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How to construe tax-neutrality following a hive up

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Section 776 of CTA explains the "consequences of a transfer of an asset being “tax-neutral... as not involving... any acquisition of the asset by the transferee."  This is what precludes the annual deduction from taxable profit of 6.5% of the goodwill.

However, FRS 102 requires fair value accounting for goodwill following a reconstruction.  This includes impairment of goodwill, which is the accounting equivalent of amortisation.  The following guidance suggests " inform clients of the consequences of depreciating this over 5/10 years and the impact on profits and distributable reserves" https://www.accountingweb.co.uk/community/industry-insights/frs-102-sect...

A reduction in distributable reserves would affect income tax position of the shareholders and so in that sense cannot be said to be tax neutral.

Should 'tax neutral' under Corporation Tax Act 2009 be construed as relating solely to corporation tax?

Replies (17)

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Psycho
By Wilson Philips
24th Nov 2020 21:54

I don’t know why you would think that a “tax -neutral” provision in a Corporation Tax Act would be construed as relating to any tax other than corporation tax.

No different to a tax-neutral transfer of a tangible fixed asset followed by depreciation.

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Replying to Wilson Philips:
Coman And Co
By ComanCo
24th Nov 2020 22:02

Wilson Philips wrote:

I don’t know why you would think that a “tax -neutral” provision in a Corporation Tax Act would be construed as relating to any tax other than corporation tax.

No different to a tax-neutral transfer of a tangible fixed asset followed by depreciation.


Thanks Wilson Philips.
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By Tax Dragon
25th Nov 2020 07:35

What is being amortised/depreciated? The (actual, not tax) cost of the asset. What gave rise to that cost? A payment to the subsidiary (albeit left outstanding). So, what has the subsidiary done? Sold the asset. And what does that 'create' in the subsidiary? Distributable reserves.

Why am I answering my own questions? Because you don't.

But perhaps you'd like to revisit your previous thread. Imho, you are on the wrong track (and Wilson's 'help' above isn't helping).

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Replying to Tax Dragon:
Coman And Co
By ComanCo
25th Nov 2020 08:19

Tax Dragon wrote:

What is being amortised/depreciated? The (actual, not tax) cost of the asset. What gave rise to that cost? A payment to the subsidiary (albeit left outstanding). So, what has the subsidiary done? Sold the asset. And what does that 'create' in the subsidiary? Distributable reserves.

Why am I answering my own questions? Because you don't.

But perhaps you'd like to revisit your previous thread. Imho, you are on the wrong track (and Wilson's 'help' above isn't helping).


Tax Dragon, Please do not communicate with me with me this way. I am an experienced chartered tax adviser.
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Replying to Tax Dragon:
Psycho
By Wilson Philips
25th Nov 2020 09:58

But there probably wouldn't be a payment to the subsidiary in this case (otherwise parent would be paying twice). Let's say S bought for its trading name - worth £100k - but holding no assets. Trade, or whatever, is hived up to P. P's investment of £100k becomes goodwill of £100k.

Alternatively, let's say that P does 'pay' S £100k for the goodwill. This would, as you say, create distributable reserves in S which could find their way to P. However, this would be matched by the required £100k impairment to P's investment in S. So, either way, no immediate effect on reserves.

OP is correct that subsequent amortisation will have the effect of an otherwise avoidable depletion of reserves. However, I think that it is a little tenuous to argue that this has an income tax effect. Yes, it would reduce the distributable reserves otherwise payable to shareholders and of course if you have lower income you are likely to have a lower income tax bill.

The tax neutrality is not there to ensure that the transaction has no overall tax impact - it is there simply to ensure that assets can be transferred within groups without an immediate charge to tax. The fact that there may be knock-on impacts is neither here nor there. (Directed of course at the OP but I couldn't be bothered to start a new comment.)

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Replying to Wilson Philips:
Coman And Co
By ComanCo
29th Nov 2020 20:58

After about 4 minutes into the video: "No adjustment to the subsidiary", following purchase of goodwill. https://vimeo.com/148633056 That was the basis on which I was surmising would be no increase in distributable reserves the subsidiary company following transfer of goodwill.

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Coman And Co
By ComanCo
25th Nov 2020 08:29

The subsidiary has not been paid for goodwill, the subsidiary shareholders have been paid for shares. Thank you.

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Replying to ComanCo:
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By Tax Dragon
25th Nov 2020 09:14

I was trying to pursue your logic (as I understood it) to its conclusion.

I now think I misunderstood your logic. I retract.

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Replying to Tax Dragon:
Coman And Co
By ComanCo
25th Nov 2020 09:22

Tax Dragon wrote:

I was trying to pursue your logic (as I understood it) to its conclusion.

I now think I misunderstood your logic. I retract.

No problem.
The observations and questions have been very helpful. I am not sure where else I could have turned.

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Replying to ComanCo:
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By Tax Dragon
25th Nov 2020 09:49

One last question, which I think is independent of (what I think was) my misunderstanding of what you'd said. You say:

ComanCo wrote:

A reduction in distributable reserves would affect income tax position of the shareholders....

Not by itself, it doesn't. The question is: when?

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Coman And Co
By ComanCo
25th Nov 2020 10:40

In the context of the owner managed business sector, the tax implication is significant.
Return to the comparison in an earlier post (https://www.accountingweb.co.uk/any-answers/acquisition-individually-or-...) between buying shares individually or via an existing company, the latter provides income tax relief at say 32.5%, whereas the former provides capital gains tax relief at say 10%. Plus, and this is in answer to TaxDragon's question, the capital gains tax relief would only be available on eventual disposal of shares. FRS102 is interpreted as amortising over 5 to 10 years, so income tax relief is enjoyed in year one. Larger companies could have a reason to pay larger dividends to shareholders to help support their share price. A small business is less likely to be concerned about the effect of dividend policy on share price and more sensitive to the tax implications for the proprietor.

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Coman And Co
By ComanCo
29th Nov 2020 21:00

Following this discussion I have had a chance to write up my summary which for anyone reading this thread in the future can be reviewed here:
https://comanandco.co.uk/tax-planning-for-small-business-acquisitions
And for a more general report on the tax ramification of business transfer here:
https://comanandco.co.uk/sale-of-business-as-shares-or-as-a-trade
I wanted to thank the contributors again for helping me to develop my understanding of this topic area.

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Replying to ComanCo:
Psycho
By Wilson Philips
29th Nov 2020 21:18

You know, I tried to read that first article and found myself losing the will to live half way through. Heaven help any business person trying to make sense of it. Particularly since it contains a few points that are misleading at best, with one or two that are just plain wrong.

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Replying to Wilson Philips:
Coman And Co
By ComanCo
29th Nov 2020 21:21

Wilson Philips wrote:

You know, I tried to read that first article and found myself losing the will to live half way through. Heaven help any business person trying to make sense of it. Particularly since it contains a few points that are misleading at best, with one or two that are just plain wrong.

Plain wrong? Please defend your accusation.

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Replying to Wilson Philips:
Coman And Co
By ComanCo
30th Nov 2020 16:01

Wilson Philips wrote:

You know, I tried to read that first article and found myself losing the will to live half way through. Heaven help any business person trying to make sense of it. Particularly since it contains a few points that are misleading at best, with one or two that are just plain wrong.

Wilson Philips, you should be prepared to make a prompt defence of your criticism when you make such unprovoked and scathing slander on my tax report. I am protective about my reputation as a trustworthy source of tax advice.

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Replying to ComanCo:
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By Tax Dragon
30th Nov 2020 16:51

ComanCo wrote:

Following this discussion I have had a chance to write up my summary which for anyone reading this thread in the future can be reviewed here:
https://comanandco.co.uk/tax-planning-for-small-business-acquisitions

Do you mention trade and asset purchases? (Forgive me asking when I could simply read the linked article[s], but I thought it would be quicker to ask.)

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Replying to Tax Dragon:
Coman And Co
By ComanCo
30th Nov 2020 17:34

Tax Dragon wrote:

ComanCo wrote:

Following this discussion I have had a chance to write up my summary which for anyone reading this thread in the future can be reviewed here:
https://comanandco.co.uk/tax-planning-for-small-business-acquisitions

Do you mention trade and asset purchases? (Forgive me asking when I could simply read the linked article[s], but I thought it would be quicker to ask.)

Yes, it's in there. I don't know what the heavy criticism is all about. I have just re-read the report and it's fine.

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