Buying A Business – What Are The Tax Considerations?Written on February 14, 2019 by Kirk Rice LLP
Taxing Times QuestionsThe Question:
I would like to run my own business, but rather than setting up from scratch, I would like to buy an established business so that I may hit the ground running. Are there any tax considerations when buying a business?
Kirk Rice LLP answers:
Although taxation is a major element in any buying a business, the principal motivation when buying a business is a commercial one.
The suggestions made here simply form part of the normal seller-buyer negotiations. Essentially, there are two general points for the buyer to consider:
- What to buy?; and
- How to pay for it?
Is the business that will be purchased operating currently as an unincorporated business or as a company? This is a crucial question as the methods of what can be purchased are fundamentally different. Some businesses of interest to the purchaser may not have been incorporated at all. Unincorporated businesses do not have shares, in which case, the purchase must necessarily be of assets. Where assets are bought, the purchaser has the option of trading in his/her own right (as a sole trader), in partnership or through a limited company.
The most important practical reason for a purchaser to buy the assets of a target business rather than shares in the company owning it is the risk of a large liability crystallising in the company at some time after the purchase. A sale agreement for shares contains voluminous warranties and indemnities to minimise the risk where the share route to a purchase has been taken. However, in addition to the managerial effort required to obtain the benefit of these, there may also be a risk that the former owner of the company cannot meet the undertakings.
Types of Consideration
When considering normal sales – that is where (whether the sale is of assets or share capital) there is both a buyer and seller involved in the transaction. Consideration is usually more relevant for the seller, but the purchaser needs to be aware of these as they can impact on the transaction.
Where the purchase consideration is expressed as a precise amount of money, payable in full at the time of the sale, in principle the position is fairly straightforward in that the full gain from the disposal proceeds arises in the tax year of the sale. However, other factors may complicate the position, potentially resulting in consideration and therefore some gains arising in different tax years, notably:
- consideration is partly or wholly deferred, or is payable in instalments;
- variable consideration, dependent on future events (normally profitability); or
- consideration other than cash, in particular other assets or shares in another company.
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Any reader who would like to discuss the tax implications of buying a business can telephone 01344 875 000 to speak to our tax departments in London, North Hampshire or Thames Valley or email info@kirkrice.co.uk
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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