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HMRC clearance re contingent sales price

HMRC clearance re contingent sales price

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I have a client that owns a company that has sold its trade as an IFA business for £600k split into 3 payments , one now, one 12 months and one 24 month, the future payments are earnings based, his intention is to close the company the now defunct company, how do I get HMRC agreement to the value of the future proceeds 

 

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Hallerud at Easter
By DJKL
30th Jun 2020 12:20

How does he safely close the company with the purchaser still due to pay it in future years?

I presume the obligation from the purchaser to the company is to be passed to the shareholders, I would be wanting a really good solicitor to sort the assignment of the interest under the contract and a very switched on insolvency practitioner re its distribution to the shareholders, if this goes wrong the purchaser could just not bother paying and there would be no legal entity capable of enforcing the contract of sale.

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Replying to DJKL:
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By CW2012
30th Jun 2020 12:37

The funds are been paid into a new company, this is all agreed with the purchaser, it is clearance from the HMRC regarding the value of the future payments that I'm hoping that someone might have knowledge of, how do I go about gaining clearance

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Replying to CW2012:
Hallerud at Easter
By DJKL
30th Jun 2020 12:45

How is one company selling its trade but the proceeds are to be paid to a different company? How does that work legally, within the accounting and for tax?

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Replying to DJKL:
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By CW2012
30th Jun 2020 12:55

The proceeds have been assigned to a different company, I didnt get involved I'm not the solicitor, the sale and any profit from it will be dealt with in the owning company, I am at the point of wanting to get HMRC clearance on the value of the future payments and cant remember the route to do this, do you know.

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Replying to CW2012:
Hallerud at Easter
By DJKL
30th Jun 2020 13:07

If assigned to A N Other company surely price/consideration was considered at that point?

Company A had a right to receive x,y and z in future from purchaser, that right passed to Company B, what did company B pay company A for that right, if it did not pay what figure was used to determine value of the transfer of the right to receive?

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Psycho
By Wilson Philips
30th Jun 2020 13:23

Search HMRC for “post-transaction valuation”

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Replying to Wilson Philips:
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By CW2012
30th Jun 2020 13:46

Have done, form CG34looks to be the ticket

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By whitevanman
01st Jul 2020 10:08

Why would you need HMRC agreement? The value is stated in the sale agreement.

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Replying to whitevanman:
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By CW2012
01st Jul 2020 10:21

Because the proceeds are on a contingent basis and the selling company is to be wound up prior to the receipt of all the proceeds

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Replying to CW2012:
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By whitevanman
01st Jul 2020 10:42

Based on the info provided, the consideration is (partially) deferred, ascertainable and contingent. Generally speaking, the contingency does not affect the fact that the whole sum is taken into account at first instance. There is facility for postponement of part of the tax payment and adjustment if some part is not received.

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Replying to whitevanman:
Psycho
By Wilson Philips
06th Jul 2020 19:45

Assuming that the earnings in question are future earnings, how do you reach the conclusion that the consideration is ascertainable?

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Replying to Wilson Philips:
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By whitevanman
06th Jul 2020 21:40

Because it says so in the OP - business sold for £600k split into 3 payments. Of course these may not be the facts hence my reply was "based on the info provided".

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Replying to whitevanman:
Psycho
By Wilson Philips
06th Jul 2020 22:22

I agree that the OP is a little confusing. I read it as meaning that the price is £600k, but to be adjusted depending on earnings. But perhaps he meant something else. His latest question on the topic is equally devoid
of useful and clear information.

Although he does suggest that the amount receivable might be more or less than the £600k, which sounds unascertainable to me.

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Replying to Wilson Philips:
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By CW2012
07th Jul 2020 09:11

The price is £600k, but to be adjusted depending on earning, yes that's true, the price is £600k dependent on earnings, in applying for a valuation for the capital gain from the HMRC what happens when the amount received is different to the amount agreed ie £500k received not £600k bearing in mind that the selling company is now wound up.

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Replying to CW2012:
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By Tax Dragon
07th Jul 2020 09:49

You need to start answering questions if you want answers to yours. Or at the least think about why those questions have been asked of you. For example, DJKL was concerned about the mechanism by which the right to enforce the contract was passed to the new entity and Wilson has asked you about what gives the parent company the right to receive the future proceeds. You have not answered.

However, if you have a Marren v Ingles type scenario and you succeed in passing the chose in action to parent, that is clearly a disposal of that asset by the sub and an acquisition by the parent. There is then a gain or loss when the parent itself disposes of that asset. But this does assume that parent genuinely acquired the asset (i.e. that it could enforce the contract, if push came to shove - DJKL's point).

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Replying to Tax Dragon:
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By CW2012
07th Jul 2020 09:56

In terms of the right of the parent to receive the future cash receipts, I'd suggest that the sub declares a dividend to the parent and pays it in specie by way of the future sums to be received from the sale of its sales ledger. I have no knowledge as to the right to receive the future income being transferred I'm told that it has all been agreed as part of the sale under a legal process.
What happens though if the amount agreed by the HMRC as the value of those future receipts is not the same as the amounts received

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Replying to CW2012:
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By Matrix
07th Jul 2020 10:18

Please see my reply on your other thread.

I would refer the client back to the lawyers. I don’t understand why the client is coming to you after the company being wound up. I would suggest that there can be no change to the corporation tax if this company no longer exists.

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Replying to Matrix:
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By Tax Dragon
07th Jul 2020 10:40

CT on parent. Agreed re CT on sub.

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Replying to CW2012:
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By Tax Dragon
07th Jul 2020 10:42

There is presumably a gain or loss, the tax treatment of which will depend on what the parent has. It sounds like a tri-partite contract ab initio, which is not what I was expecting. You probably need to work through the contract to work out which company disposed of/acquired what and when. In principle, though, the parent has an asset (why else would it get paid?) The receipt of tranche 2 of the proceeds is a part disposal; tranche 3 is a full disposal. (I am using TCGA terms for ease though it's not necessarily TCGA that applies.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
07th Jul 2020 10:56

You may be right, TD - but the OP's continuing resistance to provide full meaningful information doesn't help.

The agreement might say "You will get £200k now, £200k in 12 months and a further £200k - to be adjused on an earnings basis - in 24 months". Arguably, £400k is deferred ascertainable, the balance is deferred unascertainable.

But what if the agreement says "You will get £600k, subject to earnings adjustment, payable as follows - £200k now, £200k in 12 months and the balance in 24 months' time". Is that different - does it make the whole sum unascertainable? I'd say still part and part, but I'm not certain.

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Replying to Wilson Philips:
Hallerud at Easter
By DJKL
07th Jul 2020 11:11

Surely depends. Does the agreement allow/permit any repayment of the two £200k payments already paid or are these fixed sums, a minimum? So if the agreement calculated £350k would £50k require to be repaid?

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Replying to Wilson Philips:
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By CW2012
07th Jul 2020 11:21

The payment is £200k already paid, £200k in December and £200k in the next December (2021) both future instalments subject to revision downwards should the company fail to match its financial projections. The parent to receive the cash as the subsidiary will have been wound up, the subsidiary will have agreed the value of the capital gain before being wound up and the tax paid. What happens to the difference between the agreed amount with the HMRC and the actual amount paid to the parent as a dividend in specie.

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Replying to CW2012:
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By Matrix
07th Jul 2020 11:56

Any adjustment should be in the parent company’s tax return. I assume they paid an amount to the sub for the assignment of the receipts. No adjustment can be made in the sub’s return if the sub has been wound up. Why are you only involved now?

I am just finding it hard to believe that no tax advice was taken on a £600k transaction and you don’t say what you have been asked to do.

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Replying to Matrix:
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By CW2012
07th Jul 2020 12:01

Thanks for the reply, the amounts from the sub will be a dividend in specie (being the future payments relating to the sale) the amount of the dividends will be the capital gain as agreed with the HMRC, the sub will be wound up and the ensuing amounts received will be different from the amount agreed with the HMRC (unless by fluky chance they agree) how do you treat the difference, a dissolved subsidiary paid Corp Tax on a gain that turned out to be more or less 2 years later than the sale. The deal was agreed via another firm of accountants and a firm of solicitors. We are picking up the pieces.

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Replying to CW2012:
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By Matrix
07th Jul 2020 12:09

Well you need to look at all the advice and paperwork. I don’t understand why the sub needs to be wound up. Why can’t you just adjust the amounts after you know them and why do you keep saying that it has been agreed with HMRC?

Doesn’t sound ideal, hard to come in at this stage.

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Replying to Matrix:
Psycho
By Wilson Philips
07th Jul 2020 12:12

Matrix wrote:
Why can’t you just adjust the amounts after you know them and why do you keep saying that it has been agreed with HMRC?

Presumably because there is an already signed sale agreement?
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Replying to Wilson Philips:
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By Matrix
07th Jul 2020 12:15

Wilson Philips wrote:

Matrix wrote: Why can’t you just adjust the amounts after you know them and why do you keep saying that it has been agreed with HMRC?
Presumably because there is an already signed sale agreement?

In the tax return, not the sales agreement. But I agree the sales agreement has been signed so all our replies are hypothetical.

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Replying to CW2012:
Psycho
By Wilson Philips
07th Jul 2020 12:10

So, my analyis is thus:

The £200k is deferred ascertainable. The £400k is deferred unascertainable and would need to be valued, let's say at £325k. Company 1 pays CT based on proceeds of £525k.

Now, forget the first £200k - that's been dealt with. Co1 then transfers its right to income (a separate chargeable asset) to Co2. Intra-group so no-gain/no-loss, with a base cost of £325k. Co2 then simply has allowable losses or chargeable gains on disposal of that right as and when proceeds received.

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Replying to Wilson Philips:
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By CW2012
07th Jul 2020 12:34

Thank you, this looks good to me, an asset disposal in company A (the right to receive a future income)at no gain no loss leaving company A to be wound up and a base cost to set against the actual receipts in company B.

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Replying to Wilson Philips:
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By Tax Dragon
07th Jul 2020 12:39

In short, any excess will be taxable but any shortfall will go unrelieved, assuming that parentco exists for the single purpose of receiving the money and then itself gets wound up.

One note: companies that do not exist cannot pay dividends, even in specie. Any such dividend occurred when the right to the proceeds was passed to parent, valued at let's say £325k.

I do wonder about BADR on parent. (But I'm not curious enough to work it through.)

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Replying to Tax Dragon:
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By CW2012
07th Jul 2020 12:59

Thanks, the parent exists to carry on in profitable business so wont be wound up, well not in the near future

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