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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.
I think that you are again confusing accounts treatment of goodwill with tax treatment of goodwill. But that was a side point.
Writing off the loan would be one means of disposing of it. Repayment would be another. In either or any case you really do need to consider what happens to it to make a meaningful comparison - you might find that the corporate purchase with borrowed funds is the more tax-efficient.
In this case a successful high street outlet is branching into new neighbourhoods via acquisition. The company has sufficient cash reserves, and a director's loan was being used earlier in the discussion to simplify the comparison.
If the acquisition is successful the founder will probably want to hive the new company into his business. This would create a goodwill, and disposal of the target company which is by that stage a shell.
While there is no tax relief on the amortisation, the amortisation could reduce distributable reserves. The cost of acquisition to that extent would result in an income tax saving. To that extent the corporate purchase could work out more tax efficient.
I am referring to Goodwill created as per the following infomercial: https://vimeo.com/148633056
About 3:21 the video states "Goodwill is then amortised over the useful economic life."
You are failing to address the point raised by Ruddles and TD. What happens to the £50k lent to the company?
And why can’t the goodwill be amortised?
The reason goodwill cannot be amortised goes back to the start of the discussion. It is because the scenario deals with a shares purchase rather than a trade purchase.
I will have to concede that Ruddles and TD have raised a valid point and in principle a purchaser would be indifferent from a tax perspective whether to use an existing co or purchase in his own name.
You don’t say where you’ve identified the tax saving but if you were in fact to compare like with like you might find that you’ve got it back to front.
Let's say he starts a new company with share capital of £1. He loans the company £50k. The £50k is used to purchase a new company (which only has goodwill, because it was a service company.) Therefore the accounts will show £50k of goodwill (that cannot be amortised) and £50k of director's loan account. Therefore still has net assets of £1. The base cost of his share is £1.
Alternatively, he buys the target company with his own funds. The target company has a net asset of £1 because there is no recognition of internally generated goodwill. However the base cost of his shares is £50k.
On eventual sale, the individual is being pad £100k, only in one example he has £50k of cost to reduce his gain. It's the same business so it's worth the same to the eventual third party purchaser regardless.
The business will not be worth 50k less if purchased by a company:
In one option he pays £50k of personal funds, but the company balance sheet shows £1 net asset because the goodwill is internally generated.
In the other option, he paid £50k of personal funds into the company for the company to make a purchase. But the net asset is still £1, because that £50k is a director's loan account creditor.
If the existing company sold the target business in the future, he would be indifferent. However, it is the proprietor who realises the sale, so he is concerned to reduce his capital gains tax exposure.
I haven't looked at the detailed permutations, but I suspect that there is a flaw somewhere in your thinking. In option 2, where individual lends £50k to company, consider what would happen if he were to immediately capitalise that loan (or indeed simply subscribe for an additional £50k worth of shares in existing company to finance the acquisition).
I thought about share subscription, but then he has created a share premium account. This either places a restriction on assets that can be withdrawn, or if share premium is converted to profit reserve, a personal tax liability. If he buys the share direct, no shares need to be issued an no share premium is created.
I was talking specifically about the issue of amortisation relief on goodwill on a hive-up.
I have conceded that I cannot see a way of achieving amortisation relief on goodwill on a hive-up because of the tax neutrality on intra group transfers (ref CTA 2009 s.775) that Wilson Philips pointed out earlier today.
I was confused because my research led me to this ICAEW explainer video which shows how goodwill is created. That is an accounting treatment not anything tax deductible.
As a separate point also in the OP, the base cost of shares would be higher if he buys target company in his own name. Higher base cost provides a tax justification for a purchase individually. Takeover preserves base cost but reduces compliance because eventually everything owned by parent
My answers
Thanks Wilson Philips.
In much the same way as the purchase of a tangible asset (such as office equipment), except for there is no impact on corporation tax.
In this case a successful high street outlet is branching into new neighbourhoods via acquisition. The company has sufficient cash reserves, and a director's loan was being used earlier in the discussion to simplify the comparison.
If the acquisition is successful the founder will probably want to hive the new company into his business. This would create a goodwill, and disposal of the target company which is by that stage a shell.
While there is no tax relief on the amortisation, the amortisation could reduce distributable reserves. The cost of acquisition to that extent would result in an income tax saving. To that extent the corporate purchase could work out more tax efficient.
I am referring to Goodwill created as per the following infomercial: https://vimeo.com/148633056
About 3:21 the video states "Goodwill is then amortised over the useful economic life."
The reason goodwill cannot be amortised goes back to the start of the discussion. It is because the scenario deals with a shares purchase rather than a trade purchase.
I will have to concede that Ruddles and TD have raised a valid point and in principle a purchaser would be indifferent from a tax perspective whether to use an existing co or purchase in his own name.
I guess if he wrote the director's loan off, he would have a £50k loss carry forward that would have the same value as a £50k base cost of the shares.
Let's say he starts a new company with share capital of £1. He loans the company £50k. The £50k is used to purchase a new company (which only has goodwill, because it was a service company.) Therefore the accounts will show £50k of goodwill (that cannot be amortised) and £50k of director's loan account. Therefore still has net assets of £1. The base cost of his share is £1.
Alternatively, he buys the target company with his own funds. The target company has a net asset of £1 because there is no recognition of internally generated goodwill. However the base cost of his shares is £50k.
Thank you for your feedback. I believe I have identified a tax saving, but I would agree that I am not comparing like with like.
On eventual sale, the individual is being pad £100k, only in one example he has £50k of cost to reduce his gain. It's the same business so it's worth the same to the eventual third party purchaser regardless.
The business will not be worth 50k less if purchased by a company:
In one option he pays £50k of personal funds, but the company balance sheet shows £1 net asset because the goodwill is internally generated.
In the other option, he paid £50k of personal funds into the company for the company to make a purchase. But the net asset is still £1, because that £50k is a director's loan account creditor.
If the existing company sold the target business in the future, he would be indifferent. However, it is the proprietor who realises the sale, so he is concerned to reduce his capital gains tax exposure.
I thought about share subscription, but then he has created a share premium account. This either places a restriction on assets that can be withdrawn, or if share premium is converted to profit reserve, a personal tax liability. If he buys the share direct, no shares need to be issued an no share premium is created.
I have conceded that I cannot see a way of achieving amortisation relief on goodwill on a hive-up because of the tax neutrality on intra group transfers (ref CTA 2009 s.775) that Wilson Philips pointed out earlier today.
I was confused because my research led me to this ICAEW explainer video which shows how goodwill is created. That is an accounting treatment not anything tax deductible.
As a separate point also in the OP, the base cost of shares would be higher if he buys target company in his own name. Higher base cost provides a tax justification for a purchase individually. Takeover preserves base cost but reduces compliance because eventually everything owned by parent