SGS 8 (Tax on Asset Sales)

Question 1

What type of tax arises on an asset sale?

Answer 1

Profits or losses from sale of trading stock, goodwill and IP = income for the purposes of CORPORATION tax.

Gains or losses from sale of capital assets, are chargeable gains or capital losses.

Question 2

What does OSC refer to?

Answer 2

all ISC other than shares, the holder of which have a right to dividend at a fixed rate but no other right to share in the company’s profits.

Question 3

Describe the test for group relief.

Answer 3

A co and its 75% subsidiaries (direct or indirect), satisfying both the:

Beneficial ownership test – 75% OSC

Economic ownership test – 75% of rights to profits and assets on winding up.

Question 4

What is the effect of group relief?

Answer 4

use trading losses of one company to offset income AND chargeable gains of another in the corresponding or later accounting period.

Question 5

What is the test for consortium relief?

Answer 5

One co owned by 2+ other companies but group relief requirements not satisfied

75% OSC owned by 2+ corporate shareholders (neither owning less than 5%)

But doesn’t apply if any 1 company owns 75%.

Question 6

How do you determine the extent of a trading loss that can be surrendered within a consortium group?

Answer 6

Find each member’s relevant ‘fraction’ = lowest of:
Shareholding; % entitlement to profits; % entitlement to assets on winding up.

multiply relevant fraction by amount of loss (if surrendering co) or gain (if claimant co)

Question 7

What type of vehicle could be refit from consortium relief?

Answer 7

Joint Venture.

Question 8

What is the test for a chargeable gains group?

Answer 8

Principle co and its 75% subsidiaries and their 75% subsidiaries (beneficial ownership test)

Providing in each case they are an effective 51% subsidiary of principle company – meaning rights to profits and assets on winding up (economic ownership test)

Question 9

What is the effect of being in a chargeable gains group?

Answer 9

Transfer capital assets to the other on a no gain / no loss basis.

capital losses can be offset against capital gains in other group companies.

Question 10

when does a de grouping charge arise?

Answer 10

If company receives a chargeable asset, then leaves CHARGEABLE GAINS group within 6 years of receipt, an exit / degroup charge arises

Question 11

For degrouping charge, how do you work out the deemed gain?

What calculation is required?

Answer 11

(market value at time of intragroup transfer) – (Base value when property brought into group)

Deemed gain notionally added to consideration received by Seller from Buyer

Question 12

How can a degrouping charge potentially be offset?

Answer 12

If SSE is available - no tax liability.

If no SSE, if transferee jointly elected with another company in CHARGEABLE GAINS group (s.171A TCGA) for deemed gain to raise in that company, Seller could mitigate some liability.

Question 13

Describe how rollover relief works.

Answer 13

If a company makes a gain on the sale of a qualifying assets and that company or another in its CHARGEABLE GAINS group acquires a replacement qualifying asset either one year before business sale or three years after, can ‘roll over’ the gain onto the base cost of the new asset.

Question 14

What are the knock on effects of rollover relief?

Answer 14

new base cost of the replacement asset may lead to a smaller loss or larger gain when the replacement asset is eventually sold.

Question 15

What are the two ways to pass cash onto SH of a cash shell company?

Answer 15

Members’ voluntary solvent liquidation, (SH capital receipt)

Dividend (SH income receipt)

Question 16

How does voluntary liquidation as a means of passing cash onto shareholders of a cash shell affect a corporate and individual shareholder?

Answer 16

C: SH treated as disposing of shares, SSE likely available.

I: capital receipt, liable for CGT but certain reliefs such as ER and IR may apply.

Question 17

What should the Buyer’s tax advisers be considering in terms of tax due diligence on an asset sale?

Answer 17

Tax warranties and indemnities less important as buyer does not inherit tax liabilities from seller.

Any SHARES being sold as part of asset sale will need full due diligence warranties and covenants.

Question 18

SDLT consideration for the buyer?

Answer 18

If there are two sellers but transaction forms part of a single scheme with the same buyer, regarded as single transaction.

Consideration for each is aggregated and SDLT rates applied on a sliding scale.

Question 19

What is the test for a Stamp Duty Group?

Answer 19

one co is a 75% subsidiary of another or both are 75% subsidiaries of a third company.

Question 20

What is the effect of SDLT clawback?

Answer 20

SDLT calculated on market value of property at date of transfer. The transferee will be liable to pay this amount.

Question 21

What is the exception to the general rule that a taxable person making a supply of goods or services must charge VAT?

Answer 21

Art 5 VAT (Special Provisions) Order 1995 – transfer of going concern (TOCG).

Must transfer sufficient assets to allow Buyer to carry on business as a separate operation

Business assets transferred must be used by Buyer in same kind of business, with no significant break

Buyer must be registered or become registered for VAT before or as a result of completion.

Question 22

If there is an interest in land, what additional condition is required to benefit from the TOGC exemption?

Answer 22

If landlord has opted out of VAT exemption (and is charging tenant VAT on rent), Buyer must undertake in AA to also opt out of exemption, to benefit from Art 5 exemption and thereby not pay VAT on the purchase price.

Question 23

What contractual provisions are required for VAT? Why is this?

Answer 23

Statement that consideration is VAT exclusive;

Undertaking from B that it will comply with conditions of Article 5;

Undertaking from B to pay VAT to S that is deemed payable by HMRC.

S wants indemnity from Buyer to cover interest and penalties charged by HMRC for late payment of VAT.

(a risk that HMRC will conclude that conditions of Art 5 are not satisfied, and Seller will need to account for VAT on consideration apportioned to asset).

Question 24

What is the TWDV and what consideration will a seller want apportioned to specific assets?

Answer 24

Tax Written Down Value (acquisition price) - (capital allowances already claimed)

Lower as if TWDV > consideration = balancing ALLOWANCE for S which is treated as loss against income profits and less corporation tax is payable.

Question 25

Why would a Buyer be concerned about VAT within groups?

Answer 25

2+ companies can apply to HMRC for group VAT registration, if one company controls the other or they are under common control

All members are jointly and severally liable to HMRC for VAT due

Buyer wants Target removed from VAT Group (indemnity)

Question 26

Stamp Duty?

Answer 26

0.5% of the consideration apportioned to shares.

Question 27

Buer’s point of view as regards TWDV?

Answer 27

Wish the value apportioned to this item to be as high as possible as it will be claiming new capital allowances on this item following completion (based on the price paid for the item at completion.)

nb parties need to make a s.198 election to HMRC otherwise qualifying expenditure for capital allowance purposes will be 0.