Tax on a company in the UK

[Matthew]

Thanks akirk. Yes I'll be starting in the UK only anyway. By the time I start looking at US companies, I will definitely have an accountant anyway. I guess that can wait for now then.

But yes I am looking to basically start a holding Ltd company, which would act as the parent of a group. Then I'd buy businesses and if they weren't already, I'd make them Ltds. Then I'd have the parent own 100% shares of the subsidiary. Then when the parent sells the shares of the subsidiary, I would be able to avoid CGT altogether in theory. I know there is some criteria to meet, for e.g. the parent has to own the sub. for at least 12 months and it has to have been trading etc. but I'm sure the criteria isn't too hard to meet?

[akirk]

Matthew - I wish you luck if it were that simple - every company sold would be owned first by a holding company (£20 to set up) and CGT would vanish!
you are missing a few other links in the puzzle...

company A owns company B
company A sells company B under the terms discussed - no CGT

but...

CGT would have been on the value of company B as an asset...
company B would have had to have traded for 12 months - you can't just sit it on a shelf...

so
Company B bought a website for £50k and sold it for £100k
£50k profit on which you have to pay corporation tax (the fact that you are selling the company doesn't avoid the need to pay corporation tax on the profits in a trading company) - tax 20% = £10k

so
Company B spends £50k (director's loan) on a website - website is now worth £100k, but the company owes £50k in director's loan on the books
company A sells company B to make the £100k - but the seller doesn't wish to pay £100k as there is £50k loans on the books
or no loan - cpaitalised - so purchaser pays £100k to company A - so how has company B traded? - therefore no exemption in company A

HMRC are likely to take a dim view of this...
purchasers may not wish to be buying a ltd company with attached potential for liability

sorry, without wishing to be rude being unsure about tax is a quick route to a very sticky situation...

your starting point is that you wish to make £50k and pay not tax...
HMRC's starting point is that they want you to pay tax...

please do yourself a favour and get an accountant - if you have £50,000 to invest in a website then not spending £500 - £1,000 on accountancy fees would be foolish!

Alasdair

[Matthew]

Well I sent your reply off to an accountant and they said:

The other poster is not making a key distinction - between selling an asset and selling shares in a company.

So - if a subsidiary company buys an asset for £50,000, which in a year's time is worth £100,000, you can either sell the asset, or you can sell the shares in the company which owns the asset. If you sell the shares in the company then substantial shareholdings comes into play. If you sell the asset, then yes there will be corporation tax to pay on the £50,000 gain.

In relation to the director loan point - it makes little sense to me. If you invest £50,000 into a company to buy an asset, which is worth £100,000 when you sell then you would agree with the buyer that either they pay you £100,000 and you write off your director loan balance, or you agree that they pay you £50,000 for the shares plus the value on your loan account.

The one point I do agree with Alasdair on is that you should seek some specific advice on this structure. Trying to do it yourself through advice on forums will end in trouble. As you have seen, you will get varying and contradictory advice and will never know which to follow....

Also

The parent company does not have to be trading - providing it is part of a trading group you will be fine. So you would have a holdings company, and a number of trading subsidiaries and that will be fine.

[Clinton]

So - if a subsidiary company buys an asset for £50,000, which in a year's time is worth £100,000, you can either sell the asset, or you can sell the shares in the company which owns the asset.

It is correct that you can sell the company's assets and retain a company shell or sell the shares in the company which transfers the whole company to the buyer. There are pros and cons to both options, so I would caution against seeing the latter as a solution to the tax saving problem. You will find that buyers on the net don't want to buy shares, they want just the assets. Buying shares involves taking on company liabilities and some past indiscretions / tax problems / legal problems that haven't come to light yet.

[Matthew]

Hi. Thanks Clinton, yes I guess this would be better for offline businesses.

[SteveGill]

I'm surprised your accountant hasn't mentioned the associated companies rule. I agree its dangerous to just take info straight off the internet, but please look into this. If the structure is setup wrongly, this can split your tax thresholds across the companies that are 'associated' - example assuming the threshold is still £300k (I'm not 100% sure on that) is if you had 2 companies that were associated for tax purposes, it would split the level to £150k each. So if one company only made £1,000 profit, and the other made £600k profit, that would be a massive hit.

If it was me, I'd get the question clarified about whether buying websites is a capital purchase or considered a simple P&L line first. When you come to sell it, having it as a P&L line means you can offset all sorts of overheads to reduce the profits - pay yourself a salary etc.

[Matthew]

Hi Steve. Not sure what that rule is completely...

But the companies wouldn't be associated with each other in any way. It's just that their shares would be all owned by a parent company. They would all be separate Ltds but a parent company, a holding company, would own 100% of each of their shares.

[bwelford]

This all raised a question in my mind of online assets and where they're located. I presume it's only bricks and mortar assets that can make you a tax payer in the country where the bricks and mortar is located. However if I as a Canadian had an ecommerce website that made sales in the US and was hosted in the US does that mean I'm liable for US taxes?

[SteveGill]

Hi Steve. Not sure what that rule is completely...

But the companies wouldn't be associated with each other in any way. It's just that their shares would be all owned by a parent company. They would all be separate Ltds but a parent company, a holding company, would own 100% of each of their shares.

Hence they'll be associated. Double check here in case things have changed, but its all to do with small companies tax relief - meaning smaller companies don't pay the full rate until they hit the threshold. I think in your example they are associated.

Edit: to say they could be completely different, one building ships and the other running a website, but they can be considered associated for tax purposes if they tick the boxes on that HMRC link above.

[akirk]

companies can be associated even if there is not a direct link between companies - other than shareholders in common (whether a person / other company)...
HMRC will also look for any reason to make links

my examples above were random / non specific thoughts to prompt questioning... I am not giving specific responses - I am just keen that this is not seen as simplistic, it is not - I am keen that anyone who is planning to set up a business without needing to pay any tax gets very sound advice - if it were as simple as being made out no company would be paying tax

I do understand the difference between assets and shares
I think that you need to explore this a bit more:
company A is the holding company - B is your business you wish to eventually sell for no tax...
who is buying the website for £50k?
who is selling the website / company for £100k?

you are saying that you wish to sell company B for £100k in order to avoid tax - in that case, how has company B actually traded? - if it hasn't traded, then doesn't apply - you pay CGT.
if company A is selling company B for £100k - how did the £50k get into company B to buy the website?

you need to ensure that the details are all accurate...

This all raised a question in my mind of online assets and where they're located. I presume it's only bricks and mortar assets that can make you a tax payer in the country where the bricks and mortar is located. However if I as a Canadian had an ecommerce website that made sales in the US and was hosted in the US does that mean I'm liable for US taxes?

every country has different rules - some require you to pay tax in your country even where the business is totally offshore...

have fun with it and let us know what HMRC say

Alasdair