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PA SGS 8 Notes LPC
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SGS 8 Private Acquisitions detailed notes first SGS - High distinction grade awarded.
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PA SGS 8: Asset Sales, tax issuesSection 1, Part B: issues for a buyer and seller in a business acquisition (asset sale)
Tax implications for the seller:
Calculating Profits or losses arising from the sale of:
corporate • Trading stock
tax liability • Goodwill and
• Intellectual property (newer version)
Acquired or created after 1 April 2002, will be treated on the income side of
the corporation tax calculation.
Gains or losses arising on the sale of capital assets such as:
• Land
• Plant and machinery
• Other goodwill and
• IP (older version)
Will be treated on the capital side of the corporation tax calculation as either
chargeable gains or capital losses.
Seller will be able to reduce its chargeable gains by using indexation in the
usual way; also, by using any available losses.
• Trading losses; a company incurring a trading loss in the year it sells
a business or which has an unrelieved carried forward trading loss, can
set the loss off against any description arising from the sale.
• Capital losses; any capital losses made in the year of disposal of the
business or in any previous years can be set off against any chargeable
gains made on disposal
• Group losses; it may be possible to set off losses which have arisen
elsewhere in the seller’s group of companies (section 3)
Balancing If an asset which qualifies for capital allowances (i.e plant or machinery) is
charges and sold for more than its tax written down value (TWDV), a balancing charge
allowances will arise. In effect an amount equal to the diff between the TWDV and the
amount for which the asset is sold will be treated as a form of profit and will
be added to the taxable profits of the seller and taxed accordingly.
If an asset which qualifies for capital allowances is sold for less than its
TWDV a balancing allowance will arise. In effect an amount equal to the
difference between the TWDV and the amount for which the asset is sold will
be treated as a form of loss and will be deducted from the seller’s taxable
profits.
Rollover on It may be possible for a seller to defer some tax liability in respect of
replacement chargeable gains by means of rollover relief on replacement business assets if
of business the selling company continues to carry on a business after the sale or if the
assets selling company is part of a chargeable gains group and another company in
(ss152-158 that group acquires qualifying assets.
TCGA)
,Passing If a company only operates one business and sells all of that business then
proceeds of following the settlement of any liabilities, the selling company will be left as
sale to the an empty cash shell.
shareholders In such a situation – likely that the shareholder(s) will wish to extract the
cash from the company.
A major disadvantage of a business sale from a perspective of the tax
treatment of the selling company + its shareholder(s) is that the tax
consideration is potentially taxed twice: once in the hands of the selling
company + once in the hands of the selling company’s shareholder(s).
There are 2 options available to the selling company:
® Declare a post-sale dividend: if the selling company declares a
dividend, the cash received by the shareholder(s) will be an income
receipt
® Place the company into liquidation after completion: the cash which
the shareholder(s) receive through a liquidation of the company will be
a capital receipt for the shareholder(s).
The tax consequences of this depend on whether the selling company is owned
by individual SH or by a holding company.
A selling ® If the company selling its business = a subsidiary company, a pre-
company liquidation dividend will be tax free because corporate shareholders
with a generally DO NOT pay corporation tax on dividends.
corporate
shareholder ® However – on a voluntary liquidation the shareholder will be treated
as disposing of its shares in the selling company, so SSE will
potentially be available provided all of the conditions are satisfied.
® If this exemption is available, the corporate shareholder will NOT have
to pay tax whether the proceeds of the sale are transferred to it by way
of dividend OR on a liquidation.
A selling ® If the selling company is placed into liquidation after the sale of its
company business, this will generally be a capital receipt for the shareholders
with and, as individuals, they will be liable to pay CGT as if they had
individual disposed of their shares in the selling company.
shareholders ® BADR and other CGT benefits (i.e investors’ relief) may apply in the
usual way. The company may pay a pre-liquidation dividend first to
reduce the value of the company before liquidation and thus reduce the
capital receipt for shareholders on a liquidation.
® If any part of the pre-liquidation dividend fell outside the individual
shareholder’s dividend nil rate allowance = would be subject to income
tax at the appropriate dividend.
® The selling company will already have paid corporation tax on the
consideration received for the sale of its business, so if the proceeds are
then taxed when they are passed to the individual shareholders this
will be a double tax burden – the same proceeds will have been taxed
twice.
Tax implications for the buyer:
® Corporation tax implications
o A buyer will be acquiring a group of assets, some income generating +
some capital generating.
, o It DOES NOT inherit the seller’s tax liabilities and it will not be
concerned about the seller’s base cost in relation to the capital assets.
® Income generating assets
o The price allocated in the business sale agreement to trading stock and
work in progress can be deducted when calculating the buyer’s income
profits.
® Capital assets
o The price allocated in the business sale agreement to each of the capital
assets acquired as part of the acquis = buyer’s base cost for that assets
(subject to any claim the buyer may make for rollover relief on
replacement business assets).
® Capital allowances
o Buyer can also claim capital allowances in respect of qualifying assets, i.e
plant and machinery. Again, price allocated in sale agreement = forms
basis for capital allowances for the buyer.
Rollover relief on replacement of business assets
® A buyer which has disposed of qualifying assets for the purposes of rollover relief
on replacement of business assets within the period of 12 months before the
business acquisition or which plans to make such a disposal in the 36 months
following the acquisition may be able to rollover the gain on that disposal into its
base cost of any qualifying assets it acquires as part of the business acquisition.
Example: Burgers Limited has just purchased all the business and assets of
Healthy Salads Limited. £2.5 million of the consideration for the business
has been allocated to Healthy Salads Limited’s main warehouse facility.
Last year Burgers Limited sold an office building, making a gain of £500,000
Burgers Limited could now make a claim for rollover relief on business
assets, and roll the gain it made on the sale of the building into the base cost
of the warehouse included in the Healthy Salads business which it has just
purchased. Burgers Limited could pay no tax on the gain made on the office
building (or reclaim any tax it has already paid); instead its base cost in the
new warehouse will be £500,000 lower and it is likely to make a larger gain
(or a smaller loss) when it sells the warehouse in the future (unless it is able
to make another claim for rollover relief on business assets at that time).
Note that it is not necessary for the new asset to actually “replace” the old
asset – here the warehouse is not going to replace the office building (i.e.
have the same function as it within Burger Limited’s business). It is
sufficient that each of the old asset and the new asset is a “qualifying asset”
for rollover relief purposes.
VAT:
® General rule: a taxable person making taxable supplies of goods / services in the
course of his business must charge VAT to the recipient of those supplies and
account for this VAT to HMRC.
® Exception: Art 5 VAT (Special Provisions Order) 1995:
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