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Ascertainable or unascertainable consideration

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Hi

A client has entered into a contract for the sale of shares. An amount has been received up front and a further amount is to be received in 12 months time based on revenue. The contract states:

If the Company’s Revenue for the Warranted Revenue Period is or exceeds £640,000, the Deferred Consideration shall be £80,000.

If the Company’s Revenue for the Warranted Revenue Period is less than £640,000, the Deferred Consideration of £80,000 shall be reduced by £1 (one pound) for every £1 (one pound) of that shortfall. Revenue below £560,001 will generate a Deferred Consideration payment of £0.

I am undecided if that makes it ascertainable or unascertainable. I know the maximum and the minimum but have 80,000 permitations inbetween. I appreciate there have already been numerous discussions as to what is and is not ascertainable previously but I am still undecided. 

Any help would be appreciated thank you.

 

 

Replies (33)

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By SWAccountant
17th Oct 2019 16:36

I'd say unascertainable.

The amount is contingent and unknown.

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By Tax Dragon
17th Oct 2019 16:50

I'd agree.

Contingent doesn't matter but unknown is pretty conclusive, IMO.

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By AnnAccountant
17th Oct 2019 18:23

You still have a stick a value on the 'chose in action asset' and tax it, don't you?

Is the client feeling optimistic and going for the full £80K? ;)

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By Montrose
19th Oct 2019 22:35

Sorry to disagree with other correspondents. This is a clearly an "ascertainable consideration", i.e £80,000.

TCGA s48 sets out the reasoning and the adjustment process in clear terms.

See https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14930.

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Replying to Montrose:
Psycho
By Wilson Philips
20th Oct 2019 11:34

Nonsense. The seller doesn’t know how much they are going to get because how much they get depends on future events. Unascertainable.

If the deal was simply “you’ll get £80,000, but only if condition x is met” that would be different.

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Replying to Wilson Philips:
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By Tax Dragon
20th Oct 2019 00:05

As CG14940 puts it, "The presence of a maximum amount to be paid does not imply that the consideration is ascertainable in the maximum."

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By Hels
21st Oct 2019 13:33

Thanks everyone for your comments. My first instinct was unascertainable but then I tried to convince myself it was somehow ascertainable!

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Replying to Hels:
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By Tax Dragon
21st Oct 2019 14:03

The distinction can be surprisingly subtle. And we are all assuming, of course, that the revenue in question is unknown future revenue.

(IMO you should remind yourself what s48A says every time you find yourself asking this question.)

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By The Dullard
21st Oct 2019 13:46

I agree with Montrose. The consideration is quite clearly £1 per satisfaction of 80,000 contingent events.

For the avoidance of doubt, that, of course, means I don't actually agree with Montrose.

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Replying to The Dullard:
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By Montrose
22nd Oct 2019 17:11

Sorry chaps[and chapesses as appropriate]- you are wrong. The law is unambiguous when applied to the situation set out in the query-the consideration is determinable initially, which is all that the law requires. Failure to meet conditions resulting in a reduction is exactly what the adjustment machinery addresses

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Replying to Montrose:
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By The Dullard
22nd Oct 2019 17:16

Are you Justin?

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By Tax Dragon
22nd Oct 2019 17:57

Smiles.

But let's avoid insulting each other and engage with the argument.

These two contracts give the same financial outcome:

1. deferred proceeds = £1 for each whole £1 of profit over £560,000 (limited to £80,000);
2. deferred proceeds = £80,000 - £1 for each £1 of profit below £640,000.

@Montrose, do you contend that 1. is unascertainable and 2. not?

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Replying to Montrose:
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By whitevanman
22nd Oct 2019 19:37

Consideration is unascertainable if the events necessary to establish the amount occur after the date of disposal. In this case, whilst the maximum is known, the amount cannot be established until the end of the relevant period when it will be known whether the revenue exceeds (or does not exceed) £560k and by how much.
See HMRC guidance at CG14940 (as referred to by an earlier respondent).

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Replying to Montrose:
Psycho
By Wilson Philips
22nd Oct 2019 23:28

There’s no point in trying to argue with you but you’re clearly in a minority of 1.

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By Montrose
23rd Oct 2019 00:33

I would rather be in a minority of one and right, than follow what impolitely might be called the herd. Look at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14883.

If you want a consideration to be unascertainable, then the consideration must not be figure can be calculated precisely from the contract itself. regardless of contingencies which can reduce that figure if certain events take place

Personal example of an unascertainable amount was :-

If there was a surplus on the target's Directors' pension fund, then further consideration based on that surplus was payable to the vendors. In the event there was no such surplus, which was a good thing as the purchaser became insolvent before the Directors reached pension age!

A particularly difficult situation can arise where there is a substantial consideration for the grant of an option, but the option is exercised in a later tax year. CGT is payable in respect of the year in which the option is granted, but that gain is reversed when the option is exercised.The initial gain still has to be shown [and consequently tax paid] in the SA 100 for the year in which the option was granted

Although there is no statutory machinery to deal with this, HMRC will repay/credit the CGT paid in the earlier year. See https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12317

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Replying to Montrose:
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By Tax Dragon
23rd Oct 2019 06:25

In the examples in CG14883, the vendor either gets the deferred amount or she doesn't, depending on whether the relevant contingency is met. Unless, as The Dullard mused, you maintain that the OP's situation contains 80,000 contingencies, the manual extract cannot apply. Let me put T_D's point to you another way: if the amount by which the deferred consideration would be reduced is unascertainable, then the consideration is itself unascertainable. If you don't know how much you won't get, then you can't know how much you will get.

And please read CG14940, as at least two of us have already suggested.

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Replying to Tax Dragon:
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By Montrose
23rd Oct 2019 09:23

I can read! The suggestion that a possible reduction is unascertainable is inherent in many "capped" buy-out arrangements, but does not make the consideration unascertainable, although contingent.
Have a look at the discussion at
https://www.taxationweb.co.uk/forum/s-48-tcga-1992-claim-time-limits-t34...

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Replying to Montrose:
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By Tax Dragon
23rd Oct 2019 09:45

An odd citation, since the consensus in that thread would seem to agree with the consensus in this one. As does CG14940 (the example there tallies exactly with the OP’s situation).

I agree with you that it's more important to be right than it is to be in the majority, but you are not addressing any of the points made by any of the contributors here…. rather, you are bringing in other examples that don't match with the present issue and are therefore of no relevance. That is one of Justin's annoying traits too… is T_D onto something?!

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Replying to Montrose:
Psycho
By Wilson Philips
23rd Oct 2019 11:54

I will make one concession. The post refers to the warranty period but doesn’t state what that period is. It is possible that it ends on or before Completion in which case I would agree that the consideration is ascertainable by events arising on or before Completion. If on the other hand it can be ascertained only by post-Completion events then it is unascertainable. The herd is correct.

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By whitevanman
23rd Oct 2019 13:49

Not sure I would even make the one concession. The question is whether the events necessary to establish the amount occur after the date of disposal.
For CGT purposes that is the date of the contract (where the contract is in fact completed) so anything in the warranted period is "after the event". There are possible circumstances that might lead to it being known before the end of that period that the additional consideration would be payable in full (revenue rapidly exceeding the target) but otherwise it will only be "established" after that period has ended.
As to Montrose, I really think you should read what it says in the guidance you quote (e.g. CG 14883) because that makes it clear that you are wrong, despite being in that heady minority of 1).

Edited as I invented a new tax (heaven forbid) called CHT.

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Replying to whitevanman:
Psycho
By Wilson Philips
23rd Oct 2019 13:54

My bad - by Completion I did mean date of contract. While it is more likely than not that the warranted period follows the disposal date it is not impossible that it is a reference to a period ending on or before disposal.

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By The Dullard
23rd Oct 2019 13:51

Possibly the proper approach would be to initially consider just the first £1 and the last £1, before then moving on to the subsequent and previous £1s, and so on?

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Replying to The Dullard:
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By whitevanman
23rd Oct 2019 20:10

Sorry but I don't understand the point - possibly my fault.
As I see it, CGT is based on the state if affairs at the date of disposal (possibly the date of the contract in this case). At that date, the additional amount was unascertainable (unless you join Montrose in the singleton party). So the value of the right is what goes in the CG computation.
After that, the additional amount may become known before the end of the warranted period but only if the maximum revenue figure is ( was) exceeded. Otherwise, the final sum will not be known until the end of said period (12 months after date of sale). They may know, when revenue exceeds the minimum by £1, that they will get £1 (and so on) but I don't think that matters. The full amount will not be known and that is what matters.

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Replying to whitevanman:
Psycho
By Wilson Philips
23rd Oct 2019 23:14

I’m playing Devil’s Advocate here. We’re told only that the deferred consideration will be paid 12 months after sale, based on revenue of the warranted period. To date, no-one has told us what the warranted period is. It may well be those same 12 months but it could be a different (possibly pre-sale) period. Until I’m told what the warranted period is I’m not offering a definitive opinion.

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By whitevanman
23rd Oct 2019 23:42

I suppose you are strictly, correct.
However, I doubt there would be a question and certainly not an uncertainty, if the period ended before the date of the contract. That would render the clause somewhat otiose as it would be known at the time whether the target revenue had or had not been achieved. Surely the contract would have simply specified an amount payable at a future date if that were the case. So, I guess the period ended after the date of the contract and quite possibly at or around the 12 month point after sale. Either way it is likely the amount was unascertainable at the date of the contract/date of sale.

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Psycho
By Wilson Philips
24th Oct 2019 02:50

I think you may have misunderstood. Even if the calculations, and payment, take place some time after the event if all factors that determine the amount are in place at disposal date the consideration is ascertainable, even though it may not actually be quantified until later. The obvious example is a sale/purchase based on Completion accounts which, by definition, cannot be drawn up until Completion at the earliest and in practice take a couple of months to draft and agree.

I do agree that in all probability it is unascertainable in this case but probably is not definitely.

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By whitevanman
24th Oct 2019 05:56

Agreed.

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By Tax Dragon
24th Oct 2019 06:12

And for the avoidance of doubt (if it wasn't already clear from my comment at 14.03 on 21st)... also agreed. The question is whether the amount is ascertainable, not whether it has been ascertained. (So, strictly, my very first comment was wrong... I should have said "unknowable", not "unknown".)

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By Hels
24th Oct 2019 09:00

Thank you all for your ongoing views. The warranted period is the 12 months post sale.

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Replying to Hels:
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By Tax Dragon
24th Oct 2019 09:11

So my assumption at 14.03 was right and we can all... nearly all... agree.

An irony is that in Montrose's personal example of unascertainable consideration (the one that involved additional consideration if there was a surplus on the target's Directors' pension fund), it's possible that the consideration was actually ascertainable! It depends on what Montrose meant by "was".

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Replying to Tax Dragon:
Psycho
By Wilson Philips
24th Oct 2019 12:33

Irony indeed!

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By Justin Bryant
24th Oct 2019 12:21

Assuming the consideration cannot be ascertained by reference to circumstances at completion, for instance, because there is an earn-out right under which deferred consideration is payable by reference to future profits of the target, the rules for unascertainable consideration apply, so if any part of the "Warranted Revenue Period" is post completion it is unascertainable, so s48 TCGA 1992 cannot apply (regardless of any stated maximum c.f. stamp duty). Unless the deferred consideration is payable only in shares or loan notes or other debentures in the buyer, the rule in Marren v Ingles [1980] 1 WLR 983 applies and the seller is treated as making two disposals for CGT purposes. The first occurs on the disposal of the target when the consideration for the shares is treated as including the right to receive the deferred consideration (earn-out right). The gain/loss on sale of the target is calculated by reference to the market value of this earn-out right together with any other consideration for the sale of the target. The second disposal occurs when the deferred consideration is received and is a disposal of the earn-out right. This may give rise to a chargeable gain or allowable loss, depending on whether the amount received is greater or less than the market value of the earn-out right at the time of the sale of the target.

Simple!

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Replying to Justin Bryant:
Psycho
By Wilson Philips
24th Oct 2019 13:29

Agreed - bearing in mind that there is only one person here that appears to think that section 48 is in point. (But only because he or she is wrong on the ascertainable/unascertainable point.)

Worth also mentioning that a loss on disposal of the right can be carried back, unlike most other capital losses, against the original gain on disposal of the underlying asset.

And, for completeness, where the deferred consideration is in the form of shares etc one can elect out of the paper-for-paper treatment.

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