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bigduckontax, Accountant
Category: Tax
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UK Ltd Company Law and Tax Questions - Urgent I have a Ltd

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UK Ltd Company Law and Tax Questions - Urgent
I have a Ltd Company of which I own 90% of voting shares or 59% by equity and rather unusually we have 97 other investors. The company is now technically insolvent but I am the largest creditor and if my part was written off the company would have roughly a zero balance sheet. If I do nothing though the company would collapse in a couple of weeks.
However, I think have a solution which will bring in some sales in quickly which will stabilise the situation. In addition I am thinking of say giving away about 24% of shares away in exchange for people providing services free of charge (some may also be invited to be on the board of directors) and then my Ltd Company also offering services free of charge and in exchange acquiring my remaining shares.
This would mean my company would in effect having voting control albeit that it may only have 25% equity. Also creditors interests will be preserved and Shareholders will either be in a no worse place or better off as they will based on contribution through services given will have got shares free of charge.
Could you advise of the implications for the above, eg stamp duty, capital gains, corporation tax (presumably the parent could offset the losses again corporation tax) and any thing else I should consider. Also are there any considerations for shareholders who came in via EIS (say 2 to 3 years ago) if the original company becomes a subsidiary?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
You will have to be very careful here. You say that the company is insolvent, thus any further trading might create fraudulent preferences. However, by abandoning your claim as a creditor you could probably avoid any possibility of this.
There is no stamp duty involved here. Your disposal would create a capital loss in your tax account.
Suddenly you start to talk about some parent. Is this company part of a company group? There is some confusion here which needs clarification.
Corporation Tax computations would be affected by the removal of some creditors; this would create a profit in the accounting year this occurred.
I am of the opinion that, in order to safeguard yourself, you should seek local, professional advice from a solicitor as the best way to proceed.
I do hope I have thrown some light on the position.
Customer: replied 2 years ago.

Hi Keith

The other company has recently been formed - in effect I would be gifting or donating my shares to shares to the company so I guess it would become a subsidiary. So in effect once NewCo makes a profit can it offset the losses from the newly to be acquired subsidiary - that is the point I am driving at?

When shareholders came in originally they paid £1 per share - the nominal value is £0.01. I want to make sure that there is no problem with gifting them (ie below nominal value) from an Inland Revenue point of view (people will be being asked to contribute time FOC).

I will need clarification on the other questions I have asked as well at the bottom of my last message.

Kindest, R

Expert:  bigduckontax replied 2 years ago.
I see, on the point of the company group profits and losses may be used upwards, downwards and sideways as convenient to minimise exposure to Corporation Tax.
The Inland Revenue was merged some years ago with HM Customs and Excise to form HMRC. There is no connection between the issue price and your decision to gift your shares elsewhere. From what you say anyway all existing shareholders holdings have diluted value.
Here is an extract from HMRC advice on EIS:
'Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company's assets in the event of a winding up. Shares may carry limited preferential rights to dividends, but may not include rights where either:
The rights attaching to the share include scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person. (Please note: this exclusion covers only those shares which carry preferential rights and does not therefore prevent the voting of dividends in respect of non-preferential shares, nor does it prevent shareholders from choosing to waive a dividend payment should they wish to do so)
the right to receive dividends is 'cumulative' - that is, where a dividend which has become payable is not in fact paid, the company is obliged to pay it a later time, normally once funds become available
There must be no arrangements to protect the investor from the normal risks associated with investing in shares, and no arrangements at the time of investment for the shares to be sold at the end of the relevant period.'
There have been changes caused by the company's trading. I would submit that the last paragraph of HMRC's advice quoted above covers the position. Money has been investment through EIS and that investment has gone a trifle pear shaped; that is life.
Please heed my advice regarding independent legal advice before you proceed.
Customer: replied 2 years ago.

Thanks Keith

I think what I am trying to establish is that if the act in itself of making the existing entity a subsidiary of NewCo affect EIS eligibility for those already invested? I just want to make sure I am protecting investor interests OK.

Also just to clarify, if shares are "gifted" (perhaps in exchange for support in terms of time and/expertise) that there is no need to make a nominal payment for shares (you sometime hear of company's being sold for a £1).

And finally, bearing in mind if NewCo was only formed a few months ago and losses were made for last year and to end this year, if company becomes subsidiary can the parent offset these rolled up losses from the subsidiary into the NewCo?

Kindest R

Expert:  bigduckontax replied 2 years ago.
The new shares are merely a substitute for the old. were shareholders to 'receive value' for their holdings there might be a problem, but that is not the case here.
Companies being sold for a quid are merely some third party buying in all the shares for that sum of money. The only investment the purchaser makes is buying the share, they put nothing into the organisation at that stage.
As I told you profits and losses can be moved up, down or sideways through the company group structure as convenient to minimise exposure to tax.
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bigduckontax, Accountant
Category: Tax
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Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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