Tax Opportunities & Tax Risk Management Strategies During a Crisis 

Understandably, entrepreneurs will initially need to focus on liquidity strategies and protecting cash flow, however, there are also other actions that can be taken by businesses to help protect the business, optimise the tax position and prepare for the future.

All business owners should currently be reviewing their third-party debt arrangements and also any covenants which are in place to ensure that these will not be breached.  Very often, particularly if a lender is not a senior lender or does not have security over debt, the lender may be willing to convert their debt to equity.  This situation can arise when the lender takes a view that the business cannot service the debt now, but on a long term view they believe the business will recover and grow again in the future.  Tax legislation includes corporate rescue tax exemptions which facilitate debt to equity swaps in certain circumstances without triggering the normal tax charges, so these should be explored further.  If structured correctly, when the company is released from its borrowing obligations, tax liabilities can be avoided.

Groups of companies should also consider a review of intergroup debt and consider the benefits of removing intergroup debt to get better terms from third party lenders and enhance creditworthiness.  This might involve the repatriation of cash throughout the group by way of intergroup dividends to facilitate the repayment of interest.  Unwinding intergroup loans can be complex, however, several tax planning reliefs are available to companies to enable them to restructure or unwind this type of debt tax efficiently.

With the focus of many business owners on liquidity and survival during these difficult times, many routine tax matters can be overlooked.  The value of losses which may arise due to business closure and the usage of these losses going forward should be reviewed.  It is also very important to maintain a focus on compliance matters to ensure normal tax submissions are made on time and penalties don’t arise.

Business owners should be asking themselves the following questions:  Should I consider shortening the current accounting period of my company so that I can receive an early cash refund from HMRC, on the carryback of losses to an earlier profitable period?  Does my company have any processes which are routed in technology, which need to be developed further because of the current pandemic, which might qualify as R&D? Can my company avail of a cash payment from HMRC by expediating the submission of an R&D tax claim?  Environmental and economic changes will drive research and development tax relief opportunities so now is a good time to look for these opportunities within all businesses.

With current business valuations likely to be suppressed, now may also be a good time to consider succession planning.  Business owners might want to consider transferring assets to the next generation at low or negligible tax cost or to ringfence a valuable property outside the company in preparation for a future sale of the trade.   By doing this, part of the business can be sold in the future using the substantial shareholding exemption, which typically means the business can be sold free from tax.  This type of planning needs to be considered well in advance of a business sale in order to be tax-effective however.  Restructuring the family business or dividing up companies into new separate entitles, in order to ringfence the trades which may struggle to recover while protecting those parts of the business which are more resilient should also be considered.

Remunerating staff in the ‘new normal’ will be challenging, with less cash for salaries and bonuses.  However, there are other tax-efficient ways to incentivise staff and motivate them to look to the future and help grow company value.  Share options, such as the enterprise management incentive scheme are an affordable tax-efficient method of rewarding key staff without the need to release cash.  These schemes typically avoid all income tax and NIC costs and also allow the business to claim a corporation tax deduction when the options are exercised.

For businesses trying to raise money over the coming months from private investors, existing owners should consider whether the company can be recognised as a qualifying company under the Enterprise Investment Scheme.  Investors are often attracted to provide finance if they can avail of the generous tax reliefs available under the EIS scheme.  Investors Relief is another tool which can be used to attract new finance into a business.  Both of these schemes are very effective in helping small private companies raise finance during difficult times.

There are many tax optimisation planning opportunities and tax risk management strategies which can be used by businesses to help navigate through these difficult times.  Before considering the implementation of any tax plan detailed examination of the conditions for tax relief should be considered and also the requirements of the Companies Act need to be reviewed.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.