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HMRC internal manual

Business Income Manual

Businesses: mergers: example

Example - Partnership formed by the merger of two partnerships with the same essential characteristics

Two accountancy firms, Morstan & Co and Watson & Co, agree to merge on 1 January 2012 to become MW & Co.

Prior to the merger Morstan & Co made annual accounts up to 30 April each year and Watson & Co to 31 December. Both firms make up final accounts to 31 December 2011. The merged partnership adopts an accounting date of 30 April and the first accounts are prepared to 30 April 2012.

All the partners in both firms take part in the merger, and at the date of the merger they all have notional trade basis periods in alignment with the partnership accounting periods.

2010/11 tax year

In 2010/11 the partners’ notional trade basis periods are as follows:

2010/11 Partners’ notional trade basis periods
Morstan & Co 12 months to 30/4/10
Watson & Co 12 months to 31/12/10

2011/12 tax year

The merger takes place in 2011/12. Based on the facts, both partnerships are deemed to continue as a merged joint business (see BIM82415).

2011/12 Partners’ notional trade basis periods
Morstan & Co* 12 months to 30/4/11
Watson & Co 12 months to 31/12/11

*Note: strictly there is a later accounting date in the year for partners of Morstan & Co (31 December 2011). However, the temporary use of a ‘new date’ need not trigger the change of accounting date rules.

2012/13 tax year

In 2012/13 the partners’ basis periods must be aligned with the new partnership accounting date.

For the ex-partners in Morstan & Co:

The basis period for the notional trade carried on by each partner follows that for 2011/12 in the normal way. The profit for that period is a composite of their share allocated from the Morstan & Co accounts for the period 1 May 2011 to 31 December 2011 and from the MW & Co accounts for the period 1 January 2012 to 30 April 2012.

For the ex-partners of Watson & Co:

There is a change of accounting date in each partner’s notional trade (from 31 December to 30 April), with the basis period for 2012/13 being the 12 months to 30 April 2012†. There is an overlap between the basis period for 2011/12 and 2012/13. The ‘overlap profit’ is the profit of the period 1 May 2011 to 31 December 2011 and therefore is based solely on the share allocated to each partner as a member of Watson & Co.

2012/13 Partners’ basis periods Notional trade profits
Ex-Morstan & Co 12 months to 30/4/12 Share of profits of:
    Morstan & Co (1/5/11 - 31/12/11)
    MW & Co (1/1/12 - 30/4/12)
Ex-Watson & Co 12 months to 30/4/12† Share of profits of:
    Watson & Co 1/1/11 - 31/12/11 x 8/12
    MW & Co (1/1/12 - 30/4/12)

†assumes relevant conditions are met for a change of accounting date (see BIM81035 and BIM81050).