Buying & selling a practice – Part 2
Tax from the buyer’s perspective.
For the buyer the acquisition has to be broken down into three separate & distinct areas. Firstly there is the goodwill itself, secondly there may well be some equipment associated with the premises and thirdly there may well be acquiring the freehold of the premises, or taking on a lease or a licence.
Goodwill. Believe it or not the tax treatment here depends on what trading entity you buy it as and what relationship the buying entity has to the selling entity (sorry for the jargon). A sole trader cannot get any tax relief for buying goodwill. All that happens here is that an acquisition value is established which will come into the calculation of Capital Gain Tax if the goodwill is sold on to another party at some later date. The same applies if you are buying as a partnership or joint venture.
If, however, you are buying as a company and you are buying from an unconnected party, then you can write off the goodwill over a period of time and claim the write off against tax. This is one of the reasons I often suggest people who are sole traders or partnerships set up as a company before acquiring a practice with a reasonable amount of goodwill.
For example suppose you buy a practice with £60,000 of goodwill. As a sole trader or partnership you get no relief for this until you sell it (how many years on?). As a company you could choose to write this off over 5-10 years giving you a tax deduction of £6,000 - £12,000 which means a tax saving of £1,260 - £2,520 per year for the first few years.
Just to confuse the issue, if you buy as a company from a connected party, you don’t get tax relief on the write off of goodwill. The most common form of buying from a connected party is where you are a sole trader and incorporate the business (to take advantage of the lower tax rates for companies). Here, you as the seller are very much connected to your own company so cannot get a tax write off for the goodwill. This doesn’t mean that incorporating is a bad idea but we don’t have space to go into this further in this article.
Equipment. The rules for buying equipment have changed in 2008/09 so that you can set against tax 100% of the cost of all equipment that you purchase up to a maximum of £50,000 in each year. Unfortunately motor vehicles are specifically excluded from this. Those of you who have been in business for a while will be used to claiming just 25% per year. If you buy a block of second hand equipment from another person then, as there is a change of owner, the buyer can claim the full 100% on the acquisition of ‘new’ equipment (i.e. new to the buyer even if pre-used).
Go back to the idea of changing from sole trader to company. The purchase of equipment by the company from the sole trader will qualify for the 100% tax relief so this is a way of accelerating the tax relief on equipment.
Premises. Now we enter the minefield that is property tax. I am not going to go into too much detail otherwise I’ll use up the rest of the magazine! Let’s start off with buying the freehold. If the purchase price is £250,000 or more then VAT will be chargeable. As you are trading in a VAT exempt capacity you cannot get this VAT back. Suppose you have a deal where the seller wants £252,000 for the building and £2,000 for equipment. They may have to register for VAT on the sale of the building generating an additional cost of £44,100 which you cannot recover, so the total cost has gone up from £252,000 to £296,100. But if you agree to change the prices to £249,000 for the building and £5,000 for the equipment, no VAT applies and you are back down to £252,000.
Then there could be SDLT (Stamp Duty Land Tax). This applies to the sale of commercial premises and also to the granting of leases so you could find yourself having to pay this on top of the purchase price (and the VAT if applicable). A word of warning here – some solicitors interpret the legislation in a way that says that SDLT is applicable to goodwill if purchased with a building. I disagree with this approach for the following reason.
If you buy just the goodwill from someone else there is no SDLT. If you buy the goodwill and set up around the corner to the old practice, there is no SDLT. If you buy the goodwill and the building next door to the old practice, there is no SDLT on the goodwill. Therefore, just because you are buying both the building and the goodwill at the same time, it makes no sense that SDLT should be payable on the goodwill.