grant) are exercised post

5 April 2010, income tax plus NIC of 50 per cent + may

be suffered on exercise

How it works

1. Company and employee agree to amend the terms of the

option to provide for early exercise of the options

2. Employee exercises their options pre 6 April 2010 thus

accelerating the tax point and accessing the 40 per cent

rate.

Issues

• Have performance conditions been met?

• Attitude of shareholders?

• Setting a precedent….

• Accounting implications of the change to the option

require careful scrutiny

Normal vesting

?

3. SHARE INCENTIVES – ACCELERATE OPTION VESTING

HMRC approved share option schemesIdea

• Share awards – boost pay without cash

• Employees should be subject to 18 per cent (ie

CGT rates) rather than 50 per cent+ (ie PAYE

and NIC rates)

• The company may be entitled to a corporation

tax deduction even if no income tax

How it works

1. Group gets approval for plans & makes awards

2. The employee sells the shares and uplift in

value from the date of award of the options

should be subject to CGT

Issues

• Can the company qualify for approved plans?

• Low level awards

• Is there a market for shares?

• Administration

Group

����

Share

options/share

purchase/share

awards

3. SHARE INCENTIVES – APPROVED PLANS

Partly-paid sharesIdea

• Buy now, pay later!

• Growth in value of the shares should be subject to CGT

at 18 per cent and not PAYE and NIC at 50 per cent +

• Usually an annual tax charge based on the value of the

shares at acquisition – currently low

How it works

1. Issue/transfer shares – at current market value

2. Defer payment

3. Pay later – time controlled by company

Issues

• Risk – biggest issue - must pay up shares

• Fund with bonuses?

• Share price drives exposure

• Must NOT transfer before payment

• Works well with low value shares

• Works well where want ‘skin in the game’ but executive

is ‘cash poor’

3. SHARE INCENTIVES – PARTLY PAID SHARES

Income tax

exposure

Capital Gains

Tax on growth

Income tax

exposure

Growth sharesIdea

• Create a new class of share and issue to employees giving

them value if the business grows in value over and above

a pre-determined ‘hurdle rate’

• Tax on the vesting of the awards ie the value which the

employees receive

• Growth should be subject to CGT at 18 per cent and not

PAYE/NIC at 50 per cent +.

How it works

1. A new class of share is created and subscribed for by key

employees

2. The employees acquire the shares at day one

3. Growth in value linked to future performance of company

4. The growth in value should be subject only to CGT

Issues

• Subject to performance – forfeit if don’t achieve

• Not suitable for listed companies

• No corporate tax relief

Group

����

Growth in value =

share value

to employees

3. SHARE INCENTIVES – GROWTH SHARES

Freezer scheme in a subsidiary

Idea

• Create a new class of share in a subsidiary carrying rights

to the future value only and award the ‘B’ shares to key

individuals

• The individuals should be subject to CGT at 18 per cent per

cent rather than PAYE and NIC at 50 per cent

How it works

1. Subsidiary creates a new class of ‘B’ share

2. These shares carry only the right to the future value of the

subsidiary

3. Subject to achieving performance conditions, the ‘B’

shareholders exchange their shares for shares in the

parent. On sale of the shares- should be subject only to

CGT at 18 per cent

4. Can potentially use with HMRC approved plans

Issues

• Is dilution in subsidiary acceptable to shareholders?

• Accommodating new joiners – gets more difficult as share

value grows

• Subject to performance

Subsidiary

����

New class of

share

Group

3. SHARE INCENTIVES – GROWTH SHARES IN A SUBSIDIARY

‘Split Interest’ share incentive schemeIdea

• A shared ownership of shares – between employees

and trust – growth in value in hands of employee

• Tax on the sale of shares should be subject to CGT

at 18 per cent and not PAYE and NIC at 50 per cent

+

How it works

1. Company funds ESOT & it subscribes/purchases for

shares

2. EBT splits the beneficial interest of shares -

transfers the future interest to employee and

retains the historic interest

3. Subject to achieving performance conditions (the

employee is subject only to CGT on growth in value

of his interest

Issues

• Unapproved options – can deliver whole value of

the shares (analogous to an LTIP)

• Not considered aggressive BDO has received

HMRC’s ‘sign off’

• Up front tax charge

• Can fit with current share plan

Share

����ESOT

3. SHARE INCENTIVES – SPLIT INTEREST SHARES

Future valueCurrent value

4. PENSIONS – POSITION UNTIL APRIL 2011

Pension Contribution PlanningIdea - Maximising higher rate tax relief on

contributions in 2009/2010 and 2010/11

How it works

• If your income is generally below £130,0000 -

can pay the maximum pension contributions

• If your income exceeds £130,000 and you are

subject to the anti-forestalling rules:

- Can continue regular (monthly or

quarterly) pension contributions

- If historically made irregular

contributions can contribute up to

£30,000 in both 2008/9 and

2009/2010

- If current contributions are below

the £20,000 can increase your

contributions to this level

Issues

• Government limits on drawdown

• Lack of flexibility

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Pension

£

4. PENSIONS – POST APRIL 2011- EFURBS

Use EFURBS for pension provision

Idea

• An Employer Funded Unapproved Retirement

Benefits Trust (“EFURBS”) is established by

Group

• It funds retirement benefits

How it works

1. Group funds EFURBS by way of contribution

to provide retirement benefits to employees

2. EFURBS establishes funds for relevant

individuals

3. More flexible investment and benefits

Issues

• Tax certainty on funding

• IHT issues for close companies

• Delay in corporation tax deduction

• Portable retirement provision

• Alternative to ‘extra cash’

Group

����

EFURBS

More flexible

Pension provision

WHAT HAPPENS NEXT?

The next 12 months….

1. Budget – a damp squib – but fat Finance Bill

2. Second Budget – the real rules

3. But – how long will it take to ‘unscramble the current rules’?

4. Will capital gains tax rates go up? If so, by how much?

5. Anti-avoidance – not a vote-catcher! Likely to continue and increase in

scope?

Corporate strategy – flexible and cost effective

Thank you

Questions for the panel?