The Summer Budget on 8 July 2015 announced the removal of corporation tax relief for the costs of any goodwill and intangible assets on an asset purchase.
Here we review the tax implications for buyers and highlight the key differences between share and asset purchases.
When purchasing a business, there are two distinct acquisition structures:
- a share purchase, where the buyer acquires the shares of the company that operates the business; or
- an asset purchase, where the buyer acquires specific assets (such as goodwill, real estate and employees) from the company that operates the business.
Differences between the structures
On a share purchase, the business is acquired 'warts and all' as a going concern, meaning that all of its assets, obligations and liabilities will be transferred to the buyer, even those unidentified by due diligence. The shares are transferred to the buyer by stock transfer form executed by the seller(s).
On an asset purchase, only those specific assets, obligations and liabilities identified by the buyer will be acquired. This allows a buyer to select the parts of the business that it wants and leave behind any risks or liabilities that it does not, although care must be taken to ensure that everything necessary to conduct the business is acquired. Each asset is transferred by a specific form of transfer (eg a real estate conveyance or, in the case of employees, by following the TUPE process). On larger transactions, this can require a significant amount of documentation.
From a very general tax perspective, a seller would have historically been likely to prefer a share purchase, whilst a buyer may well have favoured an asset purchase.
There are many different tax factors to consider which may make one structure preferable over another (such as VAT, substantial shareholding exemption, entrepreneurs' relief, de-grouping charges, capital allowances, stamp duty, SDLT, tax losses, base cost etc). However, one of the main reasons a UK buyer may have preferred an asset purchase was the ability to obtain corporation tax relief for the costs of any goodwill and intangible assets purchased as part of an asset purchase, and the costs of which were then amortised in a company's accounts.
However, the Summer Budget announced the removal of this relief for companies who write off the cost of purchased goodwill and certain intangible assets in their accounts.
Although we will have to wait for the draft legislation to see the detail of this new measure, on the face of the announcement it removes one of the main tax advantages for a buyer on an asset purchase. It remains to be seen, but it may well be that this leads to a move away from asset purchases to share purchases given that the latter are likely to continue to be more tax efficient for the seller, and one of the buyer's main reasons for wanting an asset purchase has been taken away.
Shoosmiths are experienced in advising on the corporate and tax aspects of both share and asset purchases.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.