hive up - goodwill

hive up - goodwill

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Hi,

Company A purchased the share capital of Company B.

Imediately afterwards Company B's trade and assets were hived up into Company A.

Company B is now dormant, Company A owns all income and assets previously held by Company B.

The deal was seller driven, i.e.if Company A wanted B, it would have to purchase shares and not assets.

Company A now has goodwill relating to the purchase of the Company B business.

My question:

Is amortisation on the goodwill allowable for Corp Tax.

I understand that the goodwill was not purchased from Company A, but was hived up into it by accounting entry, however it was still goodwill paid by a Company A to purchase the business from an unconnected Company B.

Thanks

Replies (94)

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By chimpsrback
25th Jul 2009 13:21

Not sure what you are saying
In the last para are you saying in the books of company B there existed goodwill in the balance sheet or A paid more than the fair value of the assets/liabilities of company B? OR There was a re-valuation of goodwill on the purchase of the business by company A ?

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By User deleted
25th Jul 2009 22:42

more info
Hi, Just to be clear. There was no revaluation.

Company A paid consideration more than the value of the net assets in Company B.

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By chimpsrback
25th Jul 2009 23:27

FRS10
If the purchased goodwill is accounted for in accordance with FRS10 then the amortisation charged in the P&L a/c will be allowed as a deduction.

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By okevin
27th Jul 2009 08:51

?
My point is though that it was not goodwill that was purchased directly, it was shares and then the trade and assets were hived up.

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By chimpsrback
27th Jul 2009 08:55

Subsequent trans...
It is irrelevant what co A did with the assets of co B after purchase date.

Goodwill in this instance is the excess of purchase consideration over the fair value of the assets/liabilities acquired.

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By JJFWilson
27th Jul 2009 10:21

Goodwill on consolidation
This appears to be simply goodwill on consolidation which would not appear in the entity accounts of either company. No tax relief would be available for this. I am not sure what proper accounting entries could be made to record the goodwill in the accounts of company A even after the hive up, but I don't see that this would make tax relief available,

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By chimpsrback
27th Jul 2009 10:26

Consolidation is not relevant...
What company A has puchased are the assets/liabilities of Co B.

Co B is dormant !

see page 9 of FRS10.

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By User deleted
27th Jul 2009 11:37

?
I think I am in agreement with Wilson on this now.

No tax relief is available unfortunately as Comapny A never bought assets directly, it bought shares.

He is correct, Goodwill upon consolidation was cancelled out.

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By chimpsrback
27th Jul 2009 11:39

I hope your PII ins is up to date---good luck !

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By okevin
27th Jul 2009 12:04

?
You quote that.

"What company A has puchased are the assets/liabilities of Co B."

I am sorry, but that is not what has happened.

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By chimpsrback
27th Jul 2009 13:59

U take the High Road....
U take the high road and I'll take the low road.

I have an influentual second opinion (gold bottom plated) that supports my view !

(I think your PII costs will be increasing nex year !)

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By User deleted
27th Jul 2009 14:05

?
Ok, no problem.

Opinions are fine, but I would rather go with legislation.

Thanks anyway.

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By chimpsrback
27th Jul 2009 14:19

Ok
OK !

Now you have have the a/l of coy B on the b/s of a

There presumably there is a difference between the price paid and the total of the a/l--what are you going to call this figure ?

Dont tell me----you've adopted merger accounting !

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By User deleted
27th Jul 2009 14:47

?
Excess of price paid for the shares over net assets is included as cost of investment on the shares in Company A accounts.

In an ideal world Company A would either have bought the trade and assets and goodwill would appear naturally, or in this case they have bought the shares, with the whole cost of investment being on Co A's balance sheet, but with a hive up of required relevant assets within the two companies, leaving goodwill.

My question was whether or not Company A could get a goodwill deduction for what was a share purchase that included an element of goodwill. I still think the answer to this is no.

If you think that a company can get a tax deduction for a share purchase, please feel free to copy us in on the relevant legislation.

p.s this is a forum, its not a lecture. The purpose of this is to air question of uncertainity, being blunt and assuming that anyone is going to get sued is a bit aggressive. Generally our work gets reviewed
by the corporate finance/tax partner, so chances of us getting this wrong at the end of the day is low, or as low as it can be.

Have you ever been wrong in the past? I have, and I may be wrong here and if I am I will take it onboard and learn from that and be happy that the forum has served its purpose..

Lets just leave it at that then.

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By lclackett
27th Jul 2009 15:04

Accounting entries
Just to clear up the accounting entries, this is what should happen (sparing too much detail).

The acquisition of B by A should initially be recorded as a fixed asset investment (investment in the shares of B in the books of A).

B then sells the goodwill and transfers all other assets and liabilities to A.

The loan account balance created by this will be equal to the retained profits of the company including the profit on the sale of the goodwill. The loan accounts can then be cleared by way of a dividend.

As B has nothing left in it the value of the fixed asset investment should get written off to nil in A. The amounts written off investments will be equal to the value of the dividend it receives (value of share capital aside).

The share capital in B should then be dealt with as appropriate as that is all it will have left.

No tax relief is available on the goodwill acquired.

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By User deleted
27th Jul 2009 15:14

?
Thanks lclackett.

You have identified exactly what has went on.

Apologies if I made it seem more complicated than it is.

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By gbuckell
27th Jul 2009 16:27

No tax relief
I am with the view that there is no tax relief.

Assume that the net assets of company B are £100k and co A pays £200k for the shares. My understanding is that this would mean £100k goodwill on consolidation but we are not concerned with consolidated accounts but with the individual accounts.

A has a cost of investment in subsidiary of £200k.

Option 1
B sells its assets to A for £100k including goodwill for £1. The inter company debt is cleared by dividend (except for B's issued share capital). A's investment in B is now worthless and must be written down to nil. No tax relief on the write down (not even a capital loss as it is a depreciatory transaction).

Option 2
B sells its assets to A for £200k including goodwill for £100k. Same analysis as above. But now A has £100k goodwill on its own balance sheet. This must be written off over a period. However, no tax relief is due as the transfer is treated as tax neutral (see FA 2002 Sch 29, para 55).

Either way no tax relief on the goodwill.

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By chimpsrback
27th Jul 2009 16:33

What does the purchase agreement say ?
Its got nothing to do with Investments or consolidated accounts.

Were the shareholders of co B also the Directors of co B?

Was 100% of company B purchased ?

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By chimpsrback
27th Jul 2009 16:33

What does the purchase agreement say ?

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By User deleted
27th Jul 2009 17:04

?
FYI.

The purchase agreement says that Company A will purchase the entire share capital of Company B for £X.

Company B is not connected and the share sale is at arms length.

Goodwill has arisen upon consolidation process of accounting (note, goodwill has not arisen upon purchase of a business), which I think is the point that some are confusing.

Thanks

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By chimpsrback
27th Jul 2009 17:06

Were the shareholders also the Directors and was 100% of equity
How does consolidation become an issue if Co B is dormant?

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By chimpsrback
27th Jul 2009 17:06

Were the shareholders also the Directors and was 100% of equity
How does consolidation become an issue ?

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By User deleted
27th Jul 2009 17:30

?
Company B only became dormant after the trade and assets were hived up to its parent company?

Thanks

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By chimpsrback
27th Jul 2009 17:41

Thats what I assumed !
Option 2 is not relevant as £200K has already been paid for the shares.

Option 1 produces a goodwill amount of £100k

Whats the problem ?

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By chimpsrback
27th Jul 2009 17:48

Did co A own any of the shares of Coy B before the transaction u

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By User deleted
27th Jul 2009 20:12

?
Company A did not own any of the shares in Company B before its acquired all of the shares.

I dont see how a deduction for amortisation is possible as A purchased goodwill from B , when both were in the same group, even if it (the original goodwill) did originate after 31 March 02.

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By chimpsrback
27th Jul 2009 21:40

Red herrings
The consolidation issue is a red herring.

The only goodwill is that arising on the purchase by A of co Bs business which is clearly set out on page 9 of FRS 10.

I presume co b will eventually wound up ?

This is exactly the type of goodwill which attracts tax relief.

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By User deleted
27th Jul 2009 22:35

How about ....
... reading CTA 2009 715(4) - as introduced by FA 2009, and the associated Explanatory Note to the 2009 Finance Bill? I think you'll find the answer there.

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By User deleted
27th Jul 2009 22:46

????
"The only goodwill is that arising on the purchase by A of co Bs business which is clearly set out on page 9 of FRS 10.

This is exactly the type of goodwill which attracts tax relief"

I would say this is exactly the type of goodwill which does not attract relief. (Or at least if you try, expect fierce resistance from HMRC - "Where a company takes over a business by acquiring shares in the target company and the consideration given for the shares exceeds the 'fair value' of the net assets of the target company the excess is treated as goodwill in the consolidated group accounts. Goodwill of this kind does not appear in any company-level balance sheet and is outside the scope of Schedule 29.")

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By chimpsrback
27th Jul 2009 23:23

715 (4) cta 09
All that s715 emphasis is that accounting principles will take precedence--but we already knew that.

As an aside if you the section carefully it states goodwill can exist on the balance sheet or not.

Forget consolidated accounts and group accounts.

Im afraid I will have to exit from the debate as it is becoming circular----r u just messing ?

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By User deleted
28th Jul 2009 07:26

Your exit from the debate
would be a wise decision, as you are clearly wrong.

A - what part of the HMRC guidance do you not understand?

B - what part of the s715(4) Explanatory Note do you not understand? For those that have not read it, it states clearly that goodwill (for Sch 29 relief purposes) cannot arise on the purchase of a business or from accounting entries/capitalisation. I think it's clear who is messing about here.

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By User deleted
28th Jul 2009 07:34

chumpsrback
CTA 2009 s715(4) has got nothing whatsoever to do with accounting principles. In the context of the other amendments, and explanatory notes, the purpose of 715(4) is clear - to exclude from amortisation relief exactly the kind of goodwill our primate friend is referring to. But I would suggest it is now time to stop feeding him bananas.

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By User deleted
28th Jul 2009 08:11

gbuckell's analysis
is correct

The chimp's response illustrates perfectly his own misunderstanding

"Option 1 produces a goodwill amount of £100k

Whats the problem ?"

option 1 does NOT produce a goodwill amount of £100k. (well, it does - but only on consolidation, which is of no relevance). As other posts above indicate, the individual company would never recognise goodwill. If there's no goodwill, there's nothing to amortise. If there's nothing to amortise, no Sch 29 relief.

What's the problem?

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By chimpsrback
28th Jul 2009 08:55

Theres no section 4 ..... only three sections
watch it guys u r dealing with lunatics

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By User deleted
28th Jul 2009 09:16

Hmmmm
Keep up to date, chump (and that includes ensuring your PI cover is adequate)

Watch it guys. u r dealing with someone who isn't keeping abreast with legislative developements and therefore at risk of offering out-of-date advice.

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By chimpsrback
28th Jul 2009 09:38

Third independent view....
I have today taken a third view from a very reputable source and they confirm goodwill is allowable.

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By chimpsrback
28th Jul 2009 09:39

I think this is a wind up ....
e.g. anybody seen the lost section 715(4)

.....come back all is forgiven !

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By okevin
28th Jul 2009 10:13

?
Hi,

Can I just take a moment to remind myself of my original question, which was:

After acquiring the shares in Company B, Company A has hived up trade and assets (which ultimately includes a goodwill figure) into its own balance sheet.

Does amortisation of goodwill fall under the Sch 29 as an allowable cost?

I may have confused the earlier post as I had in my draft accounts that the figure which was left i.e. the excess on hive up, as being cost of investment, which I now understand was not correct.

Thanks

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By User deleted
28th Jul 2009 10:13

Wake up, please
I suggest you read point 5 of Resolution 49:

http://www.hm-treasury.gov.uk/d/financebill09_envol2.pdf

As for your 3rd reputable source, unless you are prepared to name them your comment is valueless. Perhaps your reputable sources fall into the category of advisers that the Revenue refer to in their notes? I am well aware that a number of professionals did consider, under previous legislation, that such goodwill might have been allowable. But that doesn't make them right. What new subsection 4 (once CTA 09 has been updated) does is effectively put the HMRC view on a legislative footing. If you and your sources wish to continue with the belief that you can claim relief no-one (until you reach the courts, that is) is going to persuade you otherwise. For the rest of us, who like to keep up to date with legislation, we can rest easy knowing we have provided our clients with the correct advice.

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By gbuckell
28th Jul 2009 10:32

S715(4)
The "lost" s715(4) was introduced by s70(3) FA 2009.

With respect to the learned opinions I am still struggling to see where the tax relief comes from.

Co A initially purchased shares, not assets.

Co A then acquires goodwill from a group member

CTA 2009 s775 states that transfers of goodwill between group members are tax neutral.

Co B's goodwill was not recorded on its balance sheet.

Therefore the base cost to Co A is the same as Co B, i.e. nil

Please advise where this analysis is at fault.

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By User deleted
28th Jul 2009 10:41

gbuckell
Stop struggling - your analysis is spot on.

I think Chimp may be correct in that there is a wind-up going on, but by whom I wonder........?

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By chimpsrback
28th Jul 2009 11:00

Internally generated goodwill
But section 715 Ct09 concerns internally generated goodwill and of course it would not arise on the purchase of a business.

(I did know about the provisions re:Int G/will beacuse I read the press notices on budget day !)

To quote Alan Sugar "is there a village missing its idiot ?"

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By User deleted
28th Jul 2009 11:20

Being able to read
is not the same as being able to understand.

s715 is not all about internally-generated goodwill. Yes, it has been amended to ensure that internally-generated goodwill falls within the regime, but only to the extent that such goodwill (along with purchased goodwill) arises from the running of a business. For the hard of understanding:

The only goodwill arising in this case arises as a consequence of A having paid more than the net asset value for B's shares. The explanatory notes to the new legislation make it clear that no relief is available for such goodwill - I really would like to see Chump and his reputable sources try to counter this in the courts.

Of course, it may be that following the hive-up A shows goodwill on its balance sheet, but (a) this arises from the accounting of the hive-up (and therefore outside the regime as stated in the EN) and (b) even if it were within the regime, as correctly stated above it would be disregarded being an intra-group transfer.

I will never expect Chump to admit in public that he is wrong, but perhaps in the peace and quiet of the treetops he will realise the errors in his analysis. (Though I somehow doubt it)

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By chimpsrback
28th Jul 2009 11:24

For the purposes of provision in your PII providers accounts...
How much are we taking about

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By User deleted
28th Jul 2009 13:36

Hooray!
Looks like PC's back!

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By User deleted
28th Jul 2009 13:46

Surely if goodwill would be allowable on a hive up is irrelevant
Even if it was possible to create allowable goodwill on the hive up you would not because Company A would only be allowed to claim the deduction over its UEL whereas Company B which is owned by Company A would have to pay tax on the goodwill sold 9 months later.

If a company wants to buy the business of another company the tax concequences should be sorted out at the begining and the purchase price adjusted acordingly.

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By chimpsrback
28th Jul 2009 13:57

Reality.....
The reality of the sit is that in an arms lenghth trans £100K more has been paid over fair value of net assets/liabilites

Yes,if the amounts were material I would proceed along the Internal review,tribunal,court route if necessary

I think this is the final comment from me,

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By User deleted
28th Jul 2009 14:13

Reality ....
is something that you seem to have difficulty in grasping.

The facts of the matter, as far as we can tell from the information provided, are that company A paid for the share capital of company B. The fact that the price paid, negotiated at arm's length or otherwise, is greater than the net asset value of company B is of absolutely no relevance whatsoever. It's a remarkably simple concept, made even more remarkable by your failure to understand it, that all company A will show on its balance sheet is the cost of its investment in B. It has not purchased assets, it has not purchased goodwill, it has bought shares.

If, on subsequent hive-up, A ends up with goodwill on is balance sheet then that is a consequence of the accounting entries and, as already explained, is specifically excluded from relief by virtue of the amended legislation.

Hopefully the reality is that the above was indeed your last post but again I doubt it somehow.

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By chimpsrback
28th Jul 2009 15:34

Eminent a/cs
i'm sorry but myself and two other eminent a/cs disagree with you

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By gbuckell
28th Jul 2009 15:49

Why?
Please advise why you and your eminent accountants consider that tax relief is available. I am prepared to be proved wrong but want to know why I am wrong.

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