If one business splits into two (demerges) then, depending on
the facts, there are 2 possible consequences:
1. One business is a continuation of the old
business (
BIM70595)
Where one of the businesses carried on after the division is
so large in relation to the rest that it is recognisably ‘the
business’ carried on before the division then that business
will be regarded as a continuation of the old business. The other
remaining business activities carried on after the division will be
a new business.
2. Neither business is a continuation of the old
business (BIM70595)
If the two parts are similar in scale then neither will be
the continuation of the old business. So the old business has been
permanently discontinued and two new businesses have commenced
(Rolls-Royce Motors Ltd v Bamford [1976] 51TC319 at page 346).
Where two businesses similar in scale have merged, and
subsequently demerged, it is sometimes argued that the cessation
provisions should not be applied on the demerger because in effect
two separate businesses were carried on between the merger and
demerger. It is immaterial that the result after the demerger
resembles the state of affairs before the merger. The two
businesses will almost certainly have lost their separate identity
when they were merged. It is unlikely that two separate businesses
will have been carried on throughout. The degree of separation will
rarely be enough.
