What does the Autumn Statement hold in store for M&A?
December 16, 2013
This year's Autumn Statement contained a number of items of interest to the deals community. It is quite possible more will emerge in the coming week as draft legislation is released and as we speak to HMRC.
Economically, the two big tax points are as follows:
- Abolition of NICs for under 21s - From 6 April 2015, save in exceptional cases, employers will no longer be required to pay Employers National Insurance Contributions (NIC) on earnings to any employee under the age of 21. As this is a 13.8% gross cost to employers it will be a major benefit to many businesses. This is particularly likely to benefit retailers, restaurants and the leisure industry.
- Business rates - The second boost to the High Street comes through a number of measures: capping the Retail Prices Index increase in business rates to 2% in 2014-15; introducing a discount of up to £1,000 against business rates bills for retail premises with a rateable value of up to £50,000 for the next two years; introducing a temporary reoccupation relief which gives a 50% discount from business rates for new occupants of previously empty retail premises for 18 months.
From a Private Equity perspective there are some specific points:
- Losses on a change of ownership - two relaxations in the offing.
One is to change the current rule whereby investment companies forfeit their tax losses on a change of ownership if their capital increases by a mere £1m. In future the threshold will be the higher of 25% or £1m. Whilst that is good, HMRC and the professions are still not agreed on whether bank debt counts as capital and on HMRCs interpretation a change of ownership and a replacement of bank debt with intra-group loans would still probably result in a loss forfeiture.
The second relaxation is to allow a Topco to be inserted, presumably with the same shareholders, without that triggering a change in ownership.
This sort of relaxation may be the first signs of simplifications being possible with the additional safety net of the General Anti Abuse Rule. However, the devil will be in the detail next week.
- Partnerships taxation - HMRC is attacking arrangements whereby in a mixed partnership of individuals and corporates, profits are diverted to a corporate. Whilst the corporate enjoys a reduced tax rate the profits are effectively available to the individual at a later date by way of a dividend or capital gain. With the falling corporate tax rates the after tax receipt for the individual is about the same, or slightly better and much of the tax on can currently be deferred until cash is received.
The legislation announced is one part of a wider consultation and other measures can be expected.
- Compensating adjustments – As announced on 25 October 2013, the government will introduce legislation with immediate effect to prevent abuse of the rules relating to compensating adjustments in the transfer pricing code. The current rules provide that where a company is denied tax relief for interest costs on thin capitalisation grounds, an individual recipient of the interest can claim to receive this tax free. This has been subject to increasing abuse with companies being deliberately over geared to create a tax free return. In future such receipts will be taxed as dividends.
- Debt for Equity swaps - A consultation took place over the summer in which HMRC suggested some most unwelcome tightening of the rules on debt for equity swaps. The response has not yet been announced but the only changes arising from that consultation are on a different area. It is to hoped that HMRC rethinks its proposals. It is a fact of life that some companies are burdened with excessive debt and need a robust way of unwinding this without resorting to a formal insolvency process is of great importance.
- Close company loans to participators – There is probably to be no reform to these rules. Certainly no "immediate" reform. By way of background, most private equity (PE) backed companies are "close" such that when loans are made to participators (e.g. shareholders) tax may become payable to HMRC. This rule is intended to stop money being extracted from private companies without tax being paid on dividends but, as with all anti-avoidance rules, it takes on a life of its own. This is most commonly seen as an issue where loans are made to Employee Benefit Trusts (EBT) to buy shares and is sometimes seen where a target lends proceeds to a Bidco.
- Tax relief for borrowing to invest in European Economy Area (EEA) "close companies" - From April 2014 tax relief will be available for interest on borrowings to invest in close companies across the EEA and not just in the UK. This is really just a removal of a discriminatory provision and the real issue is that the relief is not available anyway unless the company being invested in is the trader or its immediate parent. Most PE structures simply have too many tiers for this relief.
- Anti-avoidance - measures include blocking the use of total return swaps to strip profits from UK companies, yet another change to the Controlled Foreign Company (CFC) rules for finance companies, and a specific measure to tackle the use of guarantee companies to manage the debt cap.
There is no mention of any change to the Quoted Eurobond Withholding Tax exemption. Note that the Channel Islands Stock Exchange announced this week that it will be reconstructing through a Scheme of Arrangement later in December 2013. Details are awaited as to any implications for debt securities currently listed on that exchange.
- Personal - the proposed introduction of non-resident capital gains tax on UK residential property have dominated the headlines. Perhaps more pertinent is the restriction on the principal private residence Capital Gains Tax (CGT) exemption for a former residence to 18 months (rather than 36 months).
I have concentrated on the points likely to be of interest to company leaders and their PE backers. If you would like to discuss these further please contact me.
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