A review of the tax implications involved in creating a local authority trading company (LATC).
Austerity is putting local authorities under severe financial pressure to consider how they can reduce costs, generate income and improve efficiency by introducing commercial structures. Increasingly councils are using local authority trading companies as a vehicle to achieve this. There are a number of tax implications that arise from establishing a LATC, however here we consider corporation tax, stamp duty land tax and VAT.
A LATC will be subject to corporation tax on its profits. The current rate is 20%, but the government announced in the July 2015 Budget that the rate will fall to 19% in 2017, and reduce further to 18% in 2020. Where an LATC is trading solely with the council, there is potential to apply to HM Revenue & Customs for a dispensation, however; outward-looking LATCs generating commercial profits wouldn’t be able to benefit from such a dispensation.
Certain deductions can be claimed in arriving at taxable profits, such as financing costs and costs of running the business. Where a connected party provides financing then rules on transfer pricing could apply. The rules would apply to restrict the deductibility of interest paid to a connected party where the company is financed by a disproportionate amount of debt (compared to equity) or is paying a rate of interest in excess of an arm's-length rate. It is likely there will be changes to these rules in the next few years in response to a recent publication by the OECD on limiting interest deductions, on which the government is currently consulting.
Should the LATC make a loss then, depending on circumstances, the loss could be carried back to an earlier period, transferred to another group company in the same period, or carried forward to future periods.
The LATC will be required to file an annual corporation tax return, which is normally due 12 months after the end of the accounting period. Tax is normally due nine months and one day after the end of the accounting period, although large companies are required to pay their corporation tax liability by quarterly instalments.
Stamp duty land tax
Where a LATC is created to undertake housing regeneration projects then stamp duty land tax (SDLT) can be an important consideration. While transfers of land and property from a local authority to a wholly owned LATC should be exempt under group relief, clawback of the relief could apply up to three years after the transfer should the LATC leave the group at a time it still holds the land or property.
Where an LATC is established as a joint venture with a private sector partner then it is likely that group relief wouldn’t apply and a full SDLT charge would crystallise. The timing of transfers could be important, for example, a transfer prior to planning permission would be at a lower value and result in a lower SDLT charge.
Value added tax
It is common for LATCs to be registered for VAT. One of the key considerations will be to understand the VAT status of goods and services being supplied by the LATC and its impact on the recoverability of VAT it has incurred. Irrecoverable VAT is a real cost to businesses and so arrangements need careful analysis to keep this cost to a minimum.
Where the LATC is undertaking housing regeneration projects, the VAT position is particularly complex. The VAT status of supplies relating to land and buildings will depend on a number of factors and getting the arrangements wrong could lead to a significant VAT cost, for both the LATC and the council.
Transactions between the LATC and the council will also need to be identified and the VAT treatment confirmed. An LATC will not have the special VAT status of a council (Section 33).
Read more about setting up an LATC in Spreading their wings: building a successful local authority trading company [ 4352 kb ] (PDF).