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When buying a business it is not uncommon for that business to be carried on through a limited company. Should you buy the business or buy the company, and does it matter? Some of the key issues are discussed below.
The price paid for a business will depend on the value attributed to the various assets of the business – usually goodwill, fixtures and fittings and/or property (either freehold or leasehold). There may be other assets depending on the size and nature of the business.
The tax positions of buying a business and buying a company are very different.
If you buy the business
The amount paid will be a combination of values attributed to goodwill, fixtures and fittings, property and any other assets. The amount paid for goodwill or property will be a capital cost and you would only get tax relief for these costs when you sell the goodwill/property on.
Fixtures and fittings qualify for capital allowances so you will get income tax relief on the amount paid over a period of time through writing down allowances.
There is also the VAT position to consider. VAT does not have to be charged when a business is transferred as a going concern but this should be addressed by both parties to prevent a potential VAT issue at a later date.
The major advantage of this route for the buyer is that there is certainty over what is being bought. You are not responsible for anything that went on in the business prior to you taking it over. Any liabilities prior to you taking over remain with the Seller. Conversely, the selling company will potentially have to pay tax on goodwill/property gains and then again when extracting those gains from the company.
If you buy the company
You are buying the shares in the company, you are, of course buying the underlying business in the company and will effectively take over the tax base costs of the company’s assets and the tax written down value of the fixtures and fittings.
However, you are also inheriting the company’s entire trading history. So if the company has any unknown tax liabilities (corporation tax, PAYE, VAT etc.), or other claims against it, which come to light post-sale, these would need to be paid and potentially make the company worth less than you paid for it. To protect the purchaser it is usual for the Share Sale Agreement to contain a number of clauses whereby the Seller indemnifies the Purchaser for any liabilities that arose before completion and warrants that all tax liabilities are paid and up to date.
Whatever is paid for the shares becomes your base cost for the shares and there is also a 0.5% Stamp Duty cost to be paid on the purchase price.
The Seller will usually prefer to sell shares rather than the business as it potentially removes a double layer of taxation and enables Business Asset Disposal Relief (formally Entrepreneurs’ Relief) to be claimed.
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