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Loan note
Value of qualifying corporate bonds for capital gains.
My client is trying to sell his company. The present purchaser is unable to raise the substantial funds required from financial institutions and the consideration will therefore be satisfied by the issue of qualifying corporate bonds (QCBs).
My understanding is that a loan note, such as one containing the right of repayment in a foreign currency before redemption, would meet the requirement to make it a non-qualifying QCB. The motivation for this is the possible availability of bad debt relief should the purchaser be unable to redeem the loan note out of future cash flow of the target company.
However, the vendors clearly would like to bank their entrepreneurs’ relief by making a TCGA 1992, s 169Q election. Therefore, they will have crystallised the gain at the date of sale.
My query is, what happens if this loan note is subsequently found to be redeemed for no consideration in whole or part? Clearly, the loss cannot be carried back. However, because they have banked their entrepreneur’s relief at the point of sale, does this mean that a capital loss for carry forward is available on the basis of the value of the loan note at the date of issue, less any sum received in redemption? Alternatively, is the base value of the loan note for capital gains purposes the original base cost of the shares in the target company?
As a further thought on this, does this make the use of the loan note somewhat redundant and the possibility of straightforward cash consideration on deferred terms more appropriate – with the possibility of a claim under TCGA 1992, s 48 if part of the consideration in cash subsequently proves to be irrecoverable?
I look forward to readers’ views.
Query 19,427– Hamlet.
EIS conundrum
Extension of time limit for enterprise investment scheme.
My client company has raised £750,000 through a share issue to finance the construction and set up costs of a new factory extension. All of the enterprise investment scheme (EIS) requirements are met and all appropriate returns have been made to HMRC.
The plan was that all of the money would have been spent well within the two-year limit, which expires in a couple of months’ time.
Unfortunately, we have learned that there has been a major difficulty with one of the main contractors who was to have provided much of the IT infrastructure. I have just heard that the firm has now become insolvent and will not be able to fulfil the contact. Luckily, my client has not paid this contractor in advance for the work it was supposed to do, so has lost only a small amount of money.
But there is now a problem. To date, £450,000 of the EIS money has actually been spent; in other words, 60% of the total. The IT works were planned to cost another £300,000 or so and thus, on the original timetable, the whole of the EIS money would have been spent within the two years. Now, for reasons beyond the company’s control, it is not going to be able to spend that money because it will not be able to arrange a new contract for all the work to done by the expiry of the two-year time limit.
My client clearly does not want to spend the money in advance of having the new supplier contracts in place. They have asked whether, in the circumstances, HMRC would agree to an extension of the time limit so that a proper commercial contact can be entered into with a new supplier and work paid for on a normal basis.
Do readers think that I have any hope of persuading HMRC?
Query 19,428– Delayed.
Ecclesiastical purposes
VAT dilemma for charity renting property.
I act for a charity client which owns a leasehold property (990 years). The charity occupies the property and it is wholly used for religious activities. Interestingly, it has not got permission to use the building for this purpose but the landlord accepts the situation without any problem.
For the early years of the lease, an annual peppercorn ground rent of £10 is being charged to the charity. However, in 2032 the ground rent is due to be reviewed and current estimates are that it will rise to between £40,000 and £60,000 a year, with further reviews every seven years thereafter.
The charity has reached an agreement with the landlord to pay £500,000 now to remove all rent reviews for the full term of the lease. In other words, the annual ground rent will be £10 a year for the full term. The charity currently pays VAT on the peppercorn rent (as the property has been opted) and the landlord has advised that VAT will also be payable on the £500,000.
Do readers think the proposed £100,000 VAT charge is correct or are there are any exemptions that can apply because the charity will be using the building for religious purposes? My client is not VAT registered because it does not make taxable sales.
Query 19,429– Vicar of Dibley.
Provincial tax
A different rate of corporation tax in Northern Ireland?
I was surprised to see that the latest company tax return (form CT600) had sections requesting information about Northern Ireland. I was not aware that the corporation tax there was any different to the rest of the UK, but clearly some new legislation has crept in unnoticed. Hopefully, none of my clients are affected, although I do have one with Northern Ireland connections.
Can Taxation readers advise me on what this is all about? Is there anything that small practices such as my own should be doing in this regard?
Query 19,430– Nigel.
