Posted on Thursday 21 April 2016 by Ulster Business
Janette Jones, Partner and Head of Northern Ireland tax practice at PwC
In the past 12 months we’ve seen signs of recovery in the form of improved business confidence and greater commercial activity in Northern Ireland, mostly by our indigenous privately-owned business sector.
The recovering economy, together with the ability to deal with legacy distressed debt, means that many businesses are now seeing the return of value and are planning for the future with a confidence that has not been felt for a number of years.
But, it is also clear that lessons have been learned and whilst businesses are clearly focused on growth, this is often tempered by a more considered and risk aware approach to planning.
For PwC, the recent recovery has seen unprecedented interest from business owners who are concerned their current structure may not be ‘fit for purpose’.
This could be because of inherent commercial or tax risk or because the structure is not flexible enough to facilitate succession planning.
Whatever the driver, restructuring a business is often more complex than it appears and there are numerous bear traps for the unwary.
Our PwC tax team has worked with many local businesses to ensure their restructure doesn’t inadvertently create tax problems for either the business or its owners.
Is your business structure fit for purpose?
One of the main hangovers from the boom and bust years, is that business owners were, and still are, locked into business structures that leave too much value exposed to unnecessary commercial risk. Often in a diversified company, or group of companies, there will be businesses on different growth trajectories, possibly with different capital requirements and value realisation plans.
Quite often it makes good sense to separate, or disaggregate these businesses or their assets into separate entities. When doing this, is also offers an opportunity to introduce new family members creating an effective way to facilitate family succession. But, if you’re going to separate businesses in this way getting good professional advice is essential as many pitfalls can trip the unwary. An experienced tax advisor will understand what you want to achieve and will work with you to ensure it is carried out in a way that is acceptable to HMRC.
Protect what you have
Sometimes, the change to the business structure can be relatively small but incredibly valuable. For example creating a holding company to take ownership of valuable assets, such as business premises or intellectual property is increasingly used by private business owners to protect valuable assets from business risk.
Keeping it confidential
Many private business owners are very concerned about disclosure especially where they are competitively tendering for work or supplying into large national or multinational businesses. The filing of statutory accounts allows competitors and customers visibility over the performance of the business and can influence pricing decisions. It is possible to structure a business to manage disclosure, allowing companies to comply with statutory filing requirement but still retain an element of privacy. Many local businesses have taken advantage to this type of structuring obtaining advance clearance from HMRC in the process.
Getting back onto the acquisition trail
Buy, buy, buy and buy as quickly as possible - that was the approach during the boom years. Typically little, if any, thought was given to the how the acquisition should be made, who should own it and should it be ring-fenced from other assets/businesses. Indeed, had more consideration been given to these questions, many would have found the last few years easier to navigate and more businesses may even have survived the storm. So, it’s not surprising that we’re now seeing a more considered approach to acquisition and disposal activity - a focus on risk mitigation, putting fire-walls in place and carving-out the target business post-acquisition. Thinking of these things upfront rather than after the acquisition reduces the need for post-acquisition restructuring which takes up valuable management time, increases professional fees and can create tax problems.
Look out for the bear-traps
Business Property Relief (BPR), is a very generous tax relief that can mean businesses are exempt from Inheritance Tax. Without BPR it would be very difficult for privately owned businesses to pass down to succeeding generations. The Inheritance Tax cost of this would force many businesses to be sold simply to pay the tax.
What is much less commonly understood are the bear-traps that frequently mean the benefit of BPR is either lost completely, or massively reduced. Many of these unfortunately, result from seemingly normal, everyday business activities and transactions. What often makes commercial sense can create a significant tax liability either immediately or in the future.
For example, if you want to partner with someone in a business venture, creating a joint venture company seems logical. Your shares in the new company will be owned by your existing business- perhaps because it’s providing some of the initial capital. Unfortunately this type of joint venture structure can put the BPR you have on your current business at risk as HMRC can view 50% interests as investments rather than trading assets. Alternatively, if the owner of one businesses needs to provide funding to another of his or her businesses and does that by way of a loan, that loan can lead to a BPR restriction, and therefore an IHT exposure on the value of the business that has made the loan.
There are of course solutions to these challenges however, finding the solution requires business owners to identify the problem in the first place, something they too often fail to do. When it comes to tax, what seems reasonable may be anything but prudent so, any transaction should be run past your tax advisor in the first instance.
Restructuring for NI Corporation Tax
The much anticipated and hard fought for 12.5% NI corporation tax rate is due to take effect on 1 April 2018. Many businesses are now considering how this will affect them and whether their corporate structure needs to be amended to ensure the company is best placed to take advantage of the new rate.
Few NI businesses are structured for the NI Corporation Tax Regime. The rules are complex and many NI businesses, unless they restructure, will find they are either ineligible or won’t obtain maximum benefit. Alternatively, they may find the costs of complying with their tax obligations under the new regime disproportionate to the benefit they receive. HMRC has said that it expects Northern Ireland businesses to restructure in order to best secure the benefits of the lower tax rate so, it’s not surprising that this is on the ‘to do’ list of most Finance Directors.
PwC is already seeing, 2 years in advance of the new rate, businesses looking at their structure and making appropriate changes. Sometimes this involves separating (or even consolidating) certain business activities, introducing new companies into the group or moving assets into or out of personal ownership.
For a huge variety of reasons, now is absolutely the right time to review the structure of your business and ensure it is still ‘fit for purpose’. A robust tax efficient structure will ensure your assets are protected and value maximised. It will also make succession planning easier and minimise the risk of surprise tax liabilities. After all, it would be a real shame, having weathered the storm of the last few years and kept a business afloat, to then put it at risk due to unanticipated tax costs.
That’s where we come in. PwC’s tax team has 65 locally-based tax specialists covering all the aspects of tax relevant to private business owners, their families and their businesses. We work alongside our clients to make sure they have tax strategies in place that provide the best solutions for the entrepreneur, the business and the family. Our tax team provides world class technical advice and a pragmatic and commercial approach to business planning right here your door step. So, for private businesses operating locally or globally, we are your one stop shop for tax advice so you can be confident you’re covering all bases.