Can I minimize corporation tax by investing
Discussion
Hi,
Wonder if anyone can help me out here. I run a uk ltd company and luckely the current credit crunch hasn't affected us too much and we made a bit of money in the current financial year (which ends March 2009). Obviously if I do nothing, we have to pay coorporation tax.
An opportuunity has come along to acquire a significant stake in another business for cash and I believe this investment would really be benificial to my current company. My (probably not so simple) question is:
Is there a way of minimizing my coorporation tax liability by making an investment in another company?
Thanks in advance
DD
Wonder if anyone can help me out here. I run a uk ltd company and luckely the current credit crunch hasn't affected us too much and we made a bit of money in the current financial year (which ends March 2009). Obviously if I do nothing, we have to pay coorporation tax.
An opportuunity has come along to acquire a significant stake in another business for cash and I believe this investment would really be benificial to my current company. My (probably not so simple) question is:
Is there a way of minimizing my coorporation tax liability by making an investment in another company?
Thanks in advance
DD
It could work both for and against you.
If your existing company buys shares in another company, it may (depending on the number of shares acquired) technically create a "group" situation. If the bought company has existing unused trading losses, those losses could be utilised in your current company under "Group Loss Relief" rules. However, there are restrictions and blocks in how such loss relief can be utilised. It's quite a complicated area and requires specialist advice.
Why not spend some money on capital equipment in your current company?
The Capital Allowances available for smaller business are now quite good. With the exception of motor cars, up to £50,000 worth of capital expenditure can be completely written off against profits in the year of purchase. So, if you went out and spent (say £20,000 on a van before 31 March 2009, you would be knocking £4,000 off your Corporation Tax liability,
If your existing company buys shares in another company, it may (depending on the number of shares acquired) technically create a "group" situation. If the bought company has existing unused trading losses, those losses could be utilised in your current company under "Group Loss Relief" rules. However, there are restrictions and blocks in how such loss relief can be utilised. It's quite a complicated area and requires specialist advice.
Why not spend some money on capital equipment in your current company?
The Capital Allowances available for smaller business are now quite good. With the exception of motor cars, up to £50,000 worth of capital expenditure can be completely written off against profits in the year of purchase. So, if you went out and spent (say £20,000 on a van before 31 March 2009, you would be knocking £4,000 off your Corporation Tax liability,
Edited by Eric Mc on Thursday 15th January 08:19
Eric, thanks for your reply. Some clarification may be appropriate. The investment into the company to be bought is around 40% so significant but no majority. Not sure that changes things? Also the amounts involved are reasonably significant (for us anyway!) as this 40% will be acquired for about £200k and I don't see a way of "loosing that" as an expenditure before March. We don't really make capital investments (we write software :-))
Merely buying shares in another company gives you no automatic tax reliefs. Why should it, when you think about it.
In buying into the firm, are you using all the cash investment to buy shares?
Is their an elelment of goodwill involved in the purchase i.e. amounts over and above the true value of the shares?
As you design and create software, what about investing is some R and D expenditure. There are some good capital allowances available on that.
Doesn't your firm use computers though?
Computer equipment is eligible for the £50,000 relief.
It seems that you are going to go ahead and buy into this company anyway. The tax relief question has occured as an afterthought. Am I right?
Have you spoken to your own accountant in advance of embarking on this course of action and , if so, what advice did you receive?
In buying into the firm, are you using all the cash investment to buy shares?
Is their an elelment of goodwill involved in the purchase i.e. amounts over and above the true value of the shares?
As you design and create software, what about investing is some R and D expenditure. There are some good capital allowances available on that.
Doesn't your firm use computers though?
Computer equipment is eligible for the £50,000 relief.
It seems that you are going to go ahead and buy into this company anyway. The tax relief question has occured as an afterthought. Am I right?
Have you spoken to your own accountant in advance of embarking on this course of action and , if so, what advice did you receive?
Eric, we are not sure about buying into this company. We only really want to do it if the it reduces our tax liability so in a way the net acquisition cost comes down. What the company we are looking at is providing us with is a "tool" which will help our business significantly. So either we licence this tool from them (at a cost) or we reduce this cost by making an ecquity investment. We have spoken to our accountant and he wasn't too sure and suggested we take professional advice. I thought I try the well proven route of Piston heads first
Hmm - an accountant who advises his client to seek professional advice. Does he not consider himself a professional then?
To be fair, this can be quite a tricky area and the tax ramifications of such a deal may be outside the normal sphere of knowledge of most GP type accountants - a group in which I would include myself.
One thing to watch out for is, if your existing company is currently making profits below the £300,000 21% Small Company CT Rate, acquiring another company could dilute this threshold so that more of your normal profits in your existing company could be taxed at higher rates of CT (i.e. 28% or even 29.75%).
So, rather than getting tax relief on the acquisition of the company, you could end up paying MORE tax.
To be fair, this can be quite a tricky area and the tax ramifications of such a deal may be outside the normal sphere of knowledge of most GP type accountants - a group in which I would include myself.
One thing to watch out for is, if your existing company is currently making profits below the £300,000 21% Small Company CT Rate, acquiring another company could dilute this threshold so that more of your normal profits in your existing company could be taxed at higher rates of CT (i.e. 28% or even 29.75%).
So, rather than getting tax relief on the acquisition of the company, you could end up paying MORE tax.
Tricky one this. I would seek the advice of a corporation tax adviser. You may need to refer it to a larger accounting practice with relevant expertise.
In terms of the corporation tax group, you will create one if the company you invest in becomes a subsidiary. It will become a subsidiary if your stake means that you have a control of the business. That can happen by virtue of a majority shareholding (ie 51%) or an ability to steer the company/have an effective majority by virtue of board membership.
The other point to note is if the acquiree (the co you are buying) has accumulated tax losses you can only offset them if the trades are the similar or the same. That is to say you can't offset the losses if one business is providing professional consulting services and the other is selling widgets.
To my mind the decision you are making should not be based upon tax reasons, more on what the company will become through the synergies of the two businesses.
As i said at the top any deal like this must be structured carefully and professional advice is invaluable at this juncture.
In terms of the corporation tax group, you will create one if the company you invest in becomes a subsidiary. It will become a subsidiary if your stake means that you have a control of the business. That can happen by virtue of a majority shareholding (ie 51%) or an ability to steer the company/have an effective majority by virtue of board membership.
The other point to note is if the acquiree (the co you are buying) has accumulated tax losses you can only offset them if the trades are the similar or the same. That is to say you can't offset the losses if one business is providing professional consulting services and the other is selling widgets.
To my mind the decision you are making should not be based upon tax reasons, more on what the company will become through the synergies of the two businesses.
As i said at the top any deal like this must be structured carefully and professional advice is invaluable at this juncture.
Edited by MiloD on Thursday 15th January 22:25
I'm sure Tonker will be along soon - you are considering risking £200k buying equity in another company and asking for tax advice on Pistonheads??
Do you have a decent commercial lawyer who can properly advise you on the best way to make this investment? Is equity the best way to go?
Your accountant doesn't sound up to much. If you have made a reasonable profit last year 'invest' some of it finding good advisors - good accountants and good commercial lawyers.
Where are you based?
Do you have a decent commercial lawyer who can properly advise you on the best way to make this investment? Is equity the best way to go?
Your accountant doesn't sound up to much. If you have made a reasonable profit last year 'invest' some of it finding good advisors - good accountants and good commercial lawyers.
Where are you based?
If you buy the goodwill, rather than shares you can get tax relief but it will be over a number of years. If the price is too high unless you can get the tax relief offer a lesser sum so the acquisition works for you.
Acquiring shares is beneficial to the vendor but not you so there has to be a compromise on the tax benefit, which will be an adjustment to the price. You really should look at the commercial rationale for the transaction and how quickly you can make your money back. Don't go and buy something just because it saves you some tax.
Acquiring shares is beneficial to the vendor but not you so there has to be a compromise on the tax benefit, which will be an adjustment to the price. You really should look at the commercial rationale for the transaction and how quickly you can make your money back. Don't go and buy something just because it saves you some tax.
doubledutch said:
Obviously if I do nothing, we have to pay coorporation tax.
I don't understand.Surely - like everyone - you are happy to pay corporation tax? I mean - remember what the government do with it. It pays for our world-class police, health service, education system and armed forces.
Erm.....
Seriously though - I feel your pain - we made a decentish profit last year and I can't tell you how much I'm gnashing my teeth at the imminent CT bill, how all that my bloody hard-earned money will do is line greedy MP's pockets / pension plans, whilst the country falls apart and of course the BIG profit makers dodge CT completely.
Bitter? Me? You better believe it!!!
And the best my accountant came up with was:
"You'll just have to make more money"
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