A business you are buying or selling, if reorganised for sale, may be less valuable if you do not avoid tax pitfalls. This note highlights the most common pitfalls, including those related to an insolvency. You can avoid most with planning.

Reorganisations

Many businesses will now be considering transactions involving corporate reorganisations. They might want to take advantage of market conditions to buy or be considering the sale of business units to refocus strategy. Or they might become involved in an insolvency or reconstruction.

Many of these transactions will not have been prepared for as part of a long-term strategic plan. In these circumstances it is easy to forget to identify and think through tax issues in advance:

  • preferably before the start of any formal insolvency process (appointment of administrators, winding-up etc), and 
  • certainly before reorganisations of groups and/or asset transfers within and outside a group.

Failure to do this can make the business being bought or sold less valuable. It can result in avoidable tax liabilities crystallising to the disadvantage of the insolvent estate and its unsecured creditors (and sometimes its secured creditors). It can also result in failure to make the best use of tax losses which often occur where the insolvency is due to real trading losses.

Tax issues on insolvency 

The insolvency of a company can result in many complicated tax issues. Some of the points that you should bear in mind are as follows:

  • The beginning of an administration or a liquidation will end the current accounting period of the company for tax purposes. This can have severe adverse consequences on the ability of the company to make use of its tax losses. 
  • When a company goes into liquidation it loses the beneficial ownership of its assets. This means that it will cease to be a member of the same tax group as its subsidiaries for the purposes of: 
    • surrenders of tax losses etc by way of group relief, 
    • the carry-forward of trading losses and capital allowances on a transfer of a trade within a group, and 
    • relief from stamp duty and stamp duty land tax on intra-group transfers. 
  • Tax liabilities which arise before the commencement of an insolvency normally rank only as unsecured claims. HMRC may, however, be able to enforce these liabilities indirectly by using Crown set-off. 
  • Usually HMRC will be able to rely on case-law to establish a prior claim in respect of tax liabilities which arise during an insolvency. This is, however, a complex area on which advice should be taken in each individual case. 
  • Tax relief for bad debts is normally available in accordance with the treatment of a debt in the creditor's accounts. This is, however, subject to some complex exceptions which apply if the debtor and the creditor are, or become, connected. There are also special rules for debt-equity swaps. 
  • There are many restrictions on the carry-forward or transfer of tax losses which will often make it difficult for the tax losses of an insolvent company to be sold. 
  • VAT issues to consider: 
    • notification of appointment of office holder, 
    • VAT grouping and voluntary de-grouping, 
    • continuation of trading, VAT returns and accounting for tax, 
    • bad debt adjustments, 
    • sale of business as a transfer of going concern, 
    • preservation of VAT records, and 
    • deregistration and post-deregistration VAT accounting.

Action points

If you are considering a reorganisation, or buying or selling business units as a response to the current economic conditions, think about the tax issues now.