A great deal of corporate restructuring could be on the cards if the government legislates on its proposal to introduce a capital gains exemption for the sale of shareholdings in trading companies or groups.
The proposal forms a key part of the July consultative document, Large Business Taxation: The Government’s Strategy and Corporate Tax Reforms.
It would mean that a group wishing to dispose of activities no longer regarded as core would pay no tax on any disposal, without having to go through complex restructuring schemes as is often the case now.
For example, when Allied Domecq plc sold its pubs to Punch Taverns in 1999, the group implemented a scheme, approved by the Inland Revenue, that involved putting in place a new company on top of the existing group, which meant it had to seek Court approval and produce lengthy new listing particulars. The whole process took over three months, but saved Allied Domecq an estimated #200m-#300m in tax. In future, both time and expense could be avoided.
However, Andersen tax partner Bill Dodwell suggests groups that currently contain all their activities in one company may want to rethink their corporate structures. At present, disposals of selected activities from within the group can be achieved as sales of trade and assets, attracting roll-over relief. In future, the more tax-effective approach will be to sell shareholdings. Therefore, groups may wish to restructure themselves to divide activities into separate companies within the group. “This is something companies could look at seriously,” says Dodwell.
Ernst & Young international tax partner John Fairley is concerned that the government should not restrict the exemption to sales to third parties, but should apply it to internal restructuring as well. If it does, the proposal could help bridge the gap between tax specialists and managers.
“One of the difficulties tax directors have always had is that management wants to structure the group one way, and tax people say do it another way,” Fairley explains. “If this goes part of the way to bridging that gap, it’s got to be good.”
The consultation paper also set out how an exemption system for dividends might work, but came down strongly in favour of retaining the current double tax relief rules.
The proposals are likely to take effect in 2002. Companies have until 1 October this year to reply to the consultation.
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