What are the ways of sale and purchase of a business carried on by a company and associated tax implications?
A business carried on through a company can be sold in three ways:
(a) Sell the shares.
(b) Sell the assets.
(c) Sell a hived-down business.
Each of these will have different advantages and disadvantages for the seller and for the purchaser.
Sell the shares
Seller’s point of view
The seller must be clear about its shareholders’ objectives. These may differ depending on the type of shareholder. A non-resident shareholder may prefer a pre-sale dividend, an Irish resident may prefer to leave the dividend in the company and have CGT liability. A sale of shares has the advantage of simplicity. The shareholders pay CGT on the difference between the sale price and the acquisition cost of the shares. The purchaser pays stamp duty (1%) on the purchase price. By having a holding company sell the shares, the gain can be eliminated.
Purchaser’s point of view
The purchaser’s primary concern is to ensure that the company being bought is “clean”. You will need to carry out due diligence and receive satisfactory answers to the following questions to assure yourself that there are no hidden problems:
(a) Have all tax returns been filed?
(b) Have all taxes, interest charges and penalties been paid?
(c) Does the company’s balance sheet provide for all taxes due? Deferred tax shown in company accounts arises due to timing differences between the rate at which assets are written off for tax purposes and for accounting purposes. Such tax will probably never materialise, but the nature of the underlying transactions should be thoroughly checked. What is the tax history of the company’s assets?
(d) If the company was a member of a group, the last question should reveal whether a group gain was rolled-over into any of its assets. If so, on leaving the group with the asset, the company is deemed to have sold the asset at market value. This will crystallise any inbuilt gains in the departing company.
(e) Was the company a member of a VAT group? If so, it remains jointly and severally liable for the VAT liabilities of the group. The purchaser will need undertakings that the other group members will cover such liabilities, if any.
(f) Did the company reclaim VAT on any land or buildings it has acquired? More importantly, was it entitled to reclaim such VAT (even if it did not reclaim the VAT)? If so, the company may be liable for VAT if it sells the land or buildings, or uses them for VAT-exempt purposes (for example, if it short-term lets the properties).
(g) Is there any ongoing dispute with Revenue, for example, an incomplete Revenue audit?
(h) Was the company properly entitled to tax reliefs claimed?
(i) Did the company engage in any (aggressive) tax avoidance scheme that might be challenged by Revenue?
Sell the company’s assets
Seller’s point of view
For the seller, the advantages of a sale of assets are:
(a) You can keep assets of particular value.
(b) The sale may give rise to a balancing allowance if the asset in question qualified for capital allowances. You may agree with the purchaser that plant and machinery pass at their tax written down value. Bear in mind that no balancing adjustment may be made once the tax writing down life of the asset has expired.
(c) Your warranties to the buyer are kept to a minimum.
(d) Any accumulated trading losses of the business remain available to your company as you have only sold assets (not the entire company).
The disadvantages of a sale are:
(a) Double charge. Your company may have to pay CGT on the sale of the asset, and the shareholders pay either income tax on dividend or salary, or CGT on the sale of the shares.
(b) Balancing charge (if the asset in question qualified for capital allowances). You may agree with the purchaser that plant and machinery will pass at their tax written down value. No balancing adjustment is necessary once the tax writing down life of the asset has expired.
(c) You remain responsible for the fulfilment of existing sales orders.
(d) You must charge VAT on the sale of the assets if you were entitled to reclaim VAT when you acquired them. No VAT is chargeable if the disposal can be construed as “a transfer of a business or part of a business”.
(e) The buyer must pay stamp duty on assets consisting of land or buildings. This affects your negotiating position. It does not affect plant and machinery, as these can pass by delivery.
Purchaser’s point of view
For the buyer, the advantages of buying assets are:
(a) You are not taking over any unidentified tax liabilities or claims.
(b) You can access unused capital allowances on the assets.
(c) When you sell the assets, the base cost of assets will be higher as it will be based on market value as opposed to book value.
(d) You can deduct as a trading expense the cost of any stock acquired. If the seller has permanently ceased to trade, you may agree with the seller to bring the stock into your records at its cost to the seller.
(e) No stamp duty arises on assets passing by delivery (for example, plant and machinery), but this may be outweighed by stamp duty on transfer of other assets (for example, land and buildings).
The disadvantages of buying assets are:
(a) Stamp duty on transfers of assets inflates the price.
(b) You may have to enter into new business contracts with each of the seller’s customers, suppliers, and employees.Depending on the numbers involved, this may be a complex operation.
(c) The seller may not be willing to sell assets because of the double tax charge.
(d) If you are non-resident, some VAT may not be recoverable.
Sell a hived-down business
Hive-down
A hive-down is half-way between a sale of shares and a sale of assets. You transfer particular assets to a new subsidiary, and the buyer purchases (the shares in) the new subsidiary. The buyer gets a company holding the assets it wants. The buyer pays stamp duty at 1% for the shares, and you have a straight sale of a subsidiary.
Seller’s point of view
Your company can transfer assets to a new subsidiary without giving rise to:
(a) a chargeable gain (provided it is a 75% subsidiary),
(b) VAT (where the transfer is of a business or part thereof), or
(c) stamp duty (provided there is a 90% group relationship between company and subsidiary).
The subsidiary can claim capital allowances which would have gone to the company. The buyer may want the accumulated losses (if any) of the hived-down subsidiary. However, you also may want to use the subsidiary’s losses through group relief as far as possible rather than try and get value for them through the purchase price paid. This may not reflect the full value of the losses to the seller.
The points mentioned in sell the shares above are also relevant.
Purchaser’s point of view
The points mentioned in 5.53 above are also relevant.
As the subsidiary will have a short tax history, you will want to be aware if any inbuilt gains that will crystallise on the subsidiary leaving its group, and VAT issues if the subsidiary was a member of a VAT group. You will have reduced stamp duty, and the ability to use trading losses, if any, in the subsidiary. You will not have direct access to capital allowances, higher CGT base cost for assets acquired, and business deduction for stock acquired. The new subsidiary can carry forward the accumulated losses provided the trade continues in the same manner as before, and has the same continuing identity. If the trade is run down to a negligible level, or a different trade is carried on once the subsidiary has been bought by its new owners, the loss relief will be lost. A different trade is one dealing in different property, services or facilities, or which has different customers, outlets or markets.