BIM80675 - Computing the amount to assess: business changes: succession and changes in ownership: expansion by acquiring a business as a going concern
Businesses frequently expand by acquiring other existing businesses. Where a trader acquires another business as a going concern, depending on the facts, there are four possible situations:
1. The new owner succeeds to the trade carried on by the previous owner (BIM80645)
For this to happen:
- the new owner has to have taken over the whole of the predecessor’s trade (or a part of it which is a separate trade in its own right), and
- they must be carrying it on in an identifiable form.
Factors which would be relevant to establishing succession are:
- whether any goodwill was transferred as part of the purchase,
- whether stock was transferred,
- whether the trade continues to stock the same lines and sell to the same sort of customers, and
- whether its name stays the same.
But no one factor will necessarily be conclusive.
If there has been a change in the persons carrying on the trade then the commencement provisions will apply to the profits from the new business. If the new owner draws up a single set of accounts for their old and new businesses, the profits will have to be apportioned to enable this to be done. Unless the new business is a separate trade from their old one (BIM80530) there will be no need for any apportionment once the normal continuing basis period rules apply.
2. The new owner begins a new trade in addition to their existing trade (BIM80530)
Factors which would affect whether there were two trades after the acquisition are:
- the amount of central co-ordination and control, and
- whether staff, stock and customers are common to the two businesses.
If the new business is a separate trade then the commencement provisions (BIM81015) will apply. The businesses will continue to be charged to tax separately unless, as a matter of fact, they are merged to form a single trade. If that happens, the question again will be whether the combined business is a new one or not (BIM80590).
3. The new owner begins a single, completely new trade (BIM80595)
In this situation the acquisition of activities is on such a scale, or brings about such a change to the nature of the old business, that it means that the old business comes to an end. The combination of the two businesses represents an entirely new trade in its own right.
The commencement provisions will apply to all of the profits from the new business and the cessation provisions (BIM81025) to the old business.
4. The new owner simply expands their existing business
If none of the three previous situations apply then the acquisition of the business has no effect on the new owner’s basis of assessment. The new owner is simply carrying on the same trade as before, but on a larger scale (Maidment v Kibby [1993] 66TC137 is an example of this).