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#4786 - Tax - Mergers and Acquisitions (Private Acquisitions)

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Tax

Type of tax

Individual/Corp?

Seller/Buyer?

Share/Asset?

Corp tax on trading profits

 Corp Seller Share or Asset

Corp tax on chargeable gains

 Corp Seller Share or Asset

Income Tax

 Individual Seller Share or Asset

CGT

 Individual Seller Share or Asset

VAT

 Individual or Corp Seller or Buyer Business (TOGC)

Stamp Duty

 Individual or Corp Buyer Share

SDLT

 Individual or Corp Buyer Share or Asset

[SDLT clawback]

 Individual or Corp Target (indirectly B) Share or Asset

De-grouping charges

 Corp Seller Share

Structure for approaching tax q:

  1. is scenario share sale or business sale?

  2. who is receiving cons/is prima facie chargeable for tax?

  3. what tax(es) will be payable?

  4. how is it/are they calculated? (nb. you won’t actually have to calculate but useful notionally)

  5. are there any exemptions or reliefs (ie. can any tax be mitigated/ reduced/ extinguished?)

  6. apply any test(s) relevant to exemptions or reliefs to the facts

  7. Conclude whether the exemption or relief applies on the facts

Share sales

By corporate Seller:

Answers to (1) and (2) are clearly share sale and corporate chargeable for tax.

  1. Main tax will always be corporation tax.

  2. Tax will be calculated on the chargeable gain made on the disposal of shares

  1. Exemptions

‘SSE’ - Substantial Shareholding Exemption

Main one - v imp:

3 x conds

  1. selling co must hold @ least 10% of T’s share capital

  2. for @ least 12 consecutive months in 2 year period prior to disposal

  3. both selling co and target co are trading co’s or members of a trading group thr/out the 12 month period before and immediately after sale

... Then no tax payable on sale of shares

Tax deferral on share-for-paper exchange

If SSE not available, this may be if cons is in form of paper

2 x conds

  1. B must hold, or as a result of exchange, will hold over 25% of T’s OSC and

  2. there must be a bona fide commercial reason for structuring payment in shares/loan notes [ie. not just tax avoidance]

Where paper is loan notes there is another non-stat cond that:

  1. the loan notes should not be redeemable until @ least 6 months after their date of issue.

Effects of tax deferral

  • in form of shares = ‘Rollover’

S’s tax liability on the sale of T shares is effectively postponed until S sells the shares it has been issued in the B. S’s chargeable gain (or loss) for tax purposes is calculated as the amount if originally paid for T and the amount for which it sells shares in B. Value of T shares on date of actual transfer is therefore irrelevant.

Sum = Amount it makes selling B shares minus amount originally paid for T

Nb. S will only accept shares as cons from B if B is listed co as that means its shares will be freely marketable

  • in form of loan notes = ‘Holdover’

The tax on any gain is deferred until the loan notes are redeemend, sold or otherwise disposed of. Where shares are sold in exchange for LNs, the tax liability arising on the original shares is just held in suspense until the LNs are redeemed, sold or otherwise disposed of. This type of deferral (as it is different to shares) is known as holdover. The amount of tax on the gain is never reduced (ie. If a S bought a building for 300 and sold it for 350 of LNs to a B, when the S redeems his LNs he will owe corp tax on his chargeable gain on 50).

Nb. if S accepts cons in form of LNs, it should require LNs to be supported by a guarantee from a bank (or listed part co of the B) or by security over B’s assets.
SSE and share-for-paper exchange If SSE is satisfied, even if cons is in paper form there will be no chargeable gain for tax purposes. Therefore SSE is most desirable exemption as w/share-for-paper S is still paying tax just deferring it.
Pre sale dividend If a T declares a pre sale div it will strip the T of value and therefore reduce chargeable gain for S. Generally, there is no tax payable on a dividend to a UK co.

  1. Apply to facts

  2. Conclude

By individual Seller

As above, (1) and (2)

  1. relevant tax = Capital Gains Tax

  2. calculated on chargeable gain on 1 million

  3. Exemptions

ER’ - Entrepreneur's Relief

Tax rate of 10% applies on chargeable up to a 10 mill cumulative lifetime amount if:

  1. individual disposing of shares in a trading co

  2. who holds @ least 5% of OSC and voting rights

  3. and is an e’ee or officer of that co

  4. and conds (1)-(3) have applied for @ least 1 year prior to disposal

Tax deferral on share-for-paper exchange

 Also available for individuals

Pre-sale dividends vs ER/CGT

see if ER is available - if yes, always preferable

Otherwise calculate whether appropriate dividend tax rate is less than CGT for that tax bracket then conclude

nb. remember w/divs you need to gross up

Generally for pre-sale divs vs CGT: additional = bad idea, higher rate = good idea, basic rate = good idea

For buyer (corp or individual)

Sale is of shares (1) and either an corp/individual buyer (2)

  1. relevant taxes are Stamp Duty, VAT and SDLT clawback

Stamp Duty

 current rate is 0.5% unless transaction <1000

[VAT

 exempt supply for VAT purposes]

SDLT clawback

 can arise where T received land as a result of intra-group transfer and leaves group w/in 3 yr of receipt of that land

  1. calculated on the facts

  2. Exemptions - generally indemnities and warranties (used to flush out info)

  3. apply facts

  4. conclude

Asset Sale

Tax liabilities of T remain w/S so B is not concerned re finding out re any hidden tax liabilities

For corporate S:

Business sale (1) and corp S (2)

  1. relevant corp tax is either

income receipts/trading profits

trading stock

IP and goodwill (post April 2002)

capital receipts/chargeable gain

IP and goodwill (pre April 2002)

Land & property

Plant & Machinery

  1. calculated accordingly - both types are combined to create Total Taxable Profits (‘TTP’) and corp tax is paid on total sum

  2. exemptions

Trading profits

 balancing allowances (if T sold for less than tax written down value (‘TWDV’) a balancing (which can be a loss and used accordingly)

Chargeable gains

indexation

capital losses (T? group?)

Rollover relief on replacement of business assets - defers tax but T will need to acquiring more capital assets for this to apply

Both/overlap

 trading losses (T? group?)

  1. Apply any tests

  2. Conclude

Passing proceeds of sale to s’ers can cause an issue as on a bus sale this will lead to double taxation (once in hands of S co and once in hands of S co s’ers). Tax consequence will depend on if S co s’ers are co’s or individuals

S co w/corp s’ers

  • if co selling business is a sub, pre-liquidation/sale div will be tax-free because corp s’ers don’t pay corp tax on dividends

  • however on a voluntary liquidation (ie. pre sale div), the s’er will be treated a disposing of its shares in S co and so SSE will potentially be available (see above) w/following adjustments:

  1. the requirement that trading co should be trading immediately after disposal is disregarded (as obvi co can’t be trading as is being liquidated)

  2. the s’er co must have owned a controlling interest in T co @ some point during 2 years prior to disposal (clearly easy to satisfy in terms of liquidation of wholly-owned sub)

S co w/individual s’ers

  • pre-liquidation dividend will be treated as an income receipt

  • therefore, ER may apply depending on individuals

  • depending on their tax brackets, s’ers will either prefer pre-sale div/income tax (basic, higher) or CGT (additional)

  • if ER applies, individual will always want CGT as 10% is best rate possible

For B

Business sale (1) and buyer (2)

  1. applicable types of tax:

Corp tax

 B doesn’t inherit S’s tax liabilities therefore won’t be concerned in S’s base cost in relation to assets

Income generating assets

 The price allocated to trading stock, work in progress, IP and goodwill can be deducted when calculating B’s income profits

Capital allowances

 B can claim capital allowances in respect of qualifying assets such as P&M and price allocated in business sale agreement will form basis of B’s capital allowances

VAT

 GR - ‘taxable person’ making taxable supplies of goods or service in the course of this business must pay VAT to the recipient of those supplies and account for this VAT to HMRC [see exception below]
SDLT payable if B is acquiring land

  1. calculated as appropriate

  2. Exemptions

Rollover Relief on replacement of business assets

 A B who has disposed of qualifying assets for purposes of ROR on replacement of business assets w/in period of 3 yrs prior to business acquisition, or who plans to make such a disposal in yr following acquisition may be able to over gain of that disposal into the base cost of any qualifying asset it purchases

VAT ‘TOGC’ exception

no VAT applies where there is Transfer Of a Going Concern (TOGC)

To qualify:

  1. bus assets transferred must be used by B in same kind of business, w/ no significant break and

  2. the B must be registered or become registered for VAT before completion or as a result of completion

When business assets include land, there is an additional requirement. A Ld can make an election to waive exemption on a particular property and charge VAT on rent - turning an exempt supply into a standard rated supply. The B must check to see if S has made an election to waive exemption. If S has made such an election, B must make the same election in relation to property on or before completion otherwise will not be see as ‘same kind of business w/no significant break’ in the eyes of HMRC and condition (1) will not be satisfied.

  1. apply to facts

  2. conclude

Group co taxation

Remember in UK there are a number of tax reliefs...

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