The existing business (for P6 (UK))
Part 4 of 4
This is the Finance Act 2015 version of this article. It is relevant for candidates sitting the P6 (UK) exam in the period 1 September 2016 to 31 March 2017.
Candidates sitting P6 (UK) after 31 March 2017 should refer to the Finance Act 2016 version of this article (to be published on the ACCA website in 2017).
So far in this article we have reviewed some of the fundamental rules relating to the taxation of the unincorporated trade, compared the total tax paid on the profits of a business depending on the business vehicle used and looked at the tax implications of a change of accounting date and the cessation of a business.
In this final part we will look at some of the issues relating to the sale of a business.
SALE OF A BUSINESS
The sale of a business is a cessation of trade for the purposes of income tax. Accordingly, the issues set out above in relation to date of cessation are also relevant on a sale.
A succession election is available for the purposes of capital allowances provided the business has been sold to a connected person – for example, a company controlled by the sole trader. Under a succession election, assets are transferred at tax written down value, thus avoiding balancing adjustments.
The conditions relating to entrepreneurs’ relief are of crucial importance because of the potential significance of the relief.
VAT should be charged on the sale of a business unless it is a qualifying transfer of a going concern. Where it is such a transfer, VAT must still be charged on any taxable buildings (for example, where an option to tax has been made) unless the purchaser also opts to tax the building.
There may be a Stamp Duty Land Tax (SDLT) liability on the sale of any land or buildings. Any liability to SDLT will be payable by the purchaser.
Sale of a business to a company
A business can be sold to a company controlled by the trader or one that is independent of the trader. The consideration for the sale may consist of cash and/or debt and/or shares.
Where part of the consideration is in the form of shares in the company, incorporation relief will be given automatically (provided the relevant conditions are satisfied), such that some or all of the chargeable gains on the disposal of the business assets can be rolled over against the base cost of the shares. The starting point for the base cost of the shares is the market value of the assets sold in exchange for shares. Note that the base cost of the shares is not determined by the number of shares or their par value.
Emmanuel sold the whole of his business as a going concern to Patrick Ltd for £800,000. The chargeable gains on the assets sold were £340,000. The consideration consisted of £240,000 in cash with the balance (£560,000) in shares in Patrick Ltd. The conditions for both incorporation relief and entrepreneurs’ relief were satisfied.