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Accounting treatment re merger

Limited Company "merging" with Sole Trader

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Two of my clients in the same industry are looking to “merge” together. The value of each businesses is around £250k at the moment. If I call A the Ltd company and B the sole trader. The idea is for A to keep 50% of the shares and B to have 50% shares in A Ltd so effectively A is taking over B but with a share for value transaction and no cash passing hands. I understand that for CGT purposes the value to B can be dealt with as Holdover Relief so there will be no CT liability – is this correct? In terms of A ltd after the takeover/merger new shares will be issued to B (lets say £100 value). I presume the £250k will be deemed to be goodwill (no assets or liabilities are coming across just trade). How will the £250k less £100 be dealt as in A Ltd? Share premium? Will there be stamp duty on the proceeds of the new shares? Is there anything else that I am missing, such as HMRC approval?

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By chicken farmer
23rd Oct 2019 09:03

I think all this means that a company is buying the assets of a sole trader in exchange for an issue of shares. So how can a sole trader be liable to corporation tax?

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By Colin M Spencer
23rd Oct 2019 10:58

Sorry it was a typo - meant CGT !

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By Vaughan Blake1
23rd Oct 2019 11:01

Personally, I would form a new company to run the new business.

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By Colin M Spencer
23rd Oct 2019 11:33

For various reasons the owners do not want to do this

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By chicken farmer
23rd Oct 2019 16:29

You have said " I presume the £250k will be deemed to be goodwill (no assets or liabilities are coming across just trade). How can you transfer a trade if you do not transfer any of the assets used in that trade? If 'goodwill' is being transferred then there is a CGT disposal by B. Why do you think any gain can be held over??

Have you considered any VAT implications? Doesn't sound as if this would be a TOGC.

P.S. There ain't no such thing as a merger, its always a takeover.

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By paul.benny
23rd Oct 2019 17:25

Is B not bringing any assets (tangible, working capital) to the new business?

What's the problem with putting both businesses into a new company? If name is an issue, you could swap company names to give an illusion that it's the same entity. The downside of not doing to is that any undeclared (unknown) liabilities or obligations arising from A's business fall 50% onto B's share.

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By Colin M Spencer
23rd Oct 2019 19:56

Both businesses are in the finanacial services sector and they are both "partners" in a large organisation.

They receive commission from this organisation on a monthly basis - Initial Advice Fees and Ongoing Advice fees based on the level on the investment value of business written.

The £250k gain for the sole trade I have been informed by a tax expert qualifies as Incorporation Relief, as B i srecieving shares for his trade.

There are no tangible assets; B is keeping any cash he has generated in the sole trader business.

There are loans in a Ltd - B is very aware of this. as A had PG's for these. For this reason there is no desire for a newco

Both businesses have been independently valued and the values are virtually identical - hence the 50:50 split.

Main question I would like answered is the accounting ie Dr Goodwill £250k Cr Shares £100 Cr Share Premium £249,900 ?

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Replying to Colin M Spencer:
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By paul.benny
24th Oct 2019 07:32

The additional information helps.
Agree on the accounting entries - assuming that the £100 nominal does indeed give B a 50% share.

I'm a little concerned about the relative valuations. B is fine: the value is wholly in the client list and income stream and that is all that A Ltd is acquiring. A Ltd has the same but there are borrowings and presumably an accrued CT liability - which now B will 'own' half of. I would expect the valuation of client list and income stream of A Ltd to be rather higher than that of B to reflect that half the liabilities are not attributable to his shareholding.

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By Matrix
24th Oct 2019 09:05

I assume they will be getting lawyers to draft the shareholders agreement and warranties, indemnities etc so I would also get them to opine on the tax issues. Make it clear that you are just making the accounting entries and include a disclaimer to say that you have not been asked to advise on the optimal solution or the tax issues etc if that is the case.

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By Colin M Spencer
24th Oct 2019 12:10

Thank you - good advice. Yes I have insisted that they use a lawyer to draft SA, revised articles , warranties etc. They are effectively working together at the moment but 1 = 1 will equal 3 and the financial organisation will be giving them alot of support as they are very good at what they do!

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