Restructuring Services update
The March 2016 Budget is a tough one for distressed companies and their lenders / investors, with significant restrictions announced to both tax relief for interest and cash tax savings from loss relief. Some property taxes are also rising. These are key value issues which reinforce the need for solid, commercial support and advice.
Tax relief for interest costs cut
From 1 April 2017, where group net interest costs exceed £2m, tax relief will be limited to 30% of group UK EBITDA. A similar restriction already operates in many other European countries. A consultation is to follow to establish the detail of this new regime – including setting out where exemptions should apply (e.g. companies whose activities justify higher borrowing).
Tax losses restricted – reducing future cash tax savings on turnaround
From 1 April 2017, companies with group profits of more than £5m who are still carrying losses from an earlier period will be restricted to using those losses against up to 50% of their profits above £5m. For larger companies in, or expecting, successful turnaround – this could mean a significant delay in using their tax losses, and a real impact on transactional values as a result.
Banks have already been suffering restrictions to their ability to use losses incurred in the financial crisis – this restriction will be further tightened from 1 April 2016 to 25% of taxable profit (down from 50%).
On the plus side, tax losses incurred on or after 1 April 2017 will be more flexible than before – some of the existing restrictions are set to be lifted on the offset of one type of loss against another type of profit, and between group companies. The details have yet to be confirmed – but in principle this promises significant cash tax savings for companies in turnaround, particularly smaller businesses who are unaffected by the cap.
UK corporation tax rate falls
The UK corporation tax rate falls from 20% to 17% by 2020 – which will be good news for companies in, or expecting turnaround.
Property taxes increase
Offshore traders / developers of UK land will be subject to UK tax on their profits. The rules are expected to apply later this Spring / Summer.
Commercial property SDLT rates are moving to a banding system; freehold property transactions will be chargeable at 0% on the first £150k, 2% on the next slice up to £250k and 5% on any further consideration. At values of £1.05m or more, purchasers will pay more SDLT than before. The new rules will apply on transactions exchanging from tomorrow (17 March).
Residential properties will be subject to an extra 3% SDLT on each band when acquired by companies or individuals as a second property - from 1 April 2016.
Oil and gas changes little comfort to struggling companies
Following the impact of lower oil prices, the Government has lowered tax on Oil & Gas activities with effect from 1 January 2016 – with the rate of supplementary charge on ring fenced profits reducing from 20% to 10%, and the Petroleum Revenue Tax effectively scrapped. However these changes will be little comfort to companies suffering from the lower prices, with many recording losses rather than profits and turnaround not yet on the horizon.
Equity for management remains a tax-efficient way to incentivise turnaround
For management teams, equity incentives remain one of the best ways to align interests for a successful turnaround. Employee Shareholder Shares have become more widely used for management teams as they offer tax-free capital gains. For shares issued after today these capital gains are limited to a lifetime allowance of £100,000. Entrepreneurs’ Relief remains a compelling prospect, offering up to £10m of lifetime gains at a 10% tax rate. Where Entrepreneurs’ Relief does not apply, CGT rate is reduced from 28% to 20% from 6 April 2016 (other than on residential property or carried interest).