Combining two companies owned by the same shareholder

Combining two companies owned by the same...

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Hi,

I am gathering some information for my understanding only. Would appreciate your input greatly regarding the following: 

Shareholder X owns Company A and Company B who carry out the same trade targeting different segment of the market. 

Now shareholder wants to merge loss making Company B with profit making Company A (so we are left with only Company A), what are the issues that we need to look out for from tax and accounting point of view.

  1. What would you do with Company B’s c/fwd balances who is still trading but making some losses (show on company A as business acquisition for £0 consideration? Any tax issues with negative goodwill?)
  2. Are there any other ways of consolidating the two companies for Y/E accounts?

Brief explanation or reference to relevant standards or tax laws will be ok as I don't mind doing a bit of bed time reading.

Many thanks

 M

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By Paul Soper
01st Mar 2011 12:51

A or B? Couple of initial thoughts...

Transferring the trade of B into A will invoke the hiving off provisions of the old s343 (now s939 I think) with the danger that if company B is then left as a net debtor, and it doesn't matter whether that is external or internal debt, ie amounts owed to Company A or it's owner, the loss will be restricted on a pound for pound basis.  That suggests it might be easier to merge company A into company B - as a profit making activity is being transferred those issues won't arise and there is sufficient similarity in the nature of trade that HMRC could not argue that it is tantamount to a cessation of B's trade, preventing carry forward.

It seems that they are separately owned so issues of capital gains might arise on the transfer of assets, if company B issues shares to acquire the share capital of company A, this should get clearance under s138 and be a takeover within s135.  The two companies would then constitute a CGT group and assets could be freely transferred without involving CGT or, if land and buildings are involved SDLT either. If B does take over A A could then become a dormant entity and it would no longer count for SCR purposes giving a full 300,000 pounds at the SCR.

Assuming that the trade of A commenced before 2002 any goodwill would be a capital asset giving rise to a Capital Gain on transfer which would be exempted as an intragroup transfer.  If the trade commenced after 2002 there would be no gain but you would have to bring it within the intangible asset rules, but again within a group no consequences.

How you would then account for this is a matter for accounts specialists to consider.

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