Advice & Best Practice

How you purchase a company could affect your capital allowances claim

By Mark Anthistle, senior capital allowances analyst at specialist tax consultancy, Catax

When contemplating the acquisition of a company, there is a choice on how the purchase is structured. The buyer can either purchase the assets and trade from the company or buy the shares of the company.

For an asset sale, some or all the assets owned by a company are purchased by the buyer. This includes anything from land and buildings and furniture and equipment to goodwill, intellectual property, and stock. The seller retains ownership of the company with any liabilities or losses remaining with the company. This transaction is between the buyer and the company.

In the case of a share sale, the buyer purchases shares in the company, as opposed to just the assets. Typically, the company retains its assets and liabilities. It is the ownership of the company, a separate legal entity, that changes. The transaction is between the buyer and the shareholder.

Tax implications

There are many tax implications to consider for both the seller and buyer when structuring a transaction like this. These include, but are not restricted to, the impact on Entrepreneurs’ Relief, chargeable accounting periods, trade losses, capital gains, group relief, and associated companies. 

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In this article, we will focus on capital allowances (CA). We will look at the expenditure upon which any assessment must be based, and the difficulties faced when completing the necessary due diligence regarding prior claims and costs incurred.

Note that the information below is based on an assumption the buyer and seller are unconnected. 

Capital allowances 

Experience suggests, the more common and straightforward scenario – ignoring the minefield that is the Pooling Requirement legislation – is an asset sale. 

When the buyer purchases the assets of another company, namely the building and its associated embedded plant, the expenditure incurred in acquiring these assets forms the basis of the capital allowances assessment. Copies of the purchase documentation, including the Asset Sale Agreement, Commercial Property Standard Enquiries (CPSEs) and inventory, can be requested which will advise on the tax position of the seller and help determine whether CA are available.

The more complex scenario is when the buyer acquires shares in a company that retains legal ownership of its assets. 

For CA purposes, nothing has changed – the assets were held by the company before the share sale and that continues to be the case afterwards. However, a CA assessment must be based on the expenditure incurred when the assets were originally acquired. The buyer may have incurred significant costs in purchasing the shares, but this is not to say the company incurred significant costs in acquiring the assets, especially if they have been held for several years.

The company may also have extended or refurbished its property during the stewardship of the previous shareholders. Again, any CA analysis is restricted to this original expenditure and on the plant that qualified when this expenditure was made.

Challenges

Struggles stem from the availability of historic financial and tax information. The previous shareholders may not have provided historical tax information, and original property purchase or build documentation to the buyer.

It is also customary for a buyer to appoint a new accountant following a share sale, however, if the share sale took place several years ago, any useful documents held by the previous accountant may have been destroyed due to data protection rules.

Although share sales also include the completion of a CPSE questionnaire by the outgoing shareholder, a CA claim often still cannot be fully justified through the absence of sufficient information, evidence of costs incurred, and details of claims made to date. Frustratingly, it is for this reason, many assessments are cancelled even where there is confidence of tax savings to be had. The absence of information is a barrier that cannot be overcome.

The key thing to remember is that, when considering the acquisition of shares in a company that owns commercial property, it is critical to ensure all purchase and historical accounting and tax information is supplied by the previous shareholders and their advisers. This information could be vital when it comes to carrying out a CA assessment.

Byline by Mark Anthistle, senior capital allowances analyst at specialist tax consultancy, Catax.

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