It might be easiest to illustrate this by way of a worked example.

Parent company “Holding” operates in the ceramics market. It decides that it wishes to swap names between two of its subsidiaries – Hands Limited and Hands Services Limited.

To put this into effect Hands Limited will have to give up its name by taking another one (ABX Limited) prior to eventual dissolution. The group thinks that the name Hands Limited is free. This can then be acquired by Hands Services Limited (subject to the new rules allowing this). The problem is that there is a company specialising in manicures called Hands UK Limited. This company name was allowed under the rules prior to October 2009 but under the new rules is considered too similar to Hands Limited.

As a result when Hands Services Limited applies to change its name to Hands Limited the application is rejected. It is too similar to the name Hands UK Limited which is already on the public register.

The company name Hands Limited is lost to the group despite having been within the group for many years. Kathleen says “Some of our clients have questioned whether they could provide evidence of use of the name for a considerable length of time or at a minimum a letter of non-objection to use from Hands UK Limited (given that they operate in entirely different markets). Neither of these is possible. Letters of non-objection will only work if Hands UK Limited was also a company within Holding’s group.”

Companies are finding this a bizarre result when attempting to restructure their groups. “We think there is room for amendments to the rules. Either allowing companies to retain names within their groups which they have had for a certain number of years or allowing third parties to provide a letter of non-objection. The former is my preferred approach as it might be difficult to obtain a letter from a third party when there is little benefit to the third party.” says Kathleen. She adds “I understand that the moratorium on new regulations in this area means that it is unlikely that an improvement will be made any time soon. Groups need to tread very carefully in this area.”

The company secretary who was also a shareholder thought that there were sufficient members for a quorum. She had transferred one of her shares to her husband. She had even made filings at Companies House to reflect this.  However, she had not written up his details in the register of members (the books were with solicitors and she could not obtain access).  As a result the court found that he was not a member/shareholder and had no right to count in the quorum.

The company secretary had gone to great lengths to ensure there were only two (as she thought) members at the meeting to give the decision she wanted.  She had not arranged for a board meeting which would have led to others being able to take part in the decision. She had specifically excluded one of the other members (who was in fact a member) from the meeting as he was not in favour of the sale (she did not send him notice of the meeting).

The court relied on section 112 of the Companies Act 2006.  This provides that (other than subscribers): (2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company.” The holding of share certificates or being mentioned in annual returns will not suffice.

Kathleen O’Reilly, Head of Internal Legal Services at Jordans says “It is vital to check the registers and not just rely on information held at Companies House.  It is an understandable misconception but one that those running companies need to be alive to.  It is the register of members held by the company that is key in this respect and not what is on the public file at Companies House.“

Generally, lowering taxes on companies should increase activity, but from what source? If new business (including diverted foreign business) is at the expense of England & Wales,
then given that most of the votes are there, the UK government is unlikely to agree. They may be more relaxed about business that would otherwise have gone to the Republic where tax reductions have proved to have a dramatic impact on the economy (the 12.5% rate, introduced under EU pressure, was preceded by substantial specific exemptions from tax).

A simple reduction in the rate of tax which appears to be envisaged would be a great headline catching measure, particularly for foreign investors, but will raise two problems. First, existing businesses will seek to arrange that more of the profits will arise in
the favoured location without actually changing the substance of their operations. This will raise problems of transfer pricing and the whole battery of complex anti-avoidance legislation, only too familiar to international practitioners, would have to be applied.

What good would the change do?  As has been demonstrated many times, up to
a point, reducing tax rates can actually increase revenue. Certainly, measures to slash rates (from around 50%) and broaden the base, such as were taken by Geoffrey Howe, proved very successful, but most of the easy benefits have now been obtained and present UK
rates seem very near optimum levels in terms of pure revenue raising.

Based on international evidence, we are sceptical about whether  broad-brush regional incentives are economically efficient. If we may make a positive suggestion, , what we really need in both Northern Ireland and Scotland (and arguably in the UK as a whole) are carefully designed and targeted, simple to understand, specific incentives for small businesses (remember that many of these are unincorporated) starting up or recruiting new employees. This would be less controversial at both domestic and EU level than competing for foreign investment. The reduction in tax take from the business should then, we hope, be more than balanced by the very substantial revenue turnaround when an increase in employment turns Social Security beneficiaries into taxpayers. The newly employed  will also have more to spend, increasing the yield of Value Added Tax.

This brings us to the second problem. Neither country really has an independent budget. Scotland enjoys a Treasury block grant of £30 billion per annum and any reduction in the
corporation tax take from either would automatically cause a reduction in its grant. Scotland business is said to pay £5 billion of corporation tax (ignoring the sensitive subject of North Sea oil) and it has been calculated that a reduction rate to 12.5% would cost Scotland £2.6 billion while it is not clear that they would get back the secondary benefits just referred to.  A report by the NI Economic Group suggests (tentatively) that the cost of a change in Northern Ireland would be £2-300 million.

These figures take no account of the income tax, social security and VAT consequences of any changes and these would have to be taken into account very carefully. However, as neither country can afford to lose net revenue, we need a much more careful analysis of which revenue benefits accrue to the UK and which would actually benefit the particular territory. If this were merely a domestic problem, it could be solved with mutual good will backed by very careful calculations but we have to take into account European Union rules on State aid and the non-legal binding Code of Conduct for business taxation.

If we apply European Court of Justice criteria (the Azores judgment) it would seem that we would first have to ensure that the relevant decisions were taken by the separate governments of Northern Ireland and Scotland rather than London. More significantly, though, the loss of revenue would have to be borne by the territory concerned and could
not be compensated for by central government subsidies. This leaves an interesting question would the grant simply be reduced by the loss of corporation tax revenue or would the calculation take into account increases in the take from employment and value added taxes? In any case, to comply with these conditions, there would have to be a substantial reshaping of the budget arrangements and a probably a significant delegation of overall budgetary powers to the government concerned.

To conclude, the idea is an interesting one, but will have to clear many hurdles. As to the EU issues. Attitudes may be change (and we fear not for the better) as even more complex
issues about the relationship between monetary, fiscal and political union develop within the eurozone.

THE AUTHORS

John Chown, an economist and international tax adviser, a co-founder of the Institute for Fiscal Studies and Secretary to the International Tax Specialist Group, has done extensive
Ministerial level work on tax policy and financial markets in the EU,  Russia, Thailand and elsewhere. His colleague Binne Vries is a Dutch international tax lawyer who has worked for many years in the United Kingdom and now lives in Belfast. www.chowndewhurst.com

This article was prepared by Donald Parbrook, Head of Tax at Milne Craig, Chartered Accountants and Chartered Tax Advisers. Readers are advised to take appropriate individual advice on their circumstances regarding the article below. www.milnecraig.co.uk

In recent years, many professional firms have taken the opportunity to incorporate their partnerships into “LLPs”. Some aspects of such a move were explored in issue 11.

However, smaller partnerships (from all sectors) have sometimes chosen to incorporate as a company instead, and have then been able to benefit from the low corporation tax rates for small companies.

The Government’s move to lower the main corporation tax for larger companies now makes “going Limited” (or Unlimited!) significantly cheaper than “going LLP” for most firms.

Tax Basics – the Company or the Partnership?

Note, firstly, that for tax purposes the LLP is generally the same as a “normal” partnership. So, all profits are to be found on the personal tax returns of the partners whether drawn or credit to capital account for another day (you pay tax on the paper profit not what you take out personally!). Historically this meant 40% tax was paid on the top slice for higher earners in an LLP or partnership.

Secondly, the rates are up – the top rate is now 52% (tax and national insurance (“NI”)), if we leave aside the rather scary 62% marginal rate for income between £100,000 and £115,000 approximately, per annum, due to the way the personal allowance is withdrawn at that income point.

A particular tax downside for an LLP/partnership is that the entire profit is taxable whether the partner takes the money or not. So, in a growing business, where profits are perhaps left in the business (and often found locked up in work in progress!), paying tax at these rates can be painful – with the payments on account tax system making that pain excruciating.

So, what is to be done about these horrible tax rates?

In recent years smaller partnerships have often incorporated into companies not LLPs because the corporation tax rate for smaller companies has hovered around the 19%-22% range for some years but, as larger companies paid 28%-30%, they often favoured LLP. After allowing for corporation tax, the profits can be paid out as dividends. Dividends are then taxed on the individual (to the extent they pay higher rate tax). The combined tax on the dividend plus the corporation tax was still less than 40% tax if the corporation tax rate was at the lower end above, but not at the higher end of corporation tax rates.

Leaving aside the fact that a company can operate with its working capital being corporation tax paid at 26% (current main Corporation Tax Rate) against 52% (worst case) tax for a partnership, there is now a change in that there is an absolute tax saving regardless of the size of company.

At Budget 2011, the Chancellor decreased the main corporation tax rate to 26%, with a commitment to reduce it further by 1% per annum to 23% by 2014.

What does the new, lower corporation tax regime mean?

In short, the new lower rates of corporation tax provide a lower tax cost for a company compared with a partnership or LLP for most businesses.

Indeed, if your partnership has significant working capital, the saving on the effective tax cost of money tied up in capital accounts / directors loans is worth it alone.

The additional quirk here is the probability that 50% the tax rate may not be here forever so you can, perhaps, defer drawing the top slice of company profits as a dividend until the personal tax rates are slightly kinder.

After incorporation, you can declare a modest salary along with some dividends (typically up to the top of the basic rate tax band in total) and, if you need more funds, live on your director’s loan account (being your old capital account in the prior practice) to escape 50% and 60% tax rates. As your capital account represents tax paid money, you make an enormous short term saving. However, most partners don’t have capital accounts that are so very generous that this helps you avoid higher rate taxes for long (it varies!)….

…..The icing on the cake

The further “trick” is that many partnerships that have become companies have sold their goodwill to their new company for a full third party market valuation. Where this is possible it can significantly enhance the opening director’s loan balances owed to the former partners – at a tax cost of 10% capital gains tax in most cases. This can enhance the tax benefits of incorporation significantly.

But…the downsides

There are a few complications, but rarely any that can’t be overcome with some careful thought. And whilst an LLP has its place for some sectors, many partnerships, including professional services firms such as accountants, lawyers and the like would be well advised to look again at their tax bills and their options for incorporation. It is useful to note that Jordans and Oswalds have styles of Articles and documentation that is generally pre-approved with the relevant regulatory Institutes including solicitors, surveyors, dentists, accountants, architects and vets.

Clients often ask if it’s possible to change from a guarantee company to a company limited by shares and vice versa. Unfortunately it is not and this highlights the importance of getting the right company structure for your needs from the start.

Whether your company structure is shares or guarantee is an irreversible decision once the company is incorporated.

“I think people sometimes get confused about this issue because it is possible to play around with share companies to a considerable extent – private companies can become public and vice versa. Also, private limited companies can become unlimited, ” commented Kathleen “so it’s easy to see how this might be seen as a straightforward change too. Unfortunately, company law does not see it that way!”

If you realise your company should have been limited by guarantee e.g.

• it is not being set up to make a profit
• it is being set up to regularise arrangements e.g. it is a rugby club or golf club and as such the company needs to have the ability to remove members if necessary
• membership is intended to be personal and not easily transferable

but the company was set up as limited by shares then there is sometimes little you can do but start again.

If that is the case, the organisation would have to set up another company (this time limited by guarantee), transfer the business from the company limited by shares across to the guarantee company and then set up the register of members etc.

“Sometimes, it may simply be a question of speaking to our experts to see if anything can be done in terms of changing the share rights in the limited company. If the company is one set up to make a profit then it really should be set up limited by shares. It might be that solutions to a problem could be achieved by providing enhanced voting rights for some members compared to others.”

Given the success of various Companies House electronic filing initiatives (which compares starkly to the dismal failures of other Government led IT projects) we feel Companies House are right to concentrate on the “80/20″ rule. Jordans for over a decade have worked closely with Companies House and were the first organisation to file an electronic form, incorporate the first company electronically and spearhead the recent change to secure delivery via XML.

At a time of stringent economic cutbacks it would be pure folly to chase after the hundreds of paper forms that are only used infrequently. Jordans look forward to working with Companies House on a sensible, planned plan to increase the use of electronic filing where economically viable.

Companies House made the following statement:

‘Companies House Electronic Services

Companies House is one of the government organisations at the forefront of the digital by default agenda. Over 99% of all searches on the companies register are electronic and over 70% of all transactions are filed digitally either through our website or via third party software. Our aim is to become a fully digital registry as soon as possible and last November we announced the intention to mandate electronic delivery of most of our filing services by March 2013.

However, given our success in driving the take-up of our electronic services since November and the government’s absolute determination not to add new regulations that affect small business, we have now decided that we will not proceed with legislation to mandate electronic services by March 2013. Instead of focussing in the short term on the process to mandate, we will devote our resources to improving digital services for customers, including assisted digital services for businesses who need help using digital services, and make them the service of choice.

The biggest challenge is to drive the take-up for the electronic filing of company accounts. We are committed to using the iXBRL format for collecting accounts data, which is the same approach adopted by HMRC. We will work with the software industry to build on the work already done to meet the requirements of HMRC for submitting accounts electronically and in doing so make any change as simple as possible for companies and their agents. This will build on the success of the joint accounts filing service launched last year.

We remain focussed on our goal of being a fully electronic registry. Mandating electronic services is an issue which we will reconsider once the moratorium on new regulation for small businesses has ended in 2014.’

The Court found that in deciding whether or not one company is the subsidiary of another the following factors will be taken into account whether company A:

holds a majority of the voting rights in company B;

• is a member and has the right to appoint and/or remove a majority of the directors of company B; and/or
• is a member and controls alone (pursuant to some form of agreement with the other members (e.g. a shareholders agreement)) a majority of the voting rights in company B.

This should not cause a problem for most cases where there is a holding and a subsidiary company. However, when looking at situations involving joint ventures and legal charges it may be prudent to define subsidiary and holding company by reference to section 1159 of the Act. Practitioners are advised to clarify in the relevant documentation that for the purposes of the Act a company will be treated as a member of another company even if its shares in that other company are registered in the name of another person by way of security or in connection with the taking of security.

Kathleen O’Reilly 20.6.11

Here are Companies House top tips to keeping your company’s code secure:

• Don’t choose a code that could be guessed easily like 111111 or ANDREW.
• Mix letters and number in your code
• Only share your code with someone you trust to file information for your company
• Change your code (through Companies House Webfiling) if someone who knows it changes jobs or you think it may have been discovered by someone who isn’t trusted to file for you company
• If you file for more than one company, use a different code for each – it’s safer if it’s unique
• If you change your code and use an agent to file on your behalf, tell them in advance to avoid rejections
• No post-it notes on the PC!

With thanks to Companies House.

With any new venture, it is important to minimise risk by getting the right advice at the start as to the form that your new business venture should take. Ask your solicitor, accountant or business adviser.

Consider your options, what you want to achieve and which format gives the best protection if things don’t work out as planned.

Be aware of what could happen if things go wrong. Setting up as a sole trader is quick, cheap and easy. However, if things don’t go smoothly, the debts of the business must be met by the sole trader. Creditors may send in the bailiffs to seize assets such as electrical goods or furniture. If the losses are great, the trader may be forced into bankruptcy or lose their home. Obtaining credit later on could be difficult.

Protect your personal assets. Trading through a limited liability vehicle, such as a company or limited liability partnership, takes time and cost. But both provide the protection of limited liability. So if the business fails, the creditors have no recourse to the personal assets of the directors (unless they can be proven to have acted negligently or unlawfully) or shareholders.

Balance the costs against the protection provided. Depending on your turnover, you may find that you pay more tax than you would as a sole trader; so it is important to check that aspect out at the outset. There are also the costs of setting up the company and the ongoing costs of managing the company, as accounts will need to be prepared and various filings made at Companies House.

Consider the commercial benefits. Clients and suppliers may perceive, rightly or wrongly, that the business is more stable, more reliable, even more reputable if it is in the form of a limited company.

In these unstable times, give your business a head start by finding the vehicle that gives you the best protection at the outset.

Are you protecting your Intellectual Property – trade marks, company name, domain name, patents, designs and ideas?

If so, then you are in the minority – a recent survey of just over 1,900 directors/employees conducted by the Intellectual Property Office (the IPO) and published in March 2011 found that small and medium sized enterprises (SMEs) significantly lag behind larger businesses in protecting these often valuable items.

As the vast majority of innovating companies are small or micro enterprises, this is both surprising and concerning. The survey showed that in large businesses over 60% had sought advice at some point on protecting their intellectual property (“IP”); yet in micro-enterprises, this fell to 15%. Large firms were more likely to obtain advice from external solicitors or patent and trade mark attorneys as well as in-house staff; in comparison, SMEs relied heavily on information available from the IPO. Very few (only 11%) had a designated person within their organisation responsible for IP, compared to large businesses where considerably more (43%) had addressed this issue. 

Even within larger firms only 22% admitted to having an IP policy. Yet smaller companies were less informed about the laws and processes surrounding IP and did not necessarily appreciate that IP rights could be protected, or the processes whereby the value of their IP could be enhanced. 

IP protection can come in many forms. Trademarks can be registered to protect a distinctive name or logo used by your business. This may be the same or different to the company or trading name. Patents can be registered to protect a particular product or process from being copied. But publishing an invention in a trade magazine, or marketing a novel product before filing a patent application may prevent the subsequent registration of a patent and thus the protection which could have been obtained. This will inevitably reduce the value of the invention and open it up to being copied by others. Designs can also be registered.

In brief, the steps which need to be taken are:

1. identify IP used or developed in the business;
2. determine its potential value to the business;
3. decide whether protection afforded by registration would be desirable and if so in which jurisdiction (there needs to be a cost benefit analysis at this point as registration can be both costly and time consuming);
4. check that the IP can be registered (ie: not already registered by someone else, or not sufficiently distinctive or novel);
5. proceed with registration;
6. continue monitoring to ensure there is no infringement by third parties of the IP rights which have been registered, and indeed to check to see if anyone is using any unregistered IP owned by the business.

The IPO survey also found that when asked which sources businesses would check to clear use of a new business of product name, 48% chose to search UK Trademarks and 77% searched UK company names. 

The results of the survey present a consistent picture of IP awareness over the last 5 years, namely that larger companies are more IP aware and have greater resources to both find out about IP and do something about it, whilst SMEs and the mass of Micro-enterprises which form the cradle of IP and future large companies are in the main effectively unaware of the IP system.

Helpful information can be obtained from the IPO  explaining the different types of IP rights and how to go about protecting them or from Jordans.

Oswalds can help you with both monitoring of names and protection of domain names.  Oswalds also has links with specialists in Intellectual Property who can advise on protection and assist with registration where desirable.

With thanks to Kate Wilkinson