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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Business successions: example of an acquisition

Sole trader Mrs C sells her business to an unconnected company, Company W, for £400,000 on 23 June 2012. She sells all of the assets and liabilities of the business except cash in hand and the bank account. Her balance sheet on 31 May 2012 showed:

Liabilities     Assets  
Employees’ bonuses £60,000   Cash in hand £146
Creditors £313,689   Debtors £239,000
Bank £107,000   Stock & work in progress £84,392
Capital account £92,849   Car pool £52,000
      Plant & machinery £198,000

Company W considers that the fair values are:

Employees’ bonuses £60,000, as it has taken over their contracts
Creditors £313,689 as it has taken over the liability to pay suppliers
Onerous rental £50,000, as it intends to move the business to its own premises as part of a reorganisation and has had to take over the existing lease
Debtors £200,000 as some may be doubtful
Stock £160,000 fair value
Car pool £40,000 fair value
Plant & machinery £200,000

The accounts of Company W show the goodwill as £223,689 but the accounting is questionable.

They have accounted as:

Purchase consideration paid     £400,000
Assets acquired      
Debtors £200,000    
Stock £160,000    
Cars £40,000    
P&M £200,000 £600,000  
Bonuses £60,000    
Onerous contract £50,000    
Creditors £313,689 £423,689  
Fair value of net assets     £176,311
Positive goodwill     £223,689

Employees bonuses

Company W is not due any deduction for the employees’ bonuses which are included in the provision when it meets the liability. The monetary value of that provision was part of the capital consideration for the business. In addition we can assume that Mrs C has already had a deduction for this sum in computing her accounts for the year ended 31 May 2012, although S36 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) (see BIM47130) may be in point here.

The accountancy treatment for Company W when it pays the bonuses would be to debit the profit and loss account with the expenditure and credit the profit and loss account with the amount of the provision. This accounting method will produce the right result for tax purposes so no tax computation adjustment will be necessary.



Company W is showing the same amount as the earlier balance sheet. No adjustment is needed in any tax computation.


Onerous rental contract

This provision should not have been made as part of the ‘fair value at acquisition’ calculation. At the date of purchase the lease wasn’t onerous. If Mrs C had continued in business she would have continued to use the premises. The lease became onerous as a result of Company W’s decision to reorganise after the acquisition. The calculation looks only at assets and liabilities that existed at the date of acquisition.

The amount of the liability of £50,000 should be removed from the calculation, increasing the value of goodwill to £273,689.

The correct treatment, assuming that Company W did have leased premises which were surplus to its requirements and which it could not sublet to cover its costs would be to consider whether a provision should be made under section 21 of FRS102 (or equivalent standards, FRS12 and IAS37). If a provision could be correctly calculated in accordance with GAAP the debit to the profit and loss account would be allowable. When provisions are made in a continuing business for allowable revenue expenditure, and are debited to the profit and loss account then they are allowable deductions, BIM46500 onwards.

In this case a tax computation adjustment would be necessary to allow the deduction for the provision because the accounts were not computed correctly in accordance with GAAP. The amended value for goodwill should also be agreed.



Mrs C’s balance sheet is showing stock at her estimate of the lower of cost or market value whereas Company W is showing the fair value of the stock, which it has valued at current market value, as it is both a buyer and seller of that type of stock. S176 ITTOIA 2005 applies to Mrs C and S169 Corporation Tax Act 2009 applies to Company W. As the business sale agreement did not identify a specified amount for stock then both the vendor and the purchaser should use the fair value amount. Mrs C’s cessation accounts should show proceeds of £160,000 for stock.



No immediate tax computation adjustment is needed for Company W. It has acquired the debtors as part of the capital transaction which was the purchase of a business.


Car pool and plant and machinery

Capital allowances are due on the apportioned acquisition cost.



The sale of goodwill by Mrs C is currently within the capital gains regime, see CG68000 onwards. In the hands of Company W the goodwill is dealt with under the Corporation Tax intangible assets regime, see CIRD10000 onwards.