I own two companies (A and B) and am a 100% shareholder in both. Business A, a normal trading company, lent business B £50,000 to build an asset (a website) which was launched late in 2016 and which gains income via commissions. No annual investment allowances (AIAs) for capital allowances (CA) purposes were claimed in the 2016 accounts as it was not launched. Business B has never generated any revenue, and we are coming up to its year-end in September 2017 and I don’t think it ever will, and if it does it will be a few hundred pounds here and there. If business A (which is profitable in a different trade) buys the asset from B and still carries out the trade (i.e. hosts the site, makes it available to trade), am I right that: (1) The purchase does not have to be at market value; (2) Business A can claim capital allowances so long as the value is no more than B spent on acquiring it (no AIA's are available, as the companies are connected); (3) These CA's can be offset against the (different) trade of A in the period as the trade of B is loss making; (4) If, subsequently the director purchased the website from A, which would need to be at market value (i.e. not a lot), Business A can then claim a balancing charge. Company B would be closed, and I would be left with a potential small intercompany loan balance of about £3,000. Can you see any potential pitfalls?
Arthur Weller replies:
As can be seen from www.gov.uk/hmrc-internal-manuals/business-income-manual/bim35815, expenditure on setting up a website is treated as expenditure on computer software.
Computer software is usually dealt with under the intangible fixed asset rules. In order to enable companies to claim capital allowances, as you have described, an election must be made – see www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird25180. Assuming the election is made, the following would apply.
Where the transfer of an asset to a connected person takes place at the time when the business itself is transferred, the assets are treated as being sold at open market value. However, the predecessor and successor may make a joint election, within two years from the date of the transfer, for it to be treated as made at the tax written-down value, so there will be no balancing adjustment on the predecessor and the successor will take over the claims for allowances from that point. Special rules apply where a trade is transferred from one company to another, and at some time within one year before and two years after the transfer, the same persons own three-quarters or more of the trade. These rules enable the predecessor's capital allowances computations to continue. First-year allowances on plant and machinery are claimed by whoever incurred the expenditure and balancing adjustments are made on the company carrying on the trade at the time of the disposal. Writing-down allowances are split on a time basis (there are provisions to prevent tax avoidance through the transfer of an entitlement to benefit from capital allowances on plant and machinery where the tax written-down value exceeds its balance sheet value). Any losses from the new loss-making trade in A can be set off against profits from the old profit-making trade, in the same accounting period. If subsequently, the director purchased the asset from the company, this would have to be at open market value. If A purchased from B at the tax written-down value, there should be a balancing allowance.
This question was first printed in Business Tax Insider in December 2017.