Sole trader sells goodwill to a company for immediate cash payment of £500k and earn out of up to £900k each year (dependent on profits, reduced on a pro rata basis if profits < £900k) for the next 3 years. The earn out will comprise cash and shares in the acquiring company (minimum 60% cash).
My view is that since the earn out is "unascertainable consideration", an estimate of the value of the right to receive the earn out must be made and this figure should be included as proceeds in the initial CGT comp (together with the up front cash payment of £500k).
Assuming this is the correct treatment, I am comfortable with the treatment of the actual deferred consideration once it is received.
However, is anyone aware of any ways of avoiding this "up front" tax charge on consideration that has yet to be received? (a "paper for paper" deal is not possible since the client is a sole trader, not a company).
Any comments would be greatly appreciated.
Tim Hill
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Replies (3)
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Incorporate first?
Could you client incorporate himself first - transferring all assets etc to the company and using incorporation relief to avoid the CGT and then paper for paper with the new owner?
Can't think of any way around it
I take it the purchaser wants to acquire the goodwill itself so that they can write off for tax, rather than shares in a company which they can't.
I agree that the consideration is unascertainable.
While I can see that it's a drag to have to pay the tax up-front, with BATR we are talking about only a 10% liability. If the sale has not yet taken place so that it falls in 2007/08 the tax is not due until 31 January 2009 by which time one of the deferred payments will have been received and one imminent, so there should be well enough cash to pay the tax.
If I were you I'd file the return as late as possible - incur a £100 fine if need be so long as the tax is paid. This will give the maximum period to assess the situation as to how much is likely to be received under the earn-out. You want to value the right at it's maximum, because if you over-egg it and there is a loss when the earn-out instalment is received you can now relieve this under s279A TCGA, whereas until that section was enacted the loss could only have been carried forward and may have been of little use.
The reason you want to maximise the value of the earn-out right is BATR. The right itself is a 'chose in action' which is of course a legal right, which is an asset acquired at the time of the sale, but is not capable of qualifying for BATR. So if you value too low and there is a gain when the earn-out payments are received there will be no taper or maybe only 5% in respect of the third payment.
S280 may be relevant but I doubt it in the circumstances.
Hope that helps
Thanks both
I did consider incorporation but unfortunately shares in the new company are a (relatively) small part of the deal. CGT would therefore still be due on the cash element of the proceeds, upon which no taper would be available (since the shares in the newly formed company would have been held for less than a year).
My view is that they should be happy with 10% rate, regardless of when the tax is payable!
Thanks again.