Business Tax Planning August 2012 - Summary 13


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Business Tax Planning August 2012 - Summary 13

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Business Tax Planning August 2012 - Summary 13

  1. 1. Business Tax Planning: AUGUST 2012 SUMMARY 13 PRACTICE BRIEFS BUYING AND SELLING A BUSINESS OR COMPANYThere are two main ways in which thebuyer of a business owned by a sole traderor partnership can acquire the trade andassets. The buyer could either offer cashor, if the buyer is a company, it could alsooffer its own shares or loan stock, or anycombination of these. For a more detailed account of buying and selling a business or company, please see the full chapter included in your Practice Briefs pack.OUTLINEThe seller’s capital gains taxliabilityThe seller is chargeable to capital gains tax yy If the business is a new venture for the(CGT) on the sale of each chargeable asset of Stamp duty land tax and stampthe business. buyer (rather than an addition to an duty existing business), any losses made inThe chargeable assets of a business can the first four years of assessment can Transfer of property is liable to stampinclude: duty land tax (SDLT) normally on the be offset against other income in theyy The business premises, whether freehold consideration paid. Stamp duty is charged previous three years. Alternatively, they at 0.5 per cent on the transfer of shares and or leasehold. can be carried forward against future marketable securities. The duty is payable byyy Trademarks and patents. trading profits. the buyer.yy Goodwill. yy Another option for both buyers and sellers is to set losses arising in a particular Value added taxyy Occasionally, items of plant and machinery that are sold for more than year of assessment against total income Value added tax (VAT) is normally payable on their original cost. of that year. Any excess is available to set taxable supplies made by a VAT-registered against capital gains (subject to detailed business, and this includes the transfer ofThe seller may be able to claim CGT rules). This relief extends to the year most assets on the sale of the business.entrepreneurs’ relief, rollover relief or before the one in which the loss arises, Assets such as cash, debtors and investmentsreinvestment relief, subject to various are not normally liable to VAT. even if, in the case of the buyer, theconditions. business was not owned in the earlier yy No VAT is payable on the sale of a goingIncome tax year. concern. This is a sale where the assets transferred are used by the buyer in theWhen a sole trader or partnership sells a Capital allowances – plant and machinery same kind of business as that carried onbusiness, they are taxed on the same basis as HMRC normally accepts whatever prices by the seller.if the business had ceased to trade. are agreed between UK traders, and this yy Although it is possible to transfer theLosses provides some scope for tax planning for VAT registration from seller to buyer if both parties.yy The seller might be entitled to terminal the buyer is not yet registered, the buyer loss relief if the business has made a loss Stock should normally refuse. The transfer before being sold. Losses relating to the The price agreed for stock and work-in- passes all the VAT liabilities of the seller final 12 months of trading can be set progress at the date of sale is included in to the buyer. It is better for the buyer to against profits in the three years before ‘sales’ in the final accounts of the seller. The register separately. the final year of assessment, relieving the buyer can claim the cost in ‘purchases’ in most recent year first. the first year. The price of the stock should therefore be negotiated bearing this in mind.01
  2. 2. SUMMARY 13PRACTICE BRIEFS BUYING AND SELLING A BUSINESS OR COMPANYSale of a business for sharesA company buying a business owned by asole trader or partnership has the option ofoffering shares for a business as well as orinstead of cash. There are two main ways inwhich shares can be offered:yy Route A – the purchasing company may offer shares in exchange for the business.yy Route B – the purchasing company may offer shares in exchange for shares in a company owning the underlying business. Under this route, there are two steps: »» Step 1, the seller (sole trader or partnership) incorporates a company (Newco) and transfers the business and assets into it. »» Step 2, the seller exchanges the shares in Newco for shares in the acquiring company.With both routes A and B, the seller has The tax is payable at the normal due date poor. When all trading activity stops in aeffectively disposed of the business assets in relating to the date of sale, even though the company, it causes an accounting period toexchange for shares. CGT can therefore arise loan might not be repaid for some time. If the end for tax purposes. The sale of the businesson the chargeable assets in the same way as loan is never fully repaid, a claim can be made would then take place in the next accountingif they had been sold for cash. to reduce the tax liability to take account of period, and there would be no trading lossesUnder route A, the seller’s gains are taxable the amount lost. in that period to offset the capital gain on thebased on the market value of those assets sale.that are within the scope of CGT, are taxable,and the buyer’s company has acquired the BUYING AND SELLING AN Sale of the company that owns theassets at their market value. The seller can INCORPORATED BUSINESS businessclaim entrepreneurs’ relief subject to the usual There are three main ways to buy a business A buyer might buy the shares in the companyconditions. owned by a company. The buyer can: that owns the business, instead of buyingIf route B is used, the seller can defer any the underlying business itself. The seller will yy Buy the company’s business and its assets; often prefer to sell the shares rather than thegains by using two tax reliefs, subject to see ‘Sale of the business’ below.various conditions: assets. This avoids a double tax charge on yy Buy the shares in the company for cash, the sale of assets by the company followedyy For step 1, ‘incorporation’ relief rolls over see ‘Sale of the company’ below. by the extraction of the proceeds from the the gains into the shares in Newco. company. yy If the buyer is a company, buy the sharesyy Step 2 is a ‘share-for-share exchange’, in in exchange for an issue of its own shares Capital gains which the gains on Newco shares are or loan stock. rolled over into the base cost of the shares The seller’s capital gain arises on the sale of Sale of the business from the the shares. In practice, there might be several in the purchasing company. company shareholders, who must calculate their ownyy This double rollover ensures that capital gain or loss under the usual rules. There is gains on the disposal of the business are The buyer can buy the business from the no rollover relief on the sale of shares, but deferred until the disposal of the shares in company. The company is then the seller. reinvestment relief under the EIS or SEIS the purchasing company. yy The seller company is chargeable to might be available to individual shareholders.yy However, the deferral is at the expense of tax on capital gains on the sale of each Entrepreneurs’ relief may be available on a sale of shares in a trading company. any entrepreneurs’ relief on the deferred chargeable asset of the business. gain, as the purchasing company would yy If the gains made by the company are Corporation tax not normally qualify as the seller’s personal distributed to the shareholders, the A company will normally still be carrying on company under the entrepreneurs’ relief shareholders will usually be liable to the same business after a sale of its shares, rules. further tax. and so its tax position will generally not yy The considerations with regard to capital change. However, trading losses that aroseLoan stock before the date of sale cannot normally be allowances, stock, SDLT and VAT areThe purchasing company might offer to pay carried forward if: essentially the same when buying thesome or all of the purchase price by way of a yy There is a major change in the trade assets of an incorporated business from aloan or loan stock, as an alternative to offering within three years either side of the salecash or shares. This saves the buyer having to company. date, andfind the cash immediately. The buyer would A company with only one business to sellagree to repay the loan at a specified future should continue operating right up to the yy The company’s trade is small or negligibledate or dates, and the loan is likely to carry sale date, particularly if recent results are at the date of sale.interest. This summary has been produced for general guidance only. The publishers can accept no liability for any loss made as a result of actions taken or not02 taken as a result of relying on information contained in this publication. © Taxbriefs Ltd and PracticeWEB August 2012. Information correct at time of going to press.
  3. 3. SUMMARY 13PRACTICE BRIEFS BUYING AND SELLING A BUSINESS OR COMPANYVATThere is no transfer of the business forVAT because the business remains in thecompany. Unless the company is part ofa group VAT registration, the registrationnumber is retained and any VAT liabilitiesand potential penalties for making TAX PLANNING KEY POINTSlate returns in the past become theresponsibility of the new owners. yy Buying or selling a business is a key financial decision, and there are oftenOther considerations many different routes. The available choices usually mean that there is plentySellers will often prefer to sell the of scope for both arranging a good commercial deal and also mitigating thecompany rather than its business and possible tax liabilities. But these transactions are fraught with pitfalls, bothassets, unless they want to keep some of commercial and tax-related, and specific professional advice is crucial.the assets, such as a property, but for thebuyer the issues are more complex.yy Selling the business leaves the yy The decision is often about whether it should be an asset (business) or an seller with the responsibility for the entity (share) transaction. Asset transactions require much less in the way of company’s liabilities and the problem due diligence but often bear a larger direct cost (e.g. CGT, VAT or SDLT). Share of extracting the company profits transactions, however, often give rise to hidden charges, e.g. clawbacks of with the consequent tax costs. reliefs on the change of ownership.yy For buyers, buying the business of a company has the advantage that yy Special care should be taken over the tax consequences of earn-out deals, buyers know what they are getting, where deferred consideration is payable dependent on the company’s future because the assets of the business are results. The complexities of such sales are beyond the scope of this topic. detailed in the purchase agreement.yy SDLT on a purchase of assets may be higher than stamp duty on a purchase of shares, because of the higher rates of duty.yy A person buying a company buys it with all its actual and potential liabilities. For this reason, buyers of companies should obtain a wide range of warranties and indemnities from the seller. This summary has been produced for general guidance only. The publishers can accept no liability for any loss made as a result of actions taken or not03 taken as a result of relying on information contained in this publication. © Taxbriefs Ltd and PracticeWEB August 2012. Information correct at time of going to press.