Companies and businesses continue to face challenging times with a multitude of external factors from changes to taxes and tax rates, sustained high interest rates, higher energy costs and global conflicts impacting on supply chain forecasting.

Even businesses with an otherwise healthy cash balance and prospects may now see a squeeze on cashflow and be exploring how to manage this.
We look at four main areas companies should explore to ensure they are taking advantage of tax reliefs and the planning available to them. Good tax housekeeping can improve cashflow along with providing a firm foundation for future transaction ensuring values are maximised.

Cashflow and tax basics

Take the time to plan your corporate loss relief strategy each year to ensure you are saving the maximum amount of tax and not paying it before the deadline date.

Relief for tax losses are often maximised by taking them as early as they can be relieved. However, with the increase in the main corporation tax rate to 25% from April 2023, many companies and groups will now find themselves in a higher tax bracket.

Benefit may be achieved by amending loss carry back claims so losses are  used in future years at the 25%. Amendment of loss carry back claims will leave unpaid tax in earlier years but interest on late payment at a 19% tax rate may be less costly than saving tax at 25% at current rates.

With the increase in corporation tax rates also came a change to the definition of associated companies. Many business owners may now find that there are more companies in their ‘group’ than under the old rules. Whilst this will have an impact on the headline tax rate (as there is still a 19% rate for companies with profits below £50,000) more fundamentally it will potentially alter the profit limits for quarterly instalment thresholds if there are more associated companies in the group. Added to the general impact of fiscal drag, many groups will now find themselves firmly in the 25% banding.

Groups and related companies should examine these connections to be clear on the tax impact. We provide further discussion below on reducing the number of associated companies/companies in the group to assist with this planning. Consideration should also be given to removing any ‘unnecessary’ companies from the structure.

For companies in further stages of distress, care should be taken to understand how certain loss reliefs can be restricted in certain scenarios For example, where a trade has ceased, where there are arrangements for a company to leave a group or where an insolvency practitioner has been appointed.

Time to Pay (TTP) arrangements: If you don’t have the cashflow to pay your corporation tax liability, plan early and seek special arrangements with HMRC

HMRC offer formal and informal payment arrangements for companies struggling with cashflow to pay their corporation tax liabilities on time. However,  the key point is to engage and talk to HMRC early. Any creditor (including HMRC) may have the right to initiate winding-up procedures against a company, so agreeing a plan can offer certainty and can be a good strategy for companies in distress.

HMRC will only consider such arrangements where the company or group can demonstrate that the financial difficulties are short-term and a route back to recovery is clearly set out. The onus is on the business to set out a detailed plan as to how and when it will repay the defined outstanding amounts. This may involve changes to negotiated credit terms with suppliers, shorter payment terms from debtors, delays in capital expenditure or a halt on bonuses and/or director loans. HMRC will expect the company to offer payments of outstanding tax at the earliest opportunity and only in rare circumstances would agree a plan extending beyond 12 months.

Although HMRC see TTP arrangements as a last resort, they do offer the benefit of a bespoke plan if set out correctly. Note that HMRC will have the benefit of seeing other such arrangements in a particular industry and so will sense-check against proposed plans from other businesses.

Related insight:

Time to pay: some common questions

Research & Development (R&D) Tax Credits: Plan your R&D tax impact in year to avoid falling into traps of the new regimes.

As many companies are now aware, the valuable UK R&D regime is not just the preserve of larger corporates or white coat laboratories. Any company that is investing in innovation and developing new processes, products or service can benefit from this tax relief which can increase allowable deductions for corporation tax or lead to a cash repayment from HMRC.

Recent changes to this regime have meant that HMRC are now scrutinising claims in more detail but with the right professional advice this is still a generous relief. From April 2024 the two R&D regimes (the RDEC regime for larger corporates and the SME scheme for smaller businesses are to merge into one scheme. So, for companies that have already been taking advantage of these reliefs it is important to understand how these new changes will impact the forecasting of cashflow, as the relief may no longer apply to you in the same way as before.

Related insights: 

Research and Development Tax Reliefs  Research and Development for small and medium sized software companies

Capital allowances: If planning significant expenditure on capital assets, speak to your adviser before the purchase to maximise tax relief opportunities. 
Capital allowances provide a highly effective way of reducing the post-tax cost when incurring capital expenditure on plant, machinery, fixtures and fittings, and when acquiring, constructing, fitting out or refurbishing property.

Complex and evolving legislation coupled to increasing HMRC compliance requires prudent allocation of expenditure to relevant asset classification and pools. Specialist knowledge is required to ensure that capital allowance claims are maximised

Property transactions, (acquisitions and disposals) can also give rise to capital allowances and the introduction of complex anti-avoidance legislation requires capital allowances to be identified and correctly pooled prior to a property transaction being concluded.

Typically, 40% of expenditure on new office builds can qualify for capital allowances, increasing to 80% for office refurbishments and 95% for retail and leisure fit-outs.

Other areas to consider include expenditure on land remediation, structure and building allowances, leasehold contributions and the identification and utilisation of accelerated tax relief through Full Expensing and Annual Investment Allowance allocation.

Many companies do not claim all of the capital allowances or other property related tax reliefs to which they are entitled, so early advice is essential. Historic expenditure on assets and property may also yield capital allowances.

Please see the links below to further Crowe articles on these topics.

 Capital Allowances  Full Expensing: Does it go far enough?

Group efficiencies

Revisit your group structure to consider activities that can be streamlined, grouped together or shut down. There are several tax reliefs enabling trades and assets to be moved around a group tax efficiently.

Many corporate groups have legacy companies.

Directors should review the group structure to see where it might be beneficial to close down dormant or unused companies or to merge some trades into ‘divisions’ all operated under one company.

This will lead to savings in professional fees (for example, the need to prepare separate financial statements and tax returns) but will also have an impact on the number of associated companies in a group when considering quarterly instalment payments and profit limits (see above).

Directors should take advice on how this might apply to their business and how easy it is to implement. Similarly there are different options on how to close a company down and this will be dependent on the historical trading operations and commercial risk of each company.

To plan your strategy on which companies you may wish to remove, please see the following insights.

Related insights:

Corporate Simplification  Members Voluntary Liquidation versus Strike Off

Tax efficient disposals

Disposing of unwanted business lines or assets can help with cashflow and efficiencies. Doing this tax efficiently will maximise the result.

Expanding on the discussion above, a business may decide to sell (rather than close down) a part of the business.

Doing this tax efficiently to minimise any tax liability will maximise proceeds and cashflow to inject back into the core business.

A key factor is whether to sell the trade and assets of a business versus the shares in a subsidiary.

There may be competing objectives here between buyer and seller due to tax treatment.

Substantial Shareholding Exemption (SSE): Securing SSE relief can mean no corporation tax on a disposal

Often with the sale of a trading business, a share sale can be achieved with no tax to pay where a corporate entity is disposing of shares in a corporate entity. The Substantial Shareholding Exemption (“SSE”)broadly applies where the parent entity has held at least 10% of the share capital in a trading subsidiary for at least 12 months.

However, there is further planning that can be adopted to hive down a single trade or division from one group company into a brand new subsidiary entity and sell immediately (provided the transferor company was part of a group in the first place and has not just become a group by virtue of creating the new subsidiary). This allows the creation of a ‘clean’ company to move certain trade and assets which can increase appeal for a potential buyer. This new subsidiary does not need to have been in place for 12 months; provided that the trade itself has been carried on by the group in some form for at least 12 months. 

A key point here is that this planning is only available where there is a group in the first place. Single companies may wish to consider operating as a group and perhaps incorporating a new subsidiary now (even if it is dormant) to allow this planning to take place in the future. 

Trade and asset sale: Planning ahead enables better negotiation  

The purchaser on the other hand may prefer a trade and asset sale to a share sale. In such a case, a value will likely be placed on the goodwill of a business and the disposal of this goodwill will attract a tax charge. The vendor group should consider any other losses around the group that may be available to be utilised against such a gain.

Like most things, planning in advance is important to understand the options available and how this might impact the way the vendor goes to market. Being on the front foot before speaking to a potential purchaser will often allow the vendor to set the terms of a transaction.

Speak to your Crowe contact to work through what you want to achieve here before going to market.

Vendor Due Diligence: An advance tax health check can save costs and enable matters to be dealt with on your own terms.
A potential purchaser will want to undertake a due diligence exercise on any business or company that they are going to purchase. This will involve looking at financial projections and customer base, but will also mean a deep dive into the company’s tax affairs. Part of any pre-sale tax advice and restructuring exercise should include a vendor due diligence examination to identify any potential problem areas that a purchaser’s advisors will identify and ultimately seek to use to reduce the price.

The vendor due diligence exercise is a form of healthcheck and should incorporate not just corporate taxes but employer taxes, VAT and any customs duty processes. The intention is to identify any incorrect tax processes or tax risks and seek to correct these before a sale. The vendor company can then choose how to approach this instead of having to involve the purchaser for agreement on any remedy. In terms of costs and cashflow it is also a sensible way for the vendor to remain in the driving seat to address matters efficiently, rather than have due diligence teams and lawyer costs racking up to resolve matters in real time on a deal.

Speak to your Crowe contact for detail on how we can assist before other parties are involved.

Debt restructure and financing

Improving cashflow, business rationalisation or preparing for an exit is to consider the company’s debt position and seek to restructure any distressed debt.

This may be a restructuring of third party debt or looking at intragroup lending to determine if the group is maximising its tax cashflow.

Debt for companies is governed by the complex ‘loan relationship’ regime and care needs to be taken to ensure that any tax traps are avoided and that any relief planning is robust.

Some key points you should consider:

Documentation is key.

To fall within the definition of a loan relationship, broadly the debt must be a ‘money debt’ which arose from a transaction for the lending of money. Documenting this appropriately is the simplest way to ensure that the debt meets these conditions. Documentation can also be used to formalise historic debtor and creditor relationships that may have arisen from other transactions such as one company paying a supplier on behalf of another or one company owing another for the sale of goods.

‘Connected’ parties debt releases can allow for the release of a debt to take place in a tax neutral way.
Meaning that there is no corporation tax deduction for the debt write off but equally no corporation tax on the release credit (income) arising in another company. Care needs to be taken to ensure that any write off does not lead to an income distribution charge on the shareholders. This can often be managed in group situations (writing off of debt between members of the same corporate group) although can cause problems with companies in separate corporate groups and ‘connected’ by an individual shareholder.
Individuals are not subject to the loan relationship rules.

Reliefs under the loan relationship rules may not be available to companies in this situation:

  • An alternative to a loan write-off could be the capitalisation of a debt (to turn the debt into an equity holding of ordinary shares). Consideration should be given to values and defining exactly what is ‘given up’ in relation to the debt to ensure the tax treatment is as expected, namely that there should not be a taxable release in the hands of the company.
Relief may be available under the ‘corporate rescue exemption’.
To ensure no taxable release, this can apply in certain scenarios where 'immediately before the release, it is reasonable to assume that, without the release and any arrangements of which the release forms part, there would be a material risk that at some time within the next 12 months the company would be unable to pay its debts'. The company will therefore be required to demonstrate that this is the case with insolvent balance sheets or detailed forecasts but may need the assistance of an experience insolvency practitioner opinion to support this.

The company will therefore be required to demonstrate that this is the case with insolvent balance sheets or detailed forecasts, but may need the assistance of an experience insolvency practitioner opinion to support this.

Although there are plenty of ‘clever’ tax reliefs to work through for a debt release, a ‘simple’ work through of moving cash around a group could be a more straight-forward solution. Taking a bit of time to work through how cash can be moved in other ways (distributions, further lending and repayment) could result in a simplified structure without having to work through the loan relationship rules.

You can explore this further in our article Refinancing and the taxation of interest – some common questions.

Companies should map out their debt position to understand the true net tax cost of this to the business and how it can be simplified. Get in touch with your Crowe contact to explore how this can be improved.

Let's work together

Taking time out to prioritise a Corporate Tax Healthcheck could be the most efficient and strategically sound business decision you make this year.

If there are any matters above you would like to explore further, please contact your usual Crowe contact who can arrange a meeting to discuss a plan and introduce you to further specialists as required.