Proposed changes must not restrict genuine commercial restructurings or create unintended tax charges.
Crowe UK has called on the government to ensure that proposed changes to the taxation of company distributions are properly targeted and do not restrict ordinary commercial transactions.
In its response to HMRC’s consultation on modernising the distributions framework, Crowe UK has raised concerns that the proposals could have a significant impact on relatively commonplace and well-understood company reorganisations, including demergers and company purchases of own shares.
Protecting genuine commercial restructurings
The principal concern is the proposed treatment of capital reductions following share-for-share exchanges. The changes would restrict capital reduction demergers, which are commonly used where a company does not have sufficient distributable reserves to complete a conventional demerger.
These transactions are often utilised ahead of a third-party sale where a buyer wants to acquire a trading business but not associated property or other assets. Restricting the available routes could delay transactions or prevent some deals from proceeding at all, which is clearly at odds with a business growth program the current government has suggested is one of its main priorities.
A statutory safe harbour and transaction certainty
Crowe UK has therefore proposed a clear statutory safe harbour, supported by an HMRC clearance procedure, for genuine commercial reconstructions where no value leaves the corporate group.
Paul Twydell, Director at Crowe UK, said:
“The proposals need to be properly targeted. Measures aimed at tax-motivated extraction should not get in the way of genuine commercial transactions or create unexpected Income Tax charges. We are also concerned by the possibility of a move away from advance clearance towards rules that transactions simply pass or fail. Businesses need certainty before undertaking significant restructuring. A statutory safe harbour, backed by an effective clearance process, would give them that certainty while still allowing HMRC to challenge arrangements where there is clear evidence of avoidance.”
Crowe UK has also asked HMRC to consider why its existing powers under the Transactions in Securities rules are insufficient before introducing broader legislation. HMRC already has wide-ranging powers to counteract transactions involving shares where there is a tax avoidance purpose.
Rather than treating ordinary capital returns as income, targeted changes to clearance, notification or penalty procedures may provide a more proportionate response.
Maintaining flexibility for company purchases of own shares
In relation to company purchases of own shares, Crowe UK supports targeted protections for minority shareholders, family shareholdings and retiring business owners. The rules should remain flexible enough to deal with shareholder disputes, succession events and genuine changes in commercial circumstances.
Crowe UK supports the objective of creating a coherent distributions regime and any attempt to simplify a complex area of tax is always welcome. However, any reform should be evidence-based, proportionate and supported by clear legislation and an effective advance clearance procedure.
Crowe UK will continue to monitor the government’s response. Businesses considering a restructuring should speak to their usual Crowe UK adviser about how the proposals could affect their plans.
For further guidance on the above, please get in touch with your usual Crowe UK contact.
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