Richard Coombs, Tax Partner at Bates Weston looks at why separating businesses or assets through a demerger is worth the cost of professional tax advice.
Demerger is not a DIY project
Over the years we have written a number of articles about demergers and why they can be so useful to separate businesses or assets from businesses in a tax efficient manner. However, they can be technically complex and for that reason come at a cost. The cost is invariably a small fraction of the tax cost of not doing a demerger, but still a cost nonetheless.
Nowadays, there is such an abundance of information online that the temptation to “try it yourself” is high. I am certainly guilty of trying various home DIY projects that previously, I would never have dared turn my hand to having watched various YouTube instructional videos. It is human nature to try to cut costs where one can and it is completely understandable why a client or their accountant may think that they could “have a go” at a demerger themselves to try to keep cut costs down. But I would liken DIY demergers to DIY dentistry – it may be cheaper but I really wouldn’t recommend it.
Demerger – the need for professional tax advice
This was brought into sharp focus last month by a demerger we were asked to review by a client. The client was looking to acquire a company which owned another business they did not want to buy as part of the deal. We had previously quoted the vendor company to demerge it all out properly but they decided that they would use their own local accountant to do it, presumably on cost grounds. Nothing wrong with that as we are local accountants ourselves to those in our area and there are many very good accountants out there.
The problem is that the term “demerger” technically covers any situation where an asset is moved from one company to another. That is easy to do but not without a tax charge. When we refer to a demerger it is one done in such a way that it qualifies for various tax reliefs and has received advance HMRC clearance and therefore, more often than not, can be done free of all taxes. But this requires careful planning and invariably quite a few steps. Unfortunately, in this case the accountant who advised the vendor did not understand the rules fully and simply transferred the subsidiary business to a new company owned by the vendor.
He has unwittingly created taxable income of over £600k on the vendor personally – something which we suspect he will soon find out, as HMRC are likely to open an enquiry as the accountant also sent what he referred to as a “clearance” to HMRC , telling them exactly the steps that had been implemented. For the uninitiated, statutory clearances are only possible for a very select number of specific transactions, and this was not one of them. The “clearance” was no more than a letter to HMRC telling them what had occurred and effectively saying “hope this ok?” We obviously hope for the vendor’s sake HMRC do not pick it up, but I do not hold out much hope.
There is a saying in our business, “there is nothing as expensive as cheap tax advice”, and this is a perfect case in point. By all means, use the internet to learn how to change a tap or service a lawnmower, but please use a dentist for your teeth and a tax expert for your demergers!
If you are considering a demerger to separate your businesses or assets and would like to speak to our tax team, please do get in touch with Richard Coombs or Craig Simpson.
As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.
Additional Information:
the Dos and Don’ts of Demergers