Corporate Tax Newsletter – July 2021

Corporate Criminal Offence
Groups of Companies
Trading status in companies
Trade loss carry back extension


Corporate Criminal Offence

Background

The Criminal Finances Act introduced in September 2017, enacted a corporate criminal offence (CCO) for the failure to prevent the criminal facilitation of tax evasion.   The CCO is something all businesses should be aware of as it applies no matter the size of the business or type of service provided by the business.   

In August 2020, HMRC announced that it has ten live CCO investigations ongoing with a further 22 live opportunities under review highlighting that this is an area high on HMRC’s agenda. 

CCO is a strict liability offence and the only defence a business will be able to rely on is its ability to demonstrate it has reasonable prevention procedures in place to prevent the facilitation of tax evasion.  

Sanctions are severe and include potentially unlimited penalties, a corporate criminal conviction, a public record of the conviction and severe regulatory impacts. 

The aim of the legislation is to create an environment that fosters corporate monitoring and self-reporting of criminal activity.

It is important to appreciate that CCO is effectively a conduct offence so focussing on the underlying tax evasion risk rather than the tax evasion facilitation can be a common pitfall that businesses fall into.    A business should also not assume that a low-risk profile precludes the need for a risk assessment. 

Also important is the extraterritorial scope of the legislation.  This means that a business can be held criminally liable if its employees, or anyone else providing services for or on its behalf, assist a taxpayer in evading their UK tax and/or non-UK tax liabilities.   The underlying evasion is an offence in the country where it is committed, and it would have been a criminal offence if the activities took place in the UK.

Key Principles

There are six key principles to consider when formulating prevention procedures.

  1. Risk assessment – a business should assess the nature and extent of its exposure to the risk of an associated person engaging, during the course of business, in activity that constitutes the facilitation of tax evasion.  Ultimately, a business needs to sit at the desk of their employees, agents and those who provide services for them or on their behalf and ask whether they have a motive, the opportunity, and the means to criminally facilitate tax evasion offences, and, if so, how this risk might be managed.
  2. Proportionality of risk-based prevention procedures – businesses are expected to implement reasonable prevention procedures.  These should be designed to mitigate the identified risks and outline the business’s position on involvement in the criminal facilitation of tax evasion.  Businesses should also have a plan of how to implement and review measures to ensure that persons associated with it are not criminally facilitating tax evasion.
  3. Top level commitment – top level management should communicate and endorse the business’s stance on preventing the criminal facilitation of tax evasion and be involved in the development and review of preventative procedures.  This can be in the way of delegation of responsibility to a committee, and overseeing the work being carried out and endorsing the measures documented. 
  4. Due Diligence – is a vital part of a business’s prevention programme that ensures they know who their associated persons are, and the organisation is aware of any risks that might facilitate tax evasion.  It may be appropriate, especially for larger organisations, to have differing due diligence procedures for different parts of its business reflecting the varying levels of risk across all its activities.
  5. Communication and training – businesses should encourage the involvement of senior management in the creation and implementation of preventative procedures.  The approach should be twofold including communication and endorsement of the business’s stance on preventing the criminal facilitation of tax evasion and the involvement in the development and review of preventative procedures.
  6. Monitor & review – businesses should monitor and review procedures to evaluate the extent to which internal controls are operating as intended.   Businesses may wish to carry out their one monitory review or engage an external party to conduct a review.

Timing

If you have not started to address CCO then you should do so now.   Whilst there are no penalties for failing to establish reasonable prevention procedures by 30 September 2017, businesses are running a large and unnecessary risk by not doing so.  If HMRC were to identify an issue and a business has not conducted a risk assessment, it is unlikely that it would be able to put forward a defence that it had reasonable prevention procedures in place.   We would recommend that businesses that have not yet addressed CCO, do so as soon as possible.

Conclusion

Reviewing the completeness of reasonable prevention procedures that have been put in place should be a key focus going forward.  HMRC has confirmed they do not want to hinder how industry works but rather put in place a revised culture in this country which will lead to making tax evasion a thing of the past.  Our team is used to assessing risk and is ready to help you start the process of understanding where the risks lie in your organisation and then assist in providing solutions.


Groups of Companies

Do you individually own two or more companies? If so, there can be tax savings to be made by restructuring your shareholdings to create a corporate group. A corporate group exists where each company in the group is at least 75% owned by the same parent company.

Group Relief

One of the main benefits of doing this would be to make available trade losses, loan relationship deficits, UK property losses and excess management expenses for group relief.

For example, in 2021, Company A may have a profit of £50,000 while Company B may have a loss of £50,000. If both companies are owned by individuals, Company A would pay corporation tax on it’s profits while Company B would have a loss that can only be carried back one year or carried forward until a profit arises in Company B.

If both companies were in the same corporate group, the £50,000 loss in Company B could be surrendered to Company A, reducing Company A’s taxable profits to nil. This means the group pays no corporation tax in the period.

Capital Gains Group

The companies could also qualify as a capital gains group. This means that chargeable assets transferred between group companies take place at no gain / no loss meaning there is no immediate charge to capital gains tax on the transfer of an asset.

Furthermore, an election can be made to transfer a capital gain in Company A to Company B. This is useful where Company B has an unused capital loss which can offset the gain.

Finally, rollover relief can be claimed on a group wide basis. This means that when a group company disposes of a qualifying asset, the proceeds of sale can be reinvested in a new qualifying asset in another group company and the gain on the disposal can still be rolled over against the base cost of the new asset.

A corporate group structure may not be appropriate in every situation, the relevant facts should be considered. Please get in touch if you believe restructuring your shareholdings could be beneficial and Henderson Loggie would be happy to assist.


Trading status in companies

One of the types of profits chargeable to corporation is trade profits. The trade status of a company can also be used to determine whether or not certain reliefs would be available for other taxes (e.g. business asset disposal relief in capital gains tax, business property relief in inheritance tax) and is therefore an important definition to get right. Unfortunately (or fortunately, depending on your perspective), the legislation does not provide this definition and therefore the interpretation of “trade” has been left to case law. Over the years, a number of tests has been developed and has been coined as “badges of trade”.

Some of these badges are relatively straightforward, and not necessarily restricted to just trading companies such as the profit seeking motive and frequency and volume of transactions. All commercial businesses (including property and investment businesses) would be seeking to make a profit and would aim to meet that with repeated transactions, and these badges in isolation would not mean a company is trading simply because it is making a profit and has frequent transactions.

Businesses that have assets would look at the nature of the asset, length of ownership and any modifications to the these assets – specifically if it is to increase the value or to make it easier to sell; also, assets that are subject to a trade are typically (but not always) held for a shorter period. As an example, a housebuilder would be looking to sell its stock as soon as it was ready however, sometimes market conditions mean that the sale of houses are particularly slow. The delay in being able to sell is not an issue for the badges of trade, unless they start to hold the property as an investment and change the nature of the asset from stock to investment property.

There are a few other badges that would need to be looked at to establish the overall picture, and it should be noted that the absence or presence of a particular badge is unlikely to provide a conclusive answer of whether or not a company is “trading”. Each company’s circumstances would be looked at in full and the badges would be looked at in the overall picture to determine the status.

The trading status of companies can be important for other reliefs (as mentioned above), and although assessing the trading status is not normally done as a stand-alone exercise, this would be included any project where it is applicable. Please get in touch if you would like to have a discussion on this.


Trade Loss Carry back Extension

As part of the Finance Act 2021, a temporary extension to the trading loss carry-back rules has been granted. Under the original rules, if the company has a trading loss for an accounting period, there is the facility to carry back the losses to the previous 12 months and make a reclaim of tax. There are conditions to the availability of the relief that should be checked on a case-by-case basis however, there is no limit to the amount that can be carried back.

The extension allows a company that has a trading loss between 1 April 2020 and 31 March 2022 to carry back this loss 3 years rather than usual 1 year. This extended relief is capped for the additional 2 years to £2,000,000 for each financial year (1 April 2020 to 31 March 2021, and 1 April 2021 to 31 March 2022). For groups, this cap is shared. This claim is normally made in the return and is processed when it is submitted to HMRC; however, if the total claim is classed as de minimis (under £200,000), this can be made for a relevant accounting without having to wait for the return to be submitted and can provide substantial cash benefits for the business.


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