Plugdin Insights: The aftermath of SVB’s collapse and recent relevant tax changes

Read time: 7 minutes

The aftermath of SVB’s collapse for businesses seeking investment and changes in the Spring Finance Bill that may impact this

It has been a testing time for many UK based tech businesses: many  were facing the possibility of all of their cash balances disappearing overnight and not knowing where and how they were going to meet their bills or pay their staff. HSBC’s acquisition of Silicon Valley Bank UK (SVB UK) brought relief to the UK tech community, but uncertainty in the UK banking sector remains.

Furthermore, the aftermath of Silicon Valley Bank’s demise is still being felt with the associated ‘contagion’ still not having been contained, particularly in the US.  Funding has tightened, with certain advanced discussions on seed and Series A rounds being paused for an indefinite period. BDO has seen a number of deals at an advanced stage stall or be put on hold.

So, in light of the current banking climate what should businesses be considering?

Key Considerations

1. Consider multiple banking relationships for sufficient diversification. Having more than one banking relationship is prudent best practice.
2. Frequently review liquidity and cash management (including cash burn rate and runway) and establish contingency plans should you be unable to access funds on deposit at affected banks.
3. Evaluate and support additional governance if necessary – particularly for the finance function – is this adequately resourced with the right level of talent and are your systems fit for purpose and able to generate the right KPIs for your business?
4. Consider your insurance needs and discuss with provider(s) where appropriate.
5. Consider the tax implications of any debt refinancing, modifications to indebtedness, equity raises, or transactions involving securities or financial instruments as well as tax attribute modelling and planning for losses sustained and their tax deductibility.
6. Conduct a proactive business continuity risk assessment to identify potential internal operational, financial, market and vendor/external partner risks; determine direct and indirect impacts; generate an action plan.
7. Improve cashflow by maximising tax reliefs, like R&D relief, and submit claims as early as possible.
8. Focus on long-term resilience and ensure that the business has the appropriate systems, processes and controls in place to accurately access the current financial position at any given time e.g. a faster month end close means that important decisions can be taken earlier and before a problem becomes entrenched. 

In light of this climate, tech businesses may be considering other ways to shore up their balance sheets, improve their liquidity positions or find new sources of investment.  Sometimes the search for new investment sources leads to the exploration of a structural change for the business.  In particular, where prospective investors are US based, we have often seen commercial considerations / investor requirements drive companies  to pivot their structures to have a US holding company to make it  more attractive for US based investment. Similar considerations apply in other markets (e.g. EU investors can have a preference for an EU based investment vehicle).

Of course, such restructuring always carries a number of considerations for existing investors as well as the business itself:  the potential for tax charges or restrictions of tax attributes arising on the restructure itself, as well as ongoing impact of new tax rules on the business itself can significantly change net returns.. New governance structures often have to be considered to ensure that the new structure is managed in an appropriate way to mitigate the risk of dual tax residence or unintended taxable presences arising.

New rule on share exchanges

The UK’s Spring Finance Bill seeks to add another consideration to the list which has to date not received a great deal of attention. A specific, targeted UK tax measure has been announced which may impact reorganisations of this nature that introduce a new parent entity or change the parent entity of a group from the UK to a foreign territory.  It is in respect of share exchanges involving non-UK incorporated ‘close’ companies.  The measure has effect from 17 November 2022 and has been included in the UK’s Spring Finance Bill (which is, at the time of writing, going through the process of being finalised and has not yet received Royal Assent). 

The measure seeks to prevent UK resident, non-UK domiciled individuals who exchange securities in a UK incorporated company for securities in a non-UK company (such as a US holding company) from accessing the remittance basis of taxation on gains realised on the disposal of those non-UK securities or distributions received in respect of those securities.  The measure does so by deeming the securities in the new company to be situated in the UK and income arising on those securities (such as dividends or distributions) to be UK source in nature in the same way as they would if the securities were held in a UK company. 

Share for share exchange provisions can permit shares to be exchanged without a disposal occurring for UK capital gains tax purposes, and similar relief can apply for stamp duty purposes. Both reliefs come with conditions attached, however, that require detailed review. This new provision does not prevent such share for share exchange treatment from applying for existing UK investors (indeed, it is drafted to apply when such relief does apply). Therefore,  it is still possible to achieve the structural change in a tax neutral manner with appropriate care, but the knock-on impact needs to be understood, particularly for UK resident, non-UK domiciled shareholders.

This measure only affects ‘close’ companies incorporated in the UK which remain ‘close’ after the restructure.  Broadly, a close company is a company which is under the control of 5 or fewer ‘participators’ or under the control of any number of participators who are directors.  Participators include shareholders and loan creditors of a company.

The sequencing of investment relative to a restructuring may, therefore, be more important to consider (e.g. if investment makes a company “non-close” prior to a restructuring, then this measure may not apply). While this measure will not affect all tech companies looking to restructure, careful attention will be needed when planning and undergoing restructures of this nature, in particular, to ascertain whether they are considered ‘close’ both before and after the restructure.  Companies which have more than 5 shareholders can still be ‘close’ companies as shareholdings of associates are amalgamated for these purposes.  However, companies which have previously taken on funding may be less likely to be considered as close companies given their diverse investor bases, subject to how much equity has been surrendered by the founding shareholders.

The legislation does give individuals the option to elect out of its provisions by choosing to pay a capital gains tax charge based on the market value of the securities in the UK company at the point of the reorganisation.  This may be cost-effectivefor very early stage ventures with low valuations.

Help to change your business structure

In summary, tech founders will need to think carefully about the structure of their businesses when setting up, in particular, where they are non-UK domiciled and wish to take advantage of this status and/or wish to attract investors who will want to do so. In effect, not getting the structure right at the outset may mean that it is difficult to change the structure  later without incurring a tax charge.  

Historically, there has been the flexibility to consider a restructuring at a later date without significant adverse consequence: that flexibility is now reduced and  this needs to be factored into the overall business growth strategy.

Whatever the drivers are for considering a change to your business structure, contact Tahir Ebrahim, Ross Robertson or Vinesh Bharadwa, for help and advice on the tax implications your plans may trigger.