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HMRC internal manual

Business Income Manual

Computing the amount to assess: business changes: succession and changes in ownership: demergers

If one business splits into two (demerges) then, depending on the facts, there are two possible consequences:

  1. One business is a continuation of the old business (BIM80595)

Where one of the businesses carried on after the division is so large in relation to the rest that it is recognisably ‘the business’ carried on before the division then that business will be regarded as a continuation of the old business. The other remaining business activities carried on after the division will be a new business.

  1. Neither business is a continuation of the old business (BIM80595)

If the two parts are similar in scale then neither will be the continuation of the old business. So the old business has been permanently discontinued and two new businesses have commenced (Rolls-Royce Motors Ltd v Bamford [1976] 51TC319 at page 346).

Where two businesses similar in scale have merged, and subsequently demerged, it is sometimes argued that the cessation provisions should not be applied on the demerger because in effect two separate businesses were carried on between the merger and demerger. It is immaterial that the result after the demerger resembles the state of affairs before the merger. The two businesses will almost certainly have lost their separate identity when they were merged. It is unlikely that two separate businesses will have been carried on throughout. The degree of separation will rarely be enough.