Buying a business:
Tax issues
If you are acquiring an unincorporated business then what you actually buy is the trade, assets and liabilities of the business, including any goodwill.
If your business is operated by a company then you have a choice as to whether you take over the whole company and buy its shares, or whether you just acquire its trade and assets. This decision has a major impact on both your tax position and that of the vendor, and it may well be that the vendor will prefer to sell the company and the purchaser would prefer to acquire assets. This is an issue that will need to be negotiated between the parties.
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The way that the deal is structured can also be influenced by your long term capital gains tax and inheritance tax planning.
If you are buying shares, you will need to pay stamp duty at a rate of 0.5% on the purchase consideration. You acquisition costs should form the base cost of your shares for tax purposes.
If you are buying assets there are a range of tax related issues to consider, including:
- how the purchase consideration is allocated between the assets purchased. Tax relief will be available on some assets straight away (eg stock) but for other assets will be deferred (eg plant and machinery and goodwill
- stamp duty land tax will be charged on the acquisition of interests in land
- the tax implications of taking over onerous contracts or accrued liabilities as part of the purchase
- whether the acquired business should be brought into a VAT group with your existing businesses
- whether the transfer of trade qualifies for relief as a transfer of a going concern and is consequently outside the scope of VAT
- the extent to which VAT is recoverable on the costs of the transaction
When you acquire a business, you will also take over its tax liabilities. You may be protected to some extent by the tax warranties and indemnities, which should enable you to recover tax costs from the vendor. However, the primary responsibility for paying the tax will be yours, and so part of your due diligence should be identifying potential tax liabilities.
After the deal you also need to think about tax. For example, you may want to offer the management of the new business tax-efficient remuneration and incentive packages.
We recommend that you take professional advice over the tax issues, which are complex and will be expensive to get wrong.
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