Chapter 2 - Business Changes Flashcards
(19 cards)
Possible tax treatments for the vendor.
- Whole
- Part
- When the whole of a trade is sold or transferred, the vendor ceases to carry on that trade. The profits chargeable up to the date of cessation will be computed on that basis. For a company, an accounting period comes to an end if that was the only trade it carried on.
- If only part of a trade is sold, there is usually no change to the vendor’s basis of assessment. They should self-assess the remaining part of the trade as if there had been no sale.
However, the sale may make such a substantial change in the scale or nature of the trade as to cause the old trade to cease and a different trade to come into being. In these circumstances, the cessation and commencement provisions will apply to the old and new trades respectively. In the absence of such a substantial change, there is no cessation.
Possible tax treatments for the purchaser.
- not already carrying on a trade
- Is already carrying on a trade
- A purchaser who is not already carrying on a trade has started to carry on a trade. This means that the commencement rules apply. In the case of a company, this will also be the start of a new accounting period.
- If the purchaser is already carrying on a trade, there are a number of possible treatments, depending on the particular facts of the case. The acquisition of the new trade could be
- an extension of the existing trade without succession
- an extension of the existing trade with succession
- the commencement of a separate trade
- the commencement of a new combined trade merging the old and new businesses.
CT implications for companies if not under common ownership
Where a company begins to carry on a trade that had
previously been carried on by another person, the company computes its income from the trade as if the trade itself had commenced. Where a company ceases to carry on a trade but it will be carried on by another person, the company computes its income from the trade as if the trade itself had discontinued.
This may bring an accounting period to an end or cause a new one to begin. It will affect the computation of chargeable profits. For example
-stock may need to be valued in a particular way
-a disposal value will need to be brought into the vendor’s capital allowances computation
-the purchaser will start a capital allowances computation based on the price paid for the assets.
In particular, unused trading losses sustained by the vendor will not be available to the purchaser.
CT implications for companies when they are under common ownership
if both the predecessor company and the
successor company are under common ownership within
certain time limits, s938 – s953 CTA10 applies. The trade is treated as continuing and any unused trading losses sustained by the vendor will be available to the purchaser to set off against the future profits of the transferred trade.
The loss available for relief may be restricted if the predecessor company’s liabilities exceed its assets. The vendor does not bring a disposal value into its capital allowances computation, and the purchaser takes over the vendor’s residual value.
IT implications if there are only partial changes in ownership of a trade
The rules in s198 – s202 and Part 9 ITTOIA work together where there is only a partial change in the ownership of a trade. This applies where
- a partner leaves or joins a partnership, or
- a sole trader takes on a partner and a partnership is created, or
- one of two partners leaves and the business continues to be run by the remaining partner as sole trader.
The combined effect of the rules is that
- for any person continuing to be involved, the basis of assessment is unaffected, but
- for any person joining or leaving the business, the commencement or cessation provisions apply.
Laycock v Freeman, Hardy and Willis Ltd
Shoe retail business acquired the assets of wholly owned shoe manufacturers who previously sold shoes to them exclusively as wholesale. Courts found that the trade of selling wholesale shoes to the retailer no longer existed and the retailer was carrying on their original trade of retail shoe sales in an expanded form. There was therefore no changes to the basis of assessment.
Rolls Royce Motors Ltd v Bamford
Had six divisions, one division made losses on a jet engine and government bailed them out, the car making part was sold and they tried tried to claim the losses from the jet engine division, as agreed in the motor arm sale. Not allowable as the loss is attributable to the aero division, HMRC is not bound by the contract entered into.
It was argued that all businesses change over time, however the judge considered that there was a difference between organic growth and a sudden and dramatic change. The loss was incurred on the development of an engine which is completely different to the trade of Rolls Royce motors. Although they are under common ownership, there has been no succession of the trade.
Briton Ferry Steel Co Ltd v Barry
Made steel bars and sold to subsidiaries who converted them to tinplate, they took these firms over. Revenue argued that the firm now carried on the production of tinplate and were found to have succeeded their trades. This is the reverse of Laycock v Freeman, Hardy and Willis Ltd. They have succeeded the business as the trade of the individual companies (i.e selling to the public) remained the same. They only difference is how they sourced the steel bars.
Maidment v Kibby
Ran a chip shop and purchased another, they changed the name and ran it in their own style. They were found not to have succeeded to the trade, but had organically grown their own trade.
Factors to help decide if it is the same trade (3)
- Transfer of goodwill - Strong evidence that there has been a succession but not conclusive (as per Maidment v Kibby) as they may have to make a payment for goodwill even if they do not intend to carry on the same trade.
- Whether any stock has been transferred - For a succession, you don’t necessarily need to acquire all the stock (Malayam Plantations Ltd v Clark)
- Which other assets were transferred?
Malayam Plantations Ltd v Clark
Aquired a rubber estate from another company but not their sales organisation or book debts. They argued that there was no succession as thye did not accquire all of the assets and that the old trande was still continuing.
It was still found to be a succession of the trade as they didn’t need either the book debts or their sales organisation to run the same trade and although the original trade continued it was merely winding down its activities.
Scales v George Thompson & co Ltd
Established that it is possible for the proprietors of a business to carry on more than one trade. Shipping activities business and succeeded a Lloyds shipping insurers business fronted by two former partners, one died and the other retired and the company claimed it was a separate trade. The courts found they were running two separate trades as they were not connected and fundamentally different
The activities carried on by a company are only likely to
amount to more than one trade if (2)
- one activity is so different in nature from the other that it can be seen as quite separate.
- the activities are separately organised and managed
right up to board level.
Cannon Industries Ltd v Edwards
Made gas appliances and then assembled food mixers. They argued commencement of a new trade but was found to be the same trade as it wasn’t fundamentally different and activities were interlaced.
Merger possibilities (3)
- Both trades could continue as one. That is, the new owners succeed to both the old trades. This is really only possible where there is a merger of trades of the same type. There will be no cessation, but each owner will succeed to the trade previously carried on by the other. The commencement basis will apply for both parties for the other person’s original trade, plus the continuing basis for their own original trade.
- One of the old trades could cease while the other trade continues under joint ownership. There will be neither a cessation nor a commencement for the original owner of the trade that continues. The original owner of the trade that ceases will have to apply the cessation provisions to their own old trade and the commencement provisions to the new trade as a successor.
- Both the old trades could cease and a new combined trade could commence. That is, the new owners succeed to neither of the old trades. The cessation provisions apply to the old trades and the commencement provisions to the new merged trade.
How to treat a merger
You treat as though it is still two businesses, apportioning the profits of the businesses for each part on a just and reasonable basis.
How to decide which outcome applies to a merger
Determine the nature of the old trades
then
1. decide whether the trade resulting from and carried on after the merger is
– similar in nature and scale to both the old trades
– similar in nature and scale to only one of the old trades
– a new trade, different in nature from both the old trades.
The last possibility is most likely where two trades of
different types are merged.
George Humphries and Co v Cook
Processed films but he ran the clerical side and subcontracted the processing, the two trades formed a partnership and although he maintained his trade had continued it was found the amalgamation made one new trade as his trade had been lost in the merger.
In Laycock v Freeman, Hardy & Willis, Sir Wilfred Greene formulated two questions to determine whether or not there has been a succession to a trade. What are they?
- What is the trade to which the new owner is said to have succeeded?
- Is it possible to find some taxable profits arising from a trade and say that they arise from the trade which was taken over?
