Removing tax relief on ‘purchased goodwill’ and customer-related intangible assets in the summer Budget could impact how advisory firm acquisitions are structured, according to a merger market consultant.
The chancellor announced the removal of corporation tax relief for companies who write off the cost of purchased goodwill and certain customer related intangible assets, typically on the acquisition of a business.
Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business, but pays more than the fair market value of the net assets.
Legislation will withdraw tax relief for all goodwill and customer related intangible asset acquisitions that is available when structuring a business acquisition as a business and asset purchase so that goodwill can be recognised - something not generally available to companies who purchase shares of the target company.
Brian Spence, founding partner of Harrison Spence, explained that buyers will no longer benefit by buying the assets and goodwill, as they can no longer write off the purchase costs in their books.
“Will this encourage more equity purchases? Unlikely, as the reasons for most asset purchases was not for the tax benefit, but to ensure they did not take on the liability of the previous advice.”
Alan Hudson, chief executive at AFH Financial, told FTAdviser that Mr Spence is right to say that asset purchases do not give any tax advantage over a share purchase following the Budget, adding that a share purchase is still better for a vendor because of entrepreneur’s relief, which means a maximum effective tax rate of 10 per cent.
“I can only speak for ourselves, but he is wrong to suggest that the only reason we would do an asset purchase is to not buy the liabilities.
“We look at all deals on a case-by-case basis and endeavour to plot a course that is mutually beneficial to both sides.”
Mr Spence also predicted that entrepreneur’s relief may be the “next to go”.
John Morton, executive chairman of European Wealth Group, noted that the chancellor still needs to plug a big hole in the national finances, so will look at every possible opportunity.
“Entrepreneur's tax relief would chip away at the cornerstone of British business though,” he commented, noting that the firm has tended to adopt structures around wooing the seller, so all equity deals will give them significant tax relief, as opposed to asset deals.
Lee Hartley, chief executive at Fairstone, said that as their downstream buy-out model is based on a share purchase, rather than buying trade and assets, the changes to tax relief on amortisation of goodwill do not have much of an impact.
“We are focussed on buying high quality businesses with clean back-books, so have fundamentally mitigated against historic liabilities which some other operators aim to do by only offering an asset purchase.
“The additional benefit of our DBO offering is that it continues to qualify for entrepreneur’s relief, which sometimes does not apply to a sale of assets.”
peter.walker@ft.com
