Asset purchase: tax checklist

Resource type: Checklist

Status: Maintained
Jurisdictions: England, Wales
A checklist of questions and issues to consider when acting for the buyer on the acquisition of
a business or part of a business.
Practical Law Tax
Contents
Asset purchase: tax checklist
Questions about the buyer
Is the buyer a corporate or non-corporate entity?
Is the buyer connected to the seller?
Is the buyer entitled to roll-over relief?
Financing the transaction
How is the buyer financing the transaction?
Debt financing: identify the borrowing vehicle
Debt financing: check that the borrower will be able to obtain a full tax deduction for the
expenses of borrowing
Debt financing: check that there will be no withholding tax issues
Equity financing: check that the buyer can recover the VAT costs on the share issue
Is any of the consideration attributable to restrictive covenants?
Will any of the consideration be deferred?
Apportioning the consideration
Will any of the assets be used as trading stock, re-sold or give rise to tax deductions or a VAT
liability?
What value has been attributed to the goodwill of the business?
What assumptions have been made in valuing the goodwill?
VAT: Is the transfer a transfer of a business as a going concern (TOGC)?
Is there a transfer of the whole (or a part) of the business "as a going concern"?
Will the buyer be carrying on the same kind of business after the transfer?
Will there be a significant break in trading?
Is the buyer registered for VAT?
Is the buyer a member of a partly exempt VAT group?
Have there been or will there by any immediately consecutive transfers of the business?
If any property is being acquired, is the property subject to an option to tax or is it new or
uncompleted?
If any property is being acquired, is or will any tenant be in the same VAT group as the seller
or buyer
Practical tips
VAT: Capital goods scheme
Are any of the assets to be acquired within the capital goods scheme?
VAT: Debtors and creditors
Is the buyer taking over debtors and creditors?
VAT: Records
Is the buyer taking over the seller's VAT registration?
Acquisition of property
Is the buyer acquiring any fixtures or integral features?
Practical tip
Confirm the amount of SDLT payable on the transaction
Acquisition of plant and machinery
Ascertain which assets qualify for plant and machinery allowances and determine their asset
pool
VAT on expenses incurred as part of the asset purchase
Are the assets to be used in making taxable supplies?
Documentation
Is the apportionment of consideration clause appropriate?
Is the VAT clause in the asset purchase agreement appropriate?
Are the tax warranties in the asset agreement appropriate?
Has the option to tax been exercised and notified to HMRC?
Has the seller been notified that the option to tax has not been disapplied?
Has a capital allowances fixtures election been drafted?
Asset purchase: tax checklist
A checklist of questions and issues to consider when acting for the buyer on the acquisition of
a business or part of a business.
The checklist assumes that a decision has been made to acquire the assets of the business
rather than the shares of the target company. However, there may be tax advantages for the
buyer in acquiring shares rather than the assets (for example, if target has significant trading
losses). For further detail, see Practice note, Share purchase or asset purchase: tax issues.

Questions about the buyer
For an article written by in-house tax counsel, which explains the importance of
understanding the client, see Article, In-house perspective: what clients are really looking for
from their external tax counsel.
Is the buyer a corporate or non-corporate entity?
This will affect the tax treatment. If the buyer is a corporate entity within the charge to UK
corporation tax, for example, it should be entitled to tax relief for expenditure on certain
intangible fixed assets (for example, goodwill and intellectual property) broadly in line with
the way these assets are dealt with in the accounts. For further detail, see Practice note,
Intangible property: tax.
Is the buyer connected to the seller?
A connection between the buyer and seller may affect the tax consequences of the
transaction. For example, market values may replace the actual consideration given for
certain assets for tax purposes; arm's length terms may be imposed or specific anti-avoidance
rules brought into play. Connection between the parties may also give rise to a greater need
for documentation.
Is the buyer entitled to roll-over relief?
If the buyer has made chargeable gains on the disposal of assets, the acquisition of new
qualifying assets (for example, property) may enable the buyer to defer the payment of tax on
the chargeable gains. For further detail, see Practice note, Direct taxes: Deferring liability to
tax on chargeable gains. The corporation tax regime also contains roll-over provisions for
corporate entities buying and selling intangible property. For further detail, see Practice note,
Intangible property: tax: Roll-over relief in the case of realisation and reinvestment.

Financing the transaction
How is the buyer financing the transaction?
This may be by cash, debt or equity (or a mixture of the three).
Debt financing: identify the borrowing vehicle
If the borrowing vehicle is not the buyer, check that the interest expense (surplus non-trading
deficits) can be fully utilised by the buyer otherwise they may be lost. (For further detail, see
Practice note, Asset purchases: tax aspects of financing the acquisition: Identity of
borrowing vehicle).
Debt financing: check that the borrower will be able to obtain a full tax
deduction for the expenses of borrowing
The tax deductibility of interest may be:
Deferred until paid where there is a connection between buyer and lender, the lender
is resident in a non-qualifying territory (broadly, a tax haven) and the interest not paid
within 12 months. (For further detail, see Practice note, Loan relationships: Late paid
interest.)
Restricted if the loan is not on arm's length terms.
Denied if made for an unallowable purpose (and the borrower is a UK corporate
entity).
For further detail, see Practice note, Asset purchases, tax aspects of financing the acquisition:
Debt.
A tax deduction may be refused for guarantee payments if the guarantee is not necessary to
bring about the loan.
Debt financing: check that there will be no withholding tax issues
For further detail, see Practice note, Asset purchases: tax aspects of financing the
acquisition: Withholding tax
Equity financing: check that the buyer can recover the VAT costs on the share
issue
If shares or other securities are issued to raise finance for an asset purchase, the VAT
incurred on that issue should be treated as general overheads for VAT purposes and should be
recoverable as such. For further detail, see Practice note, Asset Purchases, tax aspects of
financing the acquisition: Equity.
Is any of the consideration attributable to restrictive covenants?
Where an owner-managed business is to be acquired, it is generally desirable to seek
restrictive covenants. Payments for restrictive covenants may be immediately tax deductible
as a trading expense (section 69, Corporation Tax Act 2009) provided that they are made to
individuals who are subject to income tax on the consideration received under section 225 of
the Income Tax (Earnings and Pensions) Act 2003.
Will any of the consideration be deferred?
It is possible to apply to defer payment of stamp duty land tax (SDLT) on property
acquisitions where the consideration is contingent or uncertain and falls to be paid on a future
date that falls more than six months after the effective date of the transaction. For further
detail, see Practice note, Asset purchases: tax aspects of deferred consideration: SDLT.

Apportioning the consideration
Will any of the assets be used as trading stock, re-sold or give rise to tax
deductions or a VAT liability?
The buyer will want to obtain maximum tax relief on the assets acquired. To the extent that it
is just and reasonable (and assuming the buyer and seller are not connected), maximise
allocation of consideration to the following assets because:
Trading stock should give rise to an immediate tax deduction as an expense.
(However, note that the cost of stock is taken to be the open market value, see Chapter
10 of Part 3 of the Corporation Tax Act 2009.)
Assets on which plant and machinery capital allowances are available will give rise to
an immediate 100% tax deduction to the extent the assets fall within the 25,000
annual investment allowance (AIA) (see section 11 of the Finance Act 2011), which
rose to 250,000 from 1 January 2013 and to 500,000 from 1 April 2014 (for
corporation tax purposes) or 6 April 2014 (for income tax purposes) to 1 January 2016
(see Practice note, Tax rates and limits: Capital allowances: Plant and machinery,
section 7 of, and Schedule 1 to, the Finance Act 2013 and section 10 of, and Schedule
2 to, the Finance Bill 2014).
In excess of the AIA, assets are written down at the rate of 18% per year unless they
are long life assets, or integral features (in which case the rate of allowance is 8% per
year) (see section 10 of the Finance Act 2011).
In the 2011 Budget, the government also announced that legislation would extend
from four years to eight years the period over which expenditure on plant or
machinery can be treated as short life assets (SLA). The measure has effect for
expenditure incurred from 1 April 2011 for corporation tax or from 6 April 2011 for
income tax. (See Legal update, 2011 Budget: key business tax announcements:
Capital allowances: short life assets and section 12 of the Finance Act 2011.)
On 31 May 2011, HMRC launched a consultation (announced in the 2011 Budget)
proposing that businesses notify HMRC of expenditure on fixtures in a building
within a short period (one or two years) of incurring the expenditure to be able to
claim capital allowances on that expenditure and the buyer and seller of a second hand
building including fixtures be required to agree the amount of the sale price
attributable to the fixtures and notify this to HMRC within a similar time scale. Draft
legislation for the Finance Bill 2012 was published on 6 December 2011.
Section 43 of, and Schedule 10 to, the Finance Act 2012 contain amended provisions.
The fixed value requirement has been slightly relaxed and will now be met if the
buyer obtains written statements made by the "purchaser from the past owner" that the
fixed value requirement has not been met and is no longer capable of being met and
by the past owner of the amount of the disposal value that the past owner brought into
account. The changes are effective from 1 April 2012 (for corporation tax) and 6
April 2012 (for income tax), subject to transitional rules. For more detail, see Practice
note, Capital allowances on property transactions.
A new tax regime applies to business expenditure on cars from 1 April 2009 (for
corporation tax purposes) and 6 April 2009 (for income tax purposes), see Legal
update, 2009 Budget: key tax announcements: Reforms to tax relief for business
expenditure on cars and section 30 of, and Schedule 11 to, the Finance Act 2009.
Intangible fixed assets acquired by a corporate buyer will give rise to a tax deduction
on an accounting or fixed rate basis. (New rules clarifying the tax treatment of
intangible assets were introduced in the Finance Act 2009 (see Legal update, 2009
Budget: key tax announcements: Corporate intangible fixed asset regime:
clarification of treatment of goodwill and section 71 of the Finance Act 2009).)
Assets acquired with a higher chargeable gains base cost will give rise to a lower
chargeable gain on sale.
In addition, the allocation of consideration may be important if some of the assets transferred
carry a VAT liability and others do not (but see VAT: Is the transfer a transfer of a business
as a going concern (TOGC)? regarding VAT treatment of business transfers).
For further detail, see Practice note, Asset purchases: tax issues for buyer and seller, Buyer's
preferences.
What value has been attributed to the goodwill of the business?
HMRC considers that the disposal of a business must involve the transfer of goodwill. The
CGT, SDLT and capital allowance rules require the apportionment of the purchase price
attributable to goodwill be done on a "just and reasonable" basis. Part 8 of the Corporation
Tax Act 2009 provides for a corporate buyer to obtain a tax deduction for the cost of
purchased goodwill.
What assumptions have been made in valuing the goodwill?
HMRC has published guidance on valuing goodwill. The guidance focuses on the sale of
trade related properties, such as public houses, hotels, petrol stations, cinemas, restaurants
and care homes and deals, in particular, with the valuation assumptions and valuation
approach when valuing the tangible assets to arrive at the value of goodwill, see HMRC,
Apportioning the Price Paid for a Business Transferred as a Going Concern. The guidance
was initially published on 29 January 2009 but was amended and republished on 30
September 2013 (see, Legal update, Apportionment to goodwill on trade related properties:
updated guidance).
The initial guidance was criticised by the Royal Institute of Chartered Surveyors (RICS) and
was discussed between HMRC, the Chartered Institute of Taxation (CIOT) and RICS (see
Legal updates, RICS object to HMRC's guidance on goodwill on sale of trade related
properties and HMRC, CIOT and RICS discuss valuing goodwill on trade-related properties.
On 10 August 2011, HMRC and the Valuation Office Agency published an article entitled
Goodwill and trade related properties in Tax Adviser magazine. In the article, HMRC
summarised its views on the issue of apportioning the value of trade-related properties
between the goodwill element and the property itself. HMRC stated that it continued to
debate the question with the CIOT and other stakeholders while continuing to progress
individual cases in accordance with the principles outlined in the article. However, HMRC
confirmed that some cases may proceed to litigation (see Legal update, HMRC publishes
further views on goodwill on trade-related properties.)

VAT: Is the transfer a transfer of a business as a going
concern (TOGC)?
A sale of assets is subject to VAT unless a particular asset is exempt (for example, certain
types of land and buildings) or the seller is not (and does not become as a result of the
transfer) a taxable person. However, no VAT is chargeable on the supply by a person of
assets of the business where that business is transferred as a going concern (TOGC).
The TOGC conditions are summarised below. For a full explanation, see Practice note, VAT
and property: transferring a business as a going concern. See also:
Standard document, asset purchase agreement, VAT clause.
Drafting note, asset purchase agreement, VAT clause.
Is there a transfer of the whole (or a part) of the business "as a going
concern"?
Check that after the transfer the buyer is in possession of a business and not simply a
collection of assets.
If only part of the business is transferred, check that that part is capable of separate operation.
Will the buyer be carrying on the same kind of business after the transfer?
Taxpayers have argued that following the decision of the European Court of J ustice (ECJ )
in Zita Modes Sarl (C-497/01) (in which the ECJ held that, for TOGC treatment to apply, the
business being transferred must be capable of being carried on as an independent economic
activity and the buyer must intend to continue to operate the business and not simply to
immediately liquidate the activity concerned and sell the stock), the "same kind of business"
condition in the UK legislation is unduly restrictive. However, HMRC has indicated (and two
VAT Tribunal decisions support this view) that, in its view, the UK legislation is in line with
Zita Modes.
Check the buyer's intentions following the transfer. Particularly if, as is common, the buyer
agrees to use its "reasonable endeavours" to ensure that TOGC treatment applies. This may
impose an obligation on the buyer to use the assets for the same kind of business as that
carried on by the seller.
Will there be a significant break in trading?
TOGC treatment will be denied if there is a significant break in trading either before or after
the transfer.
Is the buyer registered for VAT?
If the seller is a taxable person, the buyer must either be registered at the time of the transfer
or be required to be registered. The seller will often insist on the buyer providing a warranty
that it is VAT registered and may delay completion if the buyer is unable to provide that
warranty on completion (see Legal update, Seller entitled to delay completion because buyer
not registered for VAT).
Is the buyer a member of a partly exempt VAT group?
If it is, assets acquired on a TOGC which were owned by the seller for less than three years
will give rise to a self-supply.
Have there been or will there by any immediately consecutive transfers of the
business?
If yes, HMRC will deny TOGC treatment.
If any property is being acquired, is the property subject to an option to tax or
is it new or uncompleted?
If yes, the transferee must, before the date of the transfer:
Exercise the option to tax in relation to the land or buildings in question.
Notify HMRC of that option.
Notify the seller that the option has not been disapplied.
For PLC Tax's standard VAT clause for use when a property letting business is transferred as
a going concern, see Standard document, Contract for the sale of leasehold land subject to
lease: 11. VAT.
If any property is being acquired, is or will any tenant be in the same VAT
group as the seller or buyer
This may affect TOGC treatment.
Practical tips
Leave plenty of time to deal with the VAT registration. It is not unusual for HMRC to take
over three weeks to deal with low risk applications.
If the transfer is a TOGC, ensure the VAT clause reflects that fact and that appropriate
warranty protection is contained in the asset purchase agreement.
If the transfer is not a TOGC, consider the following:
o if the buyer is unable to reclaim the VAT and is in a strong negotiating
position, make the purchase price inclusive of VAT;
o if the buyer is able to reclaim the VAT, time the acquisition to minimise
cashflow issues;
o ensure the asset purchase agreement provides for the seller to repay the VAT
in the event that HMRC determines that the transfer was a TOGC.
If there is doubt about the TOGC treatment, consider the following
o assume there is a TOGC but seek a ruling from HMRC (the VAT clause will
need to record that in the event that HMRC disagrees and determines that
TOGC treatment does not apply, the seller can charge VAT);
o if the seller is in a strong negotiating position, rather than paying the "VAT" to
the seller and having to recover it in the event the transfer is a TOGC, the
buyer may prefer putting an amount equal to the VAT in escrow; and
o consider avoiding SDLT penalties and interest by calculating SDLT on the
consideration inclusive of VAT. If it transpires that the transfer was a TOGC
reclaim the overpaid SDLT (and, if appropriate, interest).

VAT: Capital goods scheme
Are any of the assets to be acquired within the capital goods scheme?
If yes, the buyer will take over the seller's capital goods schemeadjustment position. For
further detail, see Practice note, VAT and property: the capital goods scheme.
In addition, if the assets acquired include property, the buyer will need to notify the seller that
the option to tax has not been disapplied.

VAT: Debtors and creditors
Is the buyer taking over debtors and creditors?
A provision dealing with apportionment of VAT may be needed to reflect that the seller
claims the input tax and pays the output tax on supplies made to or by the seller. The ability
to claim bad debt relief may also remain with the seller.

VAT: Records
Is the buyer taking over the seller's VAT registration?
This would be highly unusual. If the buyer is not taking over the seller's VAT registration, the
seller will be required to keep its VAT records for six years and make them available to the
buyer.

Acquisition of property
Is the buyer acquiring any fixtures or integral features?
If yes, ascertain what fixtures are being acquired and what integral features are being
acquired. The distinction is important because the former gives rise to plant and machinery
capital allowances at the rate of 18% whereas the latter at the rate of 8%. For further detail,
see Practice note, Capital allowances on property transactions: Capital allowances on
property transactions.
The amount on which the buyer can claim capital allowances on fixtures is capped by
reference to the seller's (assuming the seller is not exempt from tax) disposal value unless the
buyer and seller enter into a section 198 CAA 2001 election. From April 2012, the buyer and
seller must agree (if possible) on the value apportioned to fixtures (which must not exceed the
original cost). Generally, this will take the form of a section 198 election. The seller must
pool the assets before the sale and the value apportioned to the fixtures must be agreed in
writing within a certain period but, if the parties cannot agree on the value, either party may
apply to the First-tier Tribunal within that period for a ruling. See Will any of the assets be
used as trading stock, re-sold or give rise to tax deductions or a VAT liability? for further
detail.
Practical tip
Request details of the seller's disposal values of the fixtures and seek warranty
protection.
If appropriate, enter into a capital allowances fixtures election, see:
o Standard document, Capital allowances fixtures election: asset purchase
agreement.
o Drafting note, Capital allowances fixtures election: asset purchase agreement.
Confirm the amount of SDLT payable on the transaction
For further details, see Practice note, Stamp duty land tax.

Acquisition of plant and machinery
Ascertain which assets qualify for plant and machinery allowances and
determine their asset pool
Assets on which plant and machinery capital allowances are available will give rise to an
immediate tax deduction to the extent the assets fall within the 25,000 AIA (which has been
increased to 500,000 until 1 January 2016). In excess of the AIA, assets are written down at
the rate of 18% per year unless they fall within a special rate pool (for example, long life
assets, integral features, thermal insulation), which qualify for capital allowances at the rate
of 8%. Legislation implementing the reduction in rates is in the Finance Act 2011.
The Finance Act 2011 also contains legislation extending from four years to eight years the
period over which expenditure on plant or machinery can be treated as SLAs with effect for
expenditure incurred from 1 April 2011 for corporation tax or from 6 April 2011 for income
tax.
From April 2012, the buyer and seller must agree (if possible) on the value apportioned to
fixtures (which must not exceed the original cost). Generally, this takes the form of a section
198 election. The seller must pool the assets before the sale and the value apportioned to the
fixtures must be agreed in writing within a certain period from the transaction but, if the
parties cannot agree on the value, either party may apply to the First-tier Tribunal within that
period for a ruling. See Will any of the assets be used as trading stock, re-sold or give rise to
tax deductions or a VAT liability? for further detail.

VAT on expenses incurred as part of the asset purchase
Are the assets to be used in making taxable supplies?
If yes, VAT incurred on the cost of acquiring those assets will be recoverable in full. If the
assets are to be used exclusively to make exempt supplies, none of the VAT will be
recoverable. If the assets are to be used in making both taxable and exempt supplies, VAT
will be recoverable in accordance with the buyer's VAT partial exemption method.

Documentation
Is the apportionment of consideration clause appropriate?
Check the apportionment schedule in the asset purchase agreement (see, for example,
Practical Law's apportionment schedule in the asset purchase agreement.)
Is the VAT clause in the asset purchase agreement appropriate?
For Practical Law Tax's standard clauses, see
Standard document, asset purchase agreement, VAT clause.
Drafting note, asset purchase agreement, VAT clause.
Standard document, Contract for the sale of leasehold land subject to lease: 11. VAT.
Are the tax warranties in the asset agreement appropriate?
For Practical Law Tax's standard tax warranties, see
Standard document, Asset purchase agreement: Schedule 13, Part 7 (Tax warranties).
Drafting notes, Asset purchase agreement, Schedule 13, Part 7 (Tax warranties).
Has the option to tax been exercised and notified to HMRC?
For HMRC's notification form, see HMRC, option to tax.
Has the seller been notified that the option to tax has not been disapplied?
For Practical Law Tax's standard wording, see clause 11.4(b) in Standard document, Contract
for the sale of leasehold land subject to lease.
Has a capital allowances fixtures election been drafted?
For Practical Law Tax's standard election, see
Standard document, Capital allowances fixtures election: asset purchase agreement.
Drafting note, Capital allowances fixtures election: asset purchase agreement.