Complexities of Buying a Loss-Making Company
The budget in March made a number of changes to current rules, including the proposition to relax current rules in relation to setting off any company losses against profits. These proposed changes which seek to simplify the rules, are currently at the consultation stage, however if these rules are indeed relaxed, they will take effect from April 2017. At this stage, the current rules still apply, which means that any set off is restricted, particularly in the event of a change in ownership or company.
Presently, if there is a change in both the ownership and a significant shift in the nature of the business of a company within a period of three years, any trading losses within a three-year period cannot be carried forward from the date that there was a change in ownership. It is clear that these rules were implemented to restrict the utilisation of any losses, following the sale of a company
HMRC take a very keen interest in any company and their trade during the run up to the proposed sale – the interest doesn’t end there because it continues post sale. Interestingly, they have reissued existing guidance in relation to the interpretation of the current rules which is largely based on previously decided cases
There are some good examples as to what constitutes a major change, and what does not. One of the examples that they provide is improving company efficiency and the rationalisation of a product change, which are not deemed to be a major change.
Merger of Change Following an Acquisition
HMRC recently won a case before the Upper Tier Tribunal, with regard to setting off profits of a competitor company which could not be set off against the profits of the acquiring company, following a merger of both of the companies. Both of the aforementioned companies were involved in the retail trade – there were four (loss making) department stores which merged with three profitable companies. The Tribunal overturned a previous decision due to the fact that trading losses should only be set off against future losses.
Buying the Trade and Assets of the Target Company
It is important to note that if (rather than buying the loss-making company) it is the trade and the assets that are acquired, the trading losses will lapse and they are not available to the purchasing company. This may be more viable, and indeed attractive from a commercial perspective as the potential purchases will not take over the liabilities of the company. There are other tax implications to consider, however, including the transfer of plant and machinery, fixtures at the market value as opposed to the tax ‘written down’ value and potentially claiming corporation tax relief on intangibles, but not goodwill.
Please get in touch if you need support or advice when buying or selling a business. The rules and regulations can often be complex in nature, and it is important to be fully versed in your responsibilities.
Complexities of Buying a Loss-Making Company
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Complexities of Buying a Loss-Making Company
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Complexities of Buying a Loss-Making Company
