LAQC's are going to be history as from 1 April 2011 and in their place we have LTC's or Look Through Companies, This is what is happening:
- As of 1 April 2011, LAQCs will not be able to attribute losses to shareholders.
- A new tax entity, called a Look Through Company (LTC) is now created. Profits and losses (but with some limitations) are passed on to its shareholders. This means that losses and profits will be deducted or taxed at the shareholders' marginal tax rate.
- Losses in LTCs will only flow through to its shareholders to the extent of the shareholder's investment in the company (including the share of any debt guaranteed by that shareholder).
- The shareholders of an LTC will be treated as holding the assets of that LTC directly. If they sell their shares in an LTC they will therefore be treated as disposing of their interest in the underlying company property (subject to some exceptions) and will therefore be up for any associated tax consequences. Examples are depreciation recovered and gains on the sale of trading stock.
- If the company exits the LTC regime (which could happen unintentionally) a disposal of the company assets will be deemed to have happened and this will possibly give rise to negative tax consequences.
- LTCs will not pay income tax as all income will be attributed to shareholders and those shareholders will be responsible for their own tax.
- LTCs can only have one class of shares.
- Having said all that, the above is merely a tax fiction. An LTC retains its identity as a registered company with limited liability and therefore is still governed by the Companies Act 1993.
Many accountants are strongly pushing LTC's, sensing perhaps an opportunity to get their fees up but the problem is that a LTC, unlike a LAQC, has some significant drawbacks:
- The loss limitation rule which restricts the losses you can claim to your investment in the company and the financial risks you're taking on behalf of the company. Not only is this a pain but it's also going to be extremely difficult and costly to administer as you have to keep a running balance of your total investment and exposure less losses claimed for each shareholder. The detailed rules contain a number of absurdities e.g. your financial risk is the lower of any loans guaranteed and the value of assets securing those loans - this means if you have a personal guarantee you have to prepare a statement of all your personal assets and liabilities - yes, that's right - think of the complications in trying to value your personal chattels and what fertile ground for the IRD to dispute!
- Profits as well as losses are allocated to shareholders whether you want them or not.
- You cannot allocate shareholder's salaries retrospectively as salaries have to be subject to PAYE under a contract of employment. This point alone makes LTC's almost useless to a profitable company.
- Disposals of property can give rise to depreciation clawback upon which you will be personally taxed.
- if you become a LTC to hedge your bets i.e. just in case you do make losses and then realise it was the wrong decision the election to revoke LTC status only takes effect from the following 1 April. For example, say we are preparing accounts in Oct 2012 for 2011 year end you can't get out of the LTC regime until 1 April 2013 which means two additional years of the LTC regime.
Don't be persuaded to rush into the LTC regime without seeking impartial advice from the Accountancy + Business Advice Centre. We can steer you in the right direction for your circumstances.