By Mark Anthistle, Senior Capital Allowances Analyst at Catax.
The difference between an Asset Sale and a Share Sale
When contemplating the acquisition of another company, there is a choice on how the purchase is structured. The buyer can either purchase the assets (and trade) from the company or the shares of the company.
For an Asset Sale, some or all the assets owned by a company are purchased by the buyer. This includes land & buildings, plant & machinery, furniture & equipment, goodwill, contracts, records, intellectual property and stock. The seller retains ownership of the company with any liabilities or losses remaining with the company. The transaction is between the buyer and the company.
In the case of a Share Sale, the buyer purchases shares in the company, as opposed to just the assets. Typically, the company retains its assets and liabilities. It is the ownership of the company, a separate legal entity, that changes. The transaction is between the buyer and the shareholder.
There are many tax implications to consider for both seller and buyer when structuring such a transaction. These include, but are not restricted to, impacts on matters such as Entrepreneurs’ Relief, chargeable accounting periods, trade losses, capital gains, group relief, and associated companies.
However, for the remainder of this article, we will focus on the impact on Capital Allowances, specifically on which expenditure any assessment must be based upon and the difficulties faced when completing the required due diligence regarding prior claims and costs incurred.
Please note that the information below is detailed on the assumption that the buyer and seller are unconnected.
For the team here at Catax, the more common and simple scenario (ignoring the minefield that is the Pooling Requirement legislation which we have discussed in more detail in previous Tax Talks) is an Asset Sale.
When our client is the buyer of the assets of another company, namely the building and its associated embedded plant, the expenditure incurred in acquiring these assets forms the basis of our assessment. We can request copies of the purchase documentation including the Asset Sale Agreement, CPSEs and inventory (if applicable) which will advise us on the tax position of the seller from which we can determine whether a viable claim is achievable.
The more complex and difficult scenario is when our client acquires the shares of the company (although in this scenario we can avoid falling foul of the Pooling Requirement). As detailed above, the client has acquired shares in the company with the legal ownership of the assets remaining with the company. So, for the purposes of a Capital Allowances exercise, nothing has changed. The assets were held by the company before the share sale and continue to be held by the company after the share sale.
We must, therefore, base our assessment on the expenditure when it was originally incurred by the company on acquiring the assets, i.e. the land & buildings, whenever that may have been. Our client may have incurred significant costs in acquiring the shares, but this is not to say the company incurred significant costs in acquiring the assets, especially if they have been held for several years.
The company may have also extended or refurbished the property or properties they own during the stewardship of the previous director(s), so again, our analysis is restricted to this original expenditure and on the plant that qualified at the time this expenditure was made.
Our struggles stem from the availability, or lack of, historical financial and tax information. We have experienced cases where the share sale took place a number of years ago, and the previous director(s) did not hand over or provide at the time the property purchase documentation, build cost information, historic tax computations and/or fixed asset registers to our client.
We also find that at the point of the share sale the buyer, more often than not, appoints a new accountant and, given the data protection guidelines, most of the useful documents detailed above held by the previous accountant have been destroyed by the time we are instructed.
Although Share Sales also include the completion of a CPSE questionnaire by the seller, we often find that we cannot fully justify a claim to capital allowances through the absence of sufficient information and evidence of costs incurred and claims made to date. Frustratingly, it is for this reason, we have had to close our files on a number of cases even where we are confident that there are tax savings to be made. The absence of information is a barrier we cannot overcome.
The message from Catax, when considering acquiring the shares of a company which owns a commercial property, is to ensure all purchase and historical accounting & tax information is supplied by the previous director(s) and their advisors. This information could be vital when it comes to carrying out a Capital Allowances assessment by the specialists here at Catax.