BADR after asset disposal as TOGC and MVL

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Hello everyone, I am looking to make an aquisition and trying to assess the seller's tax position as it may impact pricing. Is anyone aware if the seller would qualify for BADR if the sale is not a share sale, but via asset disposal in the following structure (selling entity called Company A, butying entity called Company B): 

- seller is the sole shareholder and director of company A and has owned it for more than 2 years 

- whole business is transferred from company A to company B as going concern (should not be subject to VAT and company B will register for VAT beforehand) 

- consideration will be paid as cash, a seller note and an earn-out right in 2 years time (the amount of which is not assertainable at sale as it will be a multiple of  trading results post disposal). All of these will be paid/ payable to company A

- company A will effectively stop trading post the disposal, so the seller will have an option to liquidate via MVL and takeover the receipts under the seller notes and the earn-out rights initially issued to company A

My estimate on the seller's tax position is as follows, but I fail to find clear guidance if this is correct or not: 

- CT will be due by company A on the difference between the cash + seller note amount and capital allowances remaining on the disposed assets. From what I can find CT is due in the year of disposal on the whole gain regardless that part of the consideration will be diferred as a seller note. 

- then CT will eventually be due on the earn-out right if this is achieved - given it cannot be estimated at sale, it is taxed when amount is known i.e. after 2 years. 

- then any distributions from company A to the seller would be taxable, likely as dividends if extracted this way

The question is, can the seller liquidate via MVL while company A still has some receivables outstanding and if the seller liquidates via MVL shortly after the disposal, would the seller note and the earn-out right transfer from company A to him and would those qualify for BADR or not? 

Many thanks in advance. 

 

Replies (13)

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By williams lester accountants
22nd Apr 2024 10:52

Are you the accountant, the buyer or the seller in all of this?

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Replying to williams lester accountants:
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By vk777
22nd Apr 2024 11:05

the buyer

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By David Ex
22nd Apr 2024 11:12

vk777 wrote:

Hello everyone, I am looking to make an aquisition and trying to assess the seller's tax position as it may impact pricing.

So you’re offering the seller a post-tax amount? Can’t see that working.

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Replying to David Ex:
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By vk777
22nd Apr 2024 11:36

No, but in this case a share purchase is a no go for me. So I want to understand what is the tax impact for an asset sale on the seller side, as they'll naturally factor it in their considerations and if an asset sale could be more tax efficient than simply taxing everything with CT and then distributions.

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Replying to vk777:
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By David Ex
22nd Apr 2024 11:43

vk777 wrote:

No, but in this case a share purchase is a no go for me. So I want to understand what is the tax impact for an asset sale on the seller side, as they'll naturally factor it in their considerations and if an asset sale could be more tax efficient than simply taxing everything with CT and then distributions.

You need to pay an accountant to advise you then.

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Replying to David Ex:
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By vk777
22nd Apr 2024 12:16

naturally everything would be consulted on, but I wanted to understand at general level if asset sale via MVL could preserve BADR.

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Replying to vk777:
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By David Ex
22nd Apr 2024 12:32

vk777 wrote:

naturally everything would be consulted on, but I wanted to understand at general level if asset sale via MVL could preserve BADR.

The site isn’t here to provide free tax and accounting training.

HMRC manuals and tax legislation are available online if you’re interested.

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Replying to David Ex:
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By vk777
22nd Apr 2024 13:03

Interesting, I've been seeing questions answered all over the website for years. So, if it's a fellow accountant, question gets answered, is that how it works. Fair enough I guess. I am an accountant and do my own accounting and taxes, but as everyone on the forum I come across some cases for the first time.

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Replying to vk777:
paddle steamer
By DJKL
22nd Apr 2024 12:56

If it is past history that is the issue have you considered a share purchase by a holdco and an immediate hive up of the assets you do want to have thus leaving the old history in the remaining shell of a company, or is this a non starter re say solvency?

I think adding in the what if questions for seller regarding tax is just adding a complexity, second guessing what seller might accept re tax efficiency surely opens up with seller the possibility of A N Other striding in and offering direct for the shares, you then losing the deal. Are you not raising the net position within the seller's head possibly to your own disadvantage?

I would certainly more likely steer clear of mentioning in any way tax efficiency to the seller.

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Replying to DJKL:
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By vk777
22nd Apr 2024 13:09

Thanks a lot DJKL that might be an idea. It's exactly the past history that I am worried about and it is through an SPV. The hive up didn't come to my mind, I will have a look at that and how good it is at limiting exposure. Many thanks indeed!

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Replying to DJKL:
By Ruddles
22nd Apr 2024 15:05

DJKL wrote:

I would certainly more likely steer clear of mentioning in any way tax efficiency to the seller.

+1

What matters is what you (the buyer) are prepared to pay for the business and assets. If seller tries to adjust downwards, for any reason but in particular because of alleged tax inefficiencies for them (just as you might do if the method of sale is not optimal for you) then you have a discussion at that point. I see no merit in wasting time up front in trying to establish the seller's tax position.

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Replying to Ruddles:
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By vk777
23rd Apr 2024 08:24

Quite sensible, many thanks. I wanted to cover all eventualities in advance, so that I know what the options are.

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Replying to vk777:
Stepurhan
By stepurhan
23rd Apr 2024 09:23

vk777 wrote:

Quite sensible, many thanks. I wanted to cover all eventualities in advance, so that I know what the options are.

What you appear to be ignoring is that they are not your options.

The seller's tax planning or lack of it is outside your control. The price they will be willing to accept based on any tax planning they have done is outside your control. For that matter, whatever tax calculation you make will not take into account any factors you are unaware of that would affect their tax position, so could easily be wrong anyway.

If I was selling a business and the buyer tried to negotiate based on their guess at my tax position, I'd look for a different buyer. Anyone willing to do that is going to cause major headaches on other matters during and after the sale.

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