Investing directly vs. through a holding company

It's quite common in continental Europe for private equity investors or entrepreneurs to invest in projects through a holding company, either onshore of offshore. 

Not quite so in the UK, mostly because a number of tax benefits are not available in such a situation. And yet it might be a good idea nonetheless.  Let's look at the pros and cons of each approach.

Benefits of investing directly

If you are investing in a company that has the EIS or SEIS status, you need to do the investment directly in order to benefit from the generous tax breaks. 

If you sell investments you will be taxed only once vs having the holding company pay tax on the gain first and pay tax again when you extract the profits from the holding company. 

And also, investing directly is cheaper because you don't need to maintain another structure. 

Benefits of investing through a holding company

If your investment distributes surplus profits regularly to the holding company, no dividend tax is due since dividends are only taxed when they are distributed to the final shareholders. That allows you to ring-fence those profits as if the underlying investment were to go bankrupt, those profits are now protected one level up. 

Another benefit is that when you have multiple investors, they will probably have different time preference when it comes to profit extraction. Having a holding company allows you to be neutral to the timing of those distributions since the tax point is now decided by the extraction at the holding level.

One of the benefit of direct investing is the avoidance of double taxation. However there are situations where those can be avoided. Such a case is the Substantial Shareholding Exemption where the holding company owns more than 10% of an investment for the last 2 years. 

And finally, if you keep the profits in the holding company to be reinvested, you can delay the dividends tax forever. 

HMRC asking for records of Crypto Exchanges

With Bitcoin looking like it's here to stay, HM Revenue & Customs, is now pressuring crypto-currency exchanges to reveal customers' names and transaction histories, in a bid to claw back unpaid taxes, industry sources said. Letters requesting lists of customers and transaction data have landed on the doorsteps of at least three exchanges doing business in the U.K. – Coinbase, eToro and CEX.IO – in the last week or so, the sources said.

The move is following a pattern set by the U.S. Internal Revenue Service (IRS) and other governments. Last month, the IRS began sending warning letters to over 10,000 Americans who it says participated in virtual currency transactions but did not report them properly.

HMRC is looking to get up to 10 years worth of historical data but that might prove difficult to achieve. Still, even if the administration manages to go back 3 years, it would mean serious tax bills for those who thought trading virtual currencies was a tax free endeavour! HMRC published in 2018 a policy paper explaining the tax treatment of crypto-assets. As described in the paper, for most people, capital gains tax will be due on any gains they might have realised. But doing the calculation of the gain might prove more complex than with other securities. Indeed, transferring bitcoins in or out of an exchange is not a taxable event per se. And conversely, buying something with Bitcoin or receiving income in crypto-currency is a taxable event!

This is why it's crucial to keep records or all transactions and refrain from using crypto-currencies as a payment currency, at least until there is a de minimis exemption like with other currencies. As, even if your gains are below the annual allowance of £12,000 (for 2019/20), you still need to declare the sales if they total more than 4 times the annual allowance, i.e. £48,000. For people who don't already do a tax return, it means registering for Self Assessment. And if you are aware of gains that you have failed to declare in the past, it's a good idea to come forward and call HMRC to avoid steeper penalties.

Saving tax with Deferral of Capital Gains

While Capital Gain Taxes have been slashed in the recent budget to 10% and 20% (from the 18% and 28% that it used to be), CGT has remained unchanged for residential property gains. While the tax rate for gains is lower than the one for income, amounts tend to be much bigger and far appart, making it harder to use allowances and low rate bands.

This is where deferral comes in handy. The Enterprise Investment Scheme (EIS) provides one of the mechanisms that allows such a deferral. Most people misunderstand that the general EIS conditions for income tax relief are much more restrictive than the conditions for CGT deferral. In particular the requirement that one owns less than 30% of the company or that one is connected to the business only applies to the income tax relief component of the EIS, not the CGT deferral. Same thing for the requirement that the investment be held 3 years or more: if you sell earlier the deferral just ends then (see HMRC note).

UKTI Export Week starting next Monday

UK Trade & Investment will be holding its 6th Export Week during the week of 10-14 November. Across the week there will be a varied series of events all over the UK, aimed at businesses to either start their export journey or increase their international business. Previous Export Weeks have seen over 17,000 companies in the UK attend exporting focussed events. This week we will again have over 70 events across the UK; there will be at least one event per day in every part of the UK.

The flagship road show, ExploreExport, will be touring the entire country at 11 venues across England, Scotland, Wales and Northern Ireland. Over 120 UKTI Trade Officers worldwide will be available for 1-2-1 meetings on their dedicated markets to help companies “explore” the possibilities of exporting to their countries. The aim is to bring the world to all parts of the UK.

UK moves up 2 notches in tax competitiveness

The UK is climbing the ranks of the most business-friendly tax regimes in the world, behind only three other countries in the western world. Only Ireland, Canada and Denmark beat the UK in Europe and North America, and the UK comes 14th overall, in a table of 189 tax jurisdictions worldwide. According to the newest report from PwC and the World Bank called "Paying Taxes 2014 – The global picture", the British tax system has climbed two places in the last year, surpassing Luxembourg.

On average, UK firms pay 34 per cent of their commercial profit in tax, taking 110 hours per year, and balanced across eight payments. The world average in each case is higher: internationally, companies pay 43.1 per cent of their tax in profits, spread over 26.7 payments, taking 268 hours. In the nine years that the report has been conducted, the amount of tax that firms pay is down nine percentage points on average, the number of hours taken down by 55, and the number of payments lower by seven.

France unleashes €20bn tax tidal wave

Faced with an acute crisis and significant drop in popularity in the polls, French President François Hollande has announced that the country’s 2013 budget will provide for additional taxes next year of €10bn for both households and businesses in France. During an interview on TF1, President Hollande said that the government plans to redress the public finances within two years, despite expected growth this year of just above zero, and forecast growth for next year of 0.8%.

Highlighting the fact that he has tasked the government with drawing up the 2013 budget based on a realistic growth forecast for next year, probably of 0.8% rather than the 1.2% initially expected for 2013, the French President stressed that the government would not spend one euro more in 2013 than in 2012.