Corporate Investment

From the research we have done, we have noted there are more than 2.4m active companies registered with companies house as at April 2011.

Each one may have a substantial amount of cash held on bank deposit accounts, which adds up to billions sitting around un-invested.

With interest rates at an all time low, any company that holds cash for any length of time will be seeking a better return for company money than they can obtain in the High St. We recognise that businesses need cash to run their businesses, so cash required for the general day to day running of the company should remain as cash. But at the same time inflation is running at a higher rate than most High St deposit accounts meaning that the real value of the businesses money is being eroded, a guaranteed loss!

Recent legislation withdrew the chargeable event rules for company investment into life assurance investment bonds with effect from the first accounting period starting after 1 April 2008 i.e. 31 March accounting period will mean new rules bite from 1 April 2008.

This means that, bonds are taxed as 'loan relationships' in the same way as other company investments such as deposits and corporate bond OEICs. Under these new rules, a company will be taxed on any increase in value of the bond shown on the company's balance sheet from one year to the next. It will also be taxed on any 'profit' made on a 'related transaction' i.e. an encashment, withdrawal, transfer of ownership or death claim.

The actual method of taxation of the bond will depend on the accounting basis used by the company. However, HM Revenue & Customs (HMRC) has confirmed that where a company adopts the 'historic cost' accounting basis, the loan relationship rules will have no effect until there is a related transaction such as the encashment of the bond.

Here we find a dilemma.

• “Does a business invest in a deposit account with little or no return?

• In fact “Does a business invest in a deposit account which by the time inflation is taken into account in any one year may even mean a guaranteed loss in the buying power of your cash?”

• Or, “Does it invest in an alternative asset and be taxed at the current rate on the higher “potential” return?”

This would mean that if a higher return were achieved then this higher rate might again possibly be reduced to below the current rate of inflation?

Additional changes were proposed to the tax rates in the March 2011 Budget which will further reduce the corporation tax main rate and the increase to the entrepreneurs’ relief lifetime limit.
For the purposes of our comment lets concentrate first on the proposals that the main rate of corporation tax is set to gradually reduce to 23% by 1 April 2014.

These are still a proposal and have not yet been included in a Finance Act, but if ratified, then it might be beneficial to achieve returns at today’s rate and pay tax on this at some point in the future when the rate were lower.

Again, a lower rate of tax on little return is a negligible gain but if there were a way to achieve a higher rate of return whilst deferring your tax liability to a later date when we suspect that the tax rate might be lower then maybe there is an advantage here. Especially as the longer you hold an investment he chances are you will be able to benefit from a higher rate of return, year on year.

Let’s also bear in mind that the small profits rate is now 20% (1 April 2011) and as we know there are times when the profits generated by a business change from year to year. In the year that a business generates cash it may be likely to declare more of a profit than in the year that they need to realise and spend it?

So if we know that the main rate of Corporation tax this year is 26% and main rate in 2013/14 might be as low as 23%, if the business has excess cash when would you rather pay the tax on the growth now or later?

There are two things to bear in mind here, cash rates of return offered within a bond are normally higher than the High St deposit rates, even by the same institutions (please contact Lansdown Place for an up to date list of deposit rates as these are updated weekly). This means the worst case scenario is that when you invest your money and pay the same rate of tax that you would have done had you kept it in a deposit account, but with a higher return*. Alternatively you run a rolling cash balance and continue to benefit from the potentially higher returns and en-cash the balance when it is needed paying the lower tax rate on the whole gain.**

One further advantage of investing your cash this way is that under normal circumstances any company with a treasury policy of searching for competitive rates on a regular basis will need to comply with each respective Bank or Building Society rules on money laundering. This means that each new account that is opened will require production of proof of identification and residency, every time. When you invest through this type of bond you will have to do this once for the bond provider chosen and then every subsequent switch to a different rate in later years requires no further identification.

Simple and effective, meaning that you are able to take advantage of accounts and rates that may only be available for short periods of time.

Lastly it is important to understand that other forms of investment are available and may be appropriate for your circumstances. To ascertain which would be the best route for your business please contact Lansdown Place where one of our corporate consultants will be happy to talk through your requirements.

We would also advocate taking advice from a qualified accountant before entering into any investment and Lansdown Place are able to help you in this regard should you need help, before you commit yourselves to any investment, as we have an established panel of accountancy firms that work with our mutual clients.

*Marginal relief will continue to apply – 27.5% for 2011/2012
*Charges may apply on initial investment or on encashment of your bond which may reduce your return
**Subject to confirmation that corporation tax rates will reduce over the coming years in line with the governments proposals.