Anti-embarrassment payment

Accounts and tax treatment query

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I’ve not come across this before so would appreciate any input.

A client (seller1) sold 100% of the shares in their company to a non-connected party (purcahser1) who then sold the business 18 months later at a higher price.  There was an anti-embarrassment clause in the contract between seller1 and purchaser1 that was triggered when the company was sold again.  The clause is fairly vague considering its been prepared by a solicitor and just states that seller1 will be due an anti-embarrassment payment if the company is sold for more than £2m within 24 months of the original transaction.

The amount paid for the shares originally was £1m and the additional amount is £100k.

We have recently been appointed to act for new business (purchaser2) and will likely be preparing the tax return for seller1 too, so I'll need to know how to account for it in the accounts and personally.

As the clause doesn’t specifically mention how this payment should be treated, I’m wondering if anyone has dealt with this before?  I don’t think it should be included in the original sale/CGT side of it, but instead think it will hit the P&L of the company and be taxed as income for seller1? 

Furthermore, will the payment from the company be tax deductible for CT purposes?

 

Replies (7)

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By Bobbo
25th Jun 2024 14:42

"Anti-embarrassment"?

What's to be embarrassed about? Having sold the company for less than could have been achieved later on?

Sounds like contingent consideration to me.

Surely this 100k should be being paid by purchaser 1 (the one who bought the company for 1m and sold it 18 months later). I don't see how it has anything to do with the company itself at all and as such should not be appearing in its P&L (or anywhere else in the accounts). But you've seen the sale and purchase agreement and I haven't.

Thanks (4)
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By pauld
25th Jun 2024 15:41

Sounds like personal CGT. Agree should not have been included in original CGT as as not deferred consideration, but does relate to sale of shares and so subject to CGT in tax year contingent consideration is triggered.

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By Alfietheaccountant
25th Jun 2024 16:12

It is simply contingent consideration so subject to CGT. If a fixed amount (£100k) then this is ascertainable and should have been taxed at date of sale - as additional consideration. If unascertainable at date of sale then should have been valued the same as any unascertainable consideration.

You need to therefore consider if original CGT reporting was correct for seller 1.

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Replying to Alfietheaccountant:
By Ruddles
25th Jun 2024 20:34

Agreed

Deferred, ascertainable, contingent consideration. (Assuming that the £100k was fixed.)

Taxable on Seller at point of sale and additional cost for Purchaser1. Nothing to do with the company accounts. Caveat - like everyone else, I don’t know what the SPA actually said.

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By nrw2
25th Jun 2024 16:32

It all sounds quite embarrassing.

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Out of my mind
By runningmate
25th Jun 2024 17:41

I was hoping this was going to be something to do with an exotic dancer and a leading politician. Very disappointing!
RM

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Replying to runningmate:
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By FactChecker
25th Jun 2024 18:19

Guess it depends on which activities of yours being uncovered you find potentially the most embarrassing ... Trump always seems most litigious when anyone suggests he hasn't made as much money as he claims, but fairly laissez-faire about all the accusations of sexual impropriety!

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