Welcome to MJ Hudson’s monthly On Target, where you’ll find useful tips and insights to ease you through your M&A transactions. This month, we look at the fundamental tax differences of structuring an acquisition as a share purchase or an asset purchase.
The key parties in an asset purchase are usually the buyer and a single corporate seller rather than a group of shareholders. Both the buyer and the seller negotiate which assets and/or liabilities will transferred, and explicitly exclude those which the buyer does not want to acquire. These other assets and/or liabilities will remain with the selling company. In an asset purchase, the purchase price is paid to the corporate seller. The shareholders of a corporate seller remain the same. In the case of a disposal of a majority of a company’s assets, the selling company is often liquidated after completion.
Unlike in an asset purchase, the key parties are the buyer and the shareholder(s) of the target company. The shareholders’ shares are sold and control of the company passes from the sellers to the buyer. As a result, the buyer takes ownership of the company. There need not be any changes to the target company’s day-to-day business operations (employees, customers, assets or liabilities etc.). The purchase price is paid to each seller pro rata to their entitlement; usually a factor of their equity percentage.
Tax is a key driver (if not THE key driver) for determining whether an acquisition is structured as a share purchase or an asset purchase. However the buyer and the seller(s) have different considerations to contend with, and the challenge of balancing these competing interests is a key focus in the earliest stages of any deal. We have taken a look at the different considerations from a UK tax perspective.
Typically, the transfer of the majority of business assets will not attract a stamp duty charge (although a limited number of assets are chargeable, which is beyond the scope of this article). However, as further discussed below, transfers of shares in a UK company are subject to stamp duty at 0.5% of the total purchase price.
A buyer will typically exclude tax liabilities from any asset sale. By contrast, in a share sale all liabilities sitting in the target company are acquired by the buyer along with the shares; these could include liabilities in respect of current and past tax. The assumption of potential tax liabilities is often one of the most sensitive points in deciding on the transaction structure.
When the buyer acquires the assets, a new base cost of acquisition will be ascribed to the assets. This means that on the disposal of the relevant assets, any profit will be calculated by reference to the increase in value above the new base cost. However, on a share purchase, the assets will retain the base cost of acquisition ascribed to them in the accounts of the target company, which will usually be lower than if the assets are acquired separately.
If the buyer is a company subject to the UK corporation tax regime, tax relief is available against the tax written down value given in the accounts for intangible fixed assets. However this does not include items such as goodwill.
Where a UK buyer acquires plant and machinery for a price greater than their current tax written down value, the difference can potentially be used to offset future corporation tax liability.
If assets such as land and machinery are acquired, any gains on other disposals of similar assets in the preceding three years or anticipated in the next year, may be “rolled-over” until the sale of the recently acquired assets i.e. the buyer may be able to defer any pre-existing tax charges on gains. Liability to capital gains tax following the sale of an asset can possibly also be deferred by reinvesting proceeds into Enterprise Investment Scheme (EIS) eligible shares although this relief is also time limited.
When any shares in a UK company are transferred (subject to very limited exemptions), stamp duty is payable at the rate of 0.5% of the total purchase price (rounded up to the nearest £5 on each transfer instrument), typically paid by the buyer, which must be paid within 30 days of closing. Stamp duty does not apply to most asset purchases.
VAT is not payable on the transfer of shares. However, where the asset purchase does not amount to a transfer of a going concern, VAT will apply to the purchase price of the assets. This can be a problem for a buyer if it is unable to recover all of its input tax.
Where a buyer acquires the shares in a target company that already has trading or capital losses, those losses may be used to reduce future tax liabilities of the target or the buyer’s group (although there are some limitations).
If the assets are sold at a loss, the loss can potentially be set against other taxable gains of the seller.
Again, if the assets are sold at a loss and the fall in value of the assets has been quicker than the tax written down value in the accounts of the seller, the loss can potentially be set against income or chargeable gains to reduce the seller’s taxable profits.
Directors and employees who hold (and have held for 12 months or more) at least 5% of the equity in a trading company (or the parent company of a trading company) who make a profit on the disposal of their shares can take advantage of entrepreneurs’ relief. The relief works by reducing the rate of capital gains tax to 10% (limited to the first £10 million of gains).
Individual sellers selling their shares are subject to capital gains tax on any profits they make. However, on a disposal of assets, the selling company may be liable to corporation tax on any gains, and then the shareholders of the selling company may be liable to income tax on any dividends paid from the proceeds of sale of the disposal of the assets. Where the target company is owned by individual shareholders, this is often the key (and a powerful) argument in favour of a share purchase to avoid the additional tax leakage at the corporate level. This is not an issue for corporate sellers as dividends are not typically liable to corporation tax.
Under the substantial shareholding exemption (SSE), any gain on a sale of shares by a UK company is tax exempt if, broadly, the selling company held a ‘substantial shareholding’ (generally, at least a 10% interest) in the company whose shares are being sold, subject to various other conditions being satisfied such as that the 10% shareholding must have been held for at least 12 months. In the past, the SSE only applied to trading companies or holding companies of trading groups; this condition was removed with effect from 1 April 2017. There is no exemption equivalent to the SSE on an asset sale (although, on an asset sale, available capital losses can be offset against any gains made on the sale).
Where all or part of the purchase price paid to the sellers on a share purchase is satisfied by the issue of shares or loan notes in the capital of the buyer, each seller may be able to delay the payment of tax on any taxable profits until they dispose or redeem their shares and loan notes in the capital of the buyer. This relief is not available to sellers on an asset purchase, although other rollover type reliefs may be applicable to sales of certain assets.
With special thanks to Daniel Lewin from the MJH Tax team who provided expert input for this article.
Is this brief too brief? Want to know more about deal structures? (of course you do). Expert legal advice is on hand from MJ Hudson’s M&A and Tax teams. Just contact any of the On Target team (details below) or your usual MJ Hudson M&A contact, and we’ll gladly help
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MJ Hudson’s M&A and Private Equity transactions team acted as English legal counsel to M3 Global Research on its acquisition of Qualitative & Quantitative Fieldwork Services (QQFS), a Swedish company. QQFS provides consultative data collection services with a focus on healthcare systems in the Nordics, Benelux, Austria, Switzerland and Eastern Europe.
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