Liam Clarke and Finbarr O'Connell explain how tax consequences need to be managed and cultivated in the right way.
In a recent agricultural administration appointment taken on by our London restructuring team, the need was highlighted for purchasers of businesses, and indeed insolvency practitioners selling those businesses, to consider all assets of a company, including the company's tax losses.
Sector overview
The agricultural sector, like many sectors of the UK economy, is struggling with the fact that the current economic forecasts are as bleak as this year's British summer weather forecasts. The recent media and political discussions relating to dairy farm production, and specifically milk prices, highlights the extreme pressures farmers and food processors are currently facing.
Despite the desire of the average UK consumer to support UK growers and producers, the marriage between the UK farmer and the national supermarket chains is a difficult one. The supermarkets' ability to control their own margins and supply chains does not fit well with the average farmer's increasing costs. Yes, the supermarket chains have recently increased farmers' dairy income, but some cynical observers have commented that this has more to do with ensuring the supermarkets' supply of milk by preventing the suppliers going out of business.
Sector expertise
Smith & Williamson's restructuring and recovery team has considerable experience of farming assignments. We have strong connections with farmer-controlled businesses (FCBs), landed estates and farmers, and have worked closely with food companies, including processors, manufacturers and retailers. These involvements have included giving strategic advice and assistance with regard to the acquisition and sale of agri-businesses. Our restructuring practitioners have undertaken a number of agri-business administrations and are familiar with the market-specific issues that an insolvency practitioner will often encounter in these types of assignments, in particular:
- supermarket relationships
- farm business tenancies (FBTs) and how these might affect the holders of legal charges
- weather damage and insurance for it
- labour management, including migrant staffing issues.
Within the Smith & Williamson group we also have individuals who are heavily involved in the agricultural sector. Steve Ellwood, head of our food and agriculture group, was formerly head of agriculture at HSBC Bank plc. Steve, who serves on the board of a number of food companies, has influential connections with the Food and Farming Foundation (FFF) of which Smith & Williamson is a main sponsor.
Philip Moody, head of corporate finance at Smith & Williamson, is also actively engaged in the agricultural sector. He is a director of FFF and is currently on the board of Openfield Group Limited, a leading grain marketing FCB that works with 7,000 arable farmers across the UK.
Our support of FFF and European Food and Farming Partnerships (EFFP) helps EFFP to develop its role as a specialist agri-food business consultancy. EFFP is aimed at facilitating greater co-operation between food companies and farmers, and also securing a profitable and sustainable future across the food supply chain. Its activities have also been backed by farming and food businesses as well as by governments.
Retention of tax losses
A recent approach to Smith & Williamson for a formal appointment over an agricultural business resulted in the administration of a multi-site trading business with operations throughout the UK. The trading locations and nature of the business allowed our London team to draw on our other offices based throughout the UK to assist in the day-to-day management of operations, as well as bringing in Smith & Williamson's specialist forensic department to assist with investigations into the company's pre-administration affairs.
After a period of post-administration trading and extensive marketing of the business, the company's most significant creditor made the best offer for the business. The creditor in question had been a joint venture stakeholder in the company's business operations prior to administration.
The existing commercial arrangements and offer made by the creditor enabled a combined approach between the purchaser's tax agents and the Smith & Williamson corporate tax team, headed up by Mark Webb. Working together the team recognised that the situation allowed for a sales process that could retain tax losses, despite the background of a formal insolvency process, together with other advantages for the purchaser.
Yielding a better return for creditors
In short, from a position where frequently there would be no tax losses accruing to the purchaser of the business, significant tax losses were preserved and additional benefits were identified.
The sale structure as a whole resulted in tax losses being maintained which helped to maximise the return to creditors by enhancing the going concern value of the company's business. The case highlights that in appropriate circumstances, i.e. where the commercial deal allows, tax planning can help to yield a better return to creditors.
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