View the related Tax Guidance about Book value
Inbound migration
Inbound migrationReasons for an inbound migrationMigration describes the situation when a company changes its tax residence. A company which is not incorporated in the UK may become resident for tax purposes in the UK if it becomes centrally managed and controlled in the UK.The Government is currently consulting on whether or not to introduce a corporate re-domiciliation regime. The consultation closed on 7 January 2022 and the response is expected to be published by HMRC in due course.See the Residence of companies guidance note.In many cases, this may happen accidentally, but a well-advised company will avoid this by taking appropriate action to ensure that central management and control is kept outside the UK.However, in some cases, there may be tax benefits of a company becoming resident in the UK, for example:•to take advantage of a UK double tax treaty•to avoid the application of anti-avoidance rules such as the attribution of gains under TCGA 1992, s 3 (formerly TCGA 1992, s 13) ― see the Gains attributable to participators in non-UK resident companies guidance note ― or the transfer of assets abroad rules, see Example 1•to qualify under the subsidiary substantial shareholding exemption (TCGA 1992, Sch 7AC, para 3, which requires the investing company to be resident in the UK), see the Substantial shareholding exemption (SSE) ― overview guidance note which also sets out legislative changes in this area applicable from 1 April 2017
Demergers ― overview
Demergers ― overviewThis guidance note gives an overview of why and how companies and groups demerge, and the aims and process of tax planning for demergers.In simple terms, a demerger involves the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company.Companies (and groups) may want to split out their activities for many different reasons. There may be a desire to focus management on one specific part of the business or there may be conflicting interests between shareholders. There could also be legal reasons to separate a trade out from the rest of the group (eg to ring fence liabilities). It may be the only way for a purchaser to be able to buy certain parts of the business. While demergers are usually triggered by a variety of commercial reasons, a business undergoing a demerger will also want to minimise, and ideally eliminate, any tax charges arising on the demerger.The different mechanisms for achieving a tax efficient demerger fall into three main categories:•statutory demerger•demerger by way of reduction of share capital (often referred to as a capital reduction demerger)•demerger by Insolvency Act 1986, s 110 demerger (also known as a liquidation demerger)For each of these demergers there are tax provisions which should mean that, for tax purposes, a qualifying distribution is exempt and as such there is no income tax for the shareholder.The decision as to which demerger mechanism to use will
Demerger via liquidation ― tax analysis
Demerger via liquidation ― tax analysisThis guidance note follows on from the Demerger via a liquidation ― overview guidance note which gives an introduction to demergers via liquidations (also known as non-statutory demergers, or section 110 demergers) and includes diagrams to illustrate a typical demerger via liquidation. HMRC clearances will be required if this demerger route is chosen and appropriate time should be built into the transactions process for these. For more information, see the Demerger clearances guidance note.For overall guidance on demergers, including choice of the most appropriate route and planning the demerger project, see the Demergers ― overview guidance note.Tax analysis of a liquidation demerger ― overviewThere is more than one method for carrying out a liquidation demerger. However, the typical steps for carrying out a liquidation demerger are shown below. Depending on the steps involved, tax charges can be triggered either at the corporate or shareholder level (or both). For a more detailed description of the steps involved in a liquidation demerger, see the Demerger via a liquidation ― overview guidance note.A high-level overview of the steps and related tax implications are as follows:StepDescription of stepTax implications ― shareholder levelTax implications ― corporate levelOneInsert a new holding company (Liquidation HoldCo) above the current holding companyProvided HMRC accepts that the share exchange is driven by commercial reasons (confirmed by a TCGA 1992, s 138 tax clearance), the shareholders will not trigger any capital gain on the
Trading subsidiaries of charities
Trading subsidiaries of charitiesIntroduction to trading subsidiariesA 'trading subsidiary' is a company owned and controlled by a charity, or occasionally several charities, which has been incorporated in order to carry on a trade or business which:•the charity cannot itself carry on due to constitutional restrictions or concerns about business risk and potential liabilities, and / or•the charity cannot carry on in a tax-efficient mannerA trading subsidiary is usually set up to generate income for the charity or charities, as the subsidiary does not have the restrictions to its trading activities that charities have.A trading subsidiary can be used to:•carry out non-primary purposes trading beyond the limits of the small scale exemption (see the Tax treatment of the charity guidance note)•protect a charity’s assets from the risks of tradingIf the subsidiary company gives all or part of its profits to the charity (in place of a dividend) then it will not pay tax on those profits, see the Gifting cash and assets to charity guidance note.Trading subsidiaries are not cheap to run and generate additional bureaucracy and complexity and so should not be created without proper consideration of their merits and disadvantages.Setting up a trading subsidiaryIf a charity wants to set up a trading subsidiary it will need to:•create a company•provide it with trading capital (see below)•consider how the charity's assets can be made available to the company (see below)•ensure that the company gives profits, which would otherwise be taxed, to the
FRS 102 ― tax presentation and disclosures
FRS 102 ― tax presentation and disclosuresPresentation of tax under FRS 102An entity must present changes in a current tax liability (or asset) and changes in a deferred tax liability (or asset) as a tax expense (or income) unless the item creating the current or deferred tax amount is recognised in OCI, in which case, the deferred tax is also recognised in OCI. Deferred tax arising on the initial recognition of a business combination is dealt with in accordance with FRS 102, s 29.11 and added to the goodwill recognised on the combination. See the FRS 102 ― specific deferred tax issues guidance note for further information. Current taxAn entity must present the tax expense (or income) in the same component of total comprehensive income (ie continuing or discontinued operations, and profit or loss, or other comprehensive income) or equity as the transaction or other event that resulted in the tax expense (or income). Deferred taxDeferred tax liabilities must be presented within ‘provisions for liabilities’ in the balance sheet. Deferred tax assets must be presented within debtors. Offsetting tax assets and liabilities under FRS 102Offsetting is the netting of assets and liabilities into the presentation of a single net figure in the accounts.Current tax assets and liabilitiesAn entity must offset when, but only when, there is a legally enforceable right of set off (ie the tax law provides for setting off, for example when group relieving losses against taxable profits) and the reporting entity either intends:•to settle on a net
Preparing group for sale or acquisition
Preparing group for sale or acquisitionOften a company or group of companies has developed gradually over years, with different businesses being run within a single company or the group structure being overly complex for historic reasons. When a decision is made that a group, sub-group, single company, business or a collection of assets should be divested, it is often necessary to restructure in order to rationalise the structure and/or separate out the parts that are to be sold.This note considers the various issues that should be considered before a sale. Indeed, groups may wish to consider these issues periodically to ensure that their structure is suitable for a quick sale if the opportunity arises suddenly.However, many companies will not address them until a potential buyer has already been identified and commercial negotiations have already started. In that case, these issues should be considered alongside the factors that should be taken into account when deciding on the sale structure itself (see the Comparison of share sale and trade and asset sale guidance note). Note that even if an asset sale is preferred then it may still be sensible or commercially necessary to restructure the business so there is a single seller/sale by the individual shareholders and/or so it is clear that a separate, ongoing trade is being sold.Other guidance notes in this topic cover:•the tax implications of the sale structure, see the Tax implications of share sale and Tax implications of trade and asset sale guidance notes•some specific
Capital reduction demerger ― overview
Capital reduction demerger ― overviewA capital reduction demerger is a non-statutory method to carry out a demerger.The stringent conditions for a statutory demerger and the chargeable payments rule can often make that demerger route unfeasible or undesirable. See the Statutory demergers - overview guidance note for details of these.Common scenarios where the statutory demerger route may not be suitable or indeed available include where:•the company does not have sufficient distributable reserves•there are plans to sell the demerged business or businesses•the business that is being demerged is not a trading businessIn such cases, there are two alternative non-statutory procedures for carrying out the demerger. One is through a reduction in the company’s share capital, known as a demerger by way of a Companies Act reconstruction or a ‘capital reduction demerger’. The second is set out in Insolvency Act 1986, s 110, and is often referred to as a section 110 demerger or a liquidation demerger. This guidance note provides an introduction to capital reduction demergers. For guidance on demergers via a liquidation, see the Demerger via a liquidation ― overview guidance note.An overview of the capital reduction demerger process and the typical steps involved are shown below. For the tax analysis of this type of demerger, see Capital reduction demerger ― tax analysis. Advance HMRC clearance should be sought as part of the demerger process to obtain HMRC’s agreement that the proposed transactions are being carried out for bona fide commercial purposes and not for the avoidance
Transition from IFRS to FRS 102
Transition from IFRS to FRS 102IntroductionTransitioning from IFRS to FRS 102 will be rare, although two examples of this scenario are provided below:•it is possible that a company currently listed on a UK / EU regulated stock exchange or the UK's Alternative Investment Market (AIM) might delist and may not need to produce IFRS financial statements in future•a subsidiary currently producing IFRS financial statements as directed by its parent may be sold by the parent company to shareholders or another group that is not using IFRS whereby it may need to transition to FRS 102Rate of taxThe rate of tax used for any deferred tax calculations on transition to FRS 102 is the rate expected to apply when the timing difference reverses, based on the rates enacted or substantively enacted at the end of the relevant year. See the FRS 102 ― current and deferred tax guidance note for a definition of when a rate is substantively enacted. Comparison of deferred tax accountingIFRS (IAS 12) calculates deferred taxation based on temporary differences between the book value of an asset or liability and its tax base. The tax base of an asset is the amount that will be deductible against future taxable profits. The tax base of a liability is the book value minus the amount deductible against future taxable profits.IAS 12 mandates that the tax base be calculated by taking into account the manner of recovery of the asset or liability. Most assets have a ‘dual tax
Reconstructions involving transfer of business
Reconstructions involving transfer of businessThe ‘paper for paper’ rules relating to share for share exchanges (discussed in the Share for share exchange guidance note) are extended to deal with reconstructions. Relief is available to shareholders where there is a reconstruction involving the issue of shares, and when there is a reconstruction involving the transfer of a business. These are considered in more detail below.Reconstructions involving share issuesWhere there is a reconstruction involving the issue of shares and it:•involves an arrangement between a company (Company A) and either:◦the persons holding shares in or debentures of the company◦where there are different classes of shares in or debentures of the company, the persons holding any class of those shares or debentures•is entered into for the purposes of, or in connection with, a scheme of reconstruction, and under the arrangement:◦another company (Company B) issues shares or debentures to those persons in respect of, and in proportion to (or as nearly as may be in proportion to), their relevant holdings in Company A◦the shares in or debentures of Company A comprised in relevant holdings are retained by those persons or are cancelled or otherwise extinguishedthen certain provisions relating to CGT apply to the reconstruction.TCGA 1992, s 136These provisions are that:•those persons are treated as exchanging their relevant holdings in Company A for the shares or debentures held by them in consequence of the arrangement•TCGA 1992, ss 127–131 (share reorganisations, etc) apply with the necessary adaptations as
Statutory demergers ― overview
Statutory demergers ― overviewThis guidance note gives an overview of the steps and tax implications of a statutory demerger. For an overall introduction to demergers, see the Demergers ― overview guidance note.Key considerationsOne of the key aspects when carrying out a demerger, from a tax perspective, is to mitigate or avoid any tax charge from splitting up the business or group.Statutory demergers provide businesses with a mechanism to demerge in a tax efficient manner, but because of the strict conditions that must be met the application of statutory demergers is limited. For example, the statutory demerger route cannot apply to non-trading businesses or where arrangements are in place at the time of the demerger to sell the demerged or successor company. In addition, there are rules (the chargeable payments rules) that can result in a tax charge if certain events take place within five years after a statutory demerger. In practice, these rules can make statutory demergers unattractive.For cases where the statutory demerger route is suitable, and provided the relevant conditions are met, the demerger should not trigger charges to income tax, capital gains tax or corporation tax, either at shareholder or company level.There are three types of statutory demerger are permitted by the legislation, which are explored in further detail below (see types 1 to 3 below).The most common scenarios where a statutory demerger are likely to be used are where the target company:•is carrying on two or more trades•has two or more trading subsidiaries, or
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