June 05, 2018 | No Comments
Buying a business is a significant decision and one that you want to get right from the outset, especially from a tax perspective. The aim of this article isn’t to give you the complete answer because each acquisition is different. Instead it’s to make you aware of all the tax liabilities that you’ll encounter along the journey, essentially so there are no nasty surprises along the way.
What are you buying?
Generally there are two ways to buy a business:
- Share purchase – you (or your company) buy all or most of the target company’s shares. It can be perceived as an easier route, however in reality it’s not always as simple, as you’ll be inheriting the company’s history and taking on its liabilities.
- Buy some or all of the assets – these assets can include property, machinery and goodwill. This might give you the ability to cherry-pick what you want and leave the rest behind, but there’s legal implications to consider here too, such as TUPE rights and more.
So what does this mean for you?
The two methods may seem similar and result in the same end game for you, but here are some of the considerations that you’ll need to be aware of.
Corporation tax instalments
When you acquire assets and incorporate the trade into your existing company, if your existing taxable profits then exceed £1.5 million over a 12 month period, you will have to pay your corporation tax in upfront instalments (rather than 9 months and 1 day after your year end). This is something we find is commonly overlooked, and will have a significant impact on your cashflow. If you don’t bear this in mind when you’re raising finance for the deal, HM Revenue & Customs will charge you late payment interest on your missed instalments.
If you’ve decided to purchase the shares in the target company rather than the assets, this creates a group structure and the £1.5 million threshold is split equally between the two companies instead. You will pay the same amount of tax in the end, but you will need to find a way to fund the upfront instalments.
So either way of buying your business is likely to change the timing of your corporation tax payments.
Buying shares in a company attracts stamp duty of 0.5% on the total amount you’ve paid, eg on a £1 million deal you’ll have to pay £5,000. However there’s no stamp duty on the purchase of a company’s individual assets.
If you were only buying the commercial property, stamp duty land tax is payable between 0-5%. On a freehold property valued at £500,000 stamp duty of £14,500 would be due, but most other assets don’t attract stamp duty on transfer.
A share purchase is exempt from VAT.
On the other hand an asset sale might be subject to VAT and if so, this will increase the amount you need to pay to seller by up to 20%. You’re likely to be able to reclaim the VAT back but you will have a cashflow implication to consider initially. However, if the assets are transferred as a TOGC (transfer of going concern) then no VAT will need to be charged. There are several conditions that need to be met for this treatment to apply, and here’s a link to an article you may find useful click here.
What should you do?
There really is no right or wrong way to buy a business and the negotiations may determine the route which you need to take. We don’t let the tail wag the dog, but as always please talk to us up front and if you have any questions, please do get in touch.