BIM72410 - Partnerships: Mergers and Demergers: Statement of Practice

The Income Tax treatment for partnership mergers and demergers was the subject of a Press Release and Statement of Practice (SP9/86) dated 10 December 1986. The text is given below.

The Statement of Practice is written in terms of the taxation provisions as they applied prior to theintroduction of the new current year basis of assessment. For ease of reference these provisions are preceded with the suffix ‘old’ in the text below.

The statutory provisions then involved were old ICTA88/S61, (new business set up and commenced), old ICTA88/S63, (permanent discontinuance of a business) and old ICTA88/S113, (changes in the persons carrying on a business). But the general principles set out in the Statement of Practice apply equally where there is a merger/demerger after the introduction of the new current year basis of assessment.

You should however note that

• The right for a business, which otherwise continues, to be treated as having ceased and recommenced on a partial change of ownership is no longer available.
• Old ICTA88/S113 (1) only applied where the business continued after a change of ownership. It required the profits to be computed as if the business had ceased and recommenced. Where as a question of fact there was an actual cessation of the business then the provisions of Section 113 did not apply. In such circumstances the provisions of old ICTA88/S63 would have applied.
• The Statement of Practice SP9/86 refers specifically to mergers of partnerships but its principles apply equally to the merger of sole trades into partnerships, such mergers being governed by exactly the same statutory provisions.
• Old ICTA88/S61 (4), as amended by FA88/SCH13/PARA2 applied only to cases where a partnership existed both before and after the change in the persons carrying on the business.

Where two businesses, which are different in nature, are merged, it may be that the business which results is a new business, different in nature from either of the previous businesses (for example, George Humphries & Co v Cook [1934] 19TC121. Where this is the case, the old businesses will have been permanently discontinued, and a new business will have been set up and commenced. Where, however, two businesses of a similar type in different ownership are merged and carried on thereafter by the joint owners in partnership, then provided that the activities of both businesses recognisably continue, even in merged form, the alternatives open to the taxpayers are

1. old ICTA88/S113 (1), applies to both businesses so that the cessation and commencement provisions are deemed to apply to both.
2. an election under old ICTA88/S113 (2), is made in respect of one business, and the cessation and commencement provisions are deemed to apply to the other.
3. elections are made in respect of both businesses.

Where b above applies, it will be necessary to apportion the profits of the combined business to apply the commencement provisions to the business in respect of which no election is made.

DEMERGERS

Where partners, who have been carrying on a business jointly, dissolve the partnership, divide the customers and assets and thereafter carry on separate businesses, there is no equivalent of the double continuation election as above where businesses are merged. Old ICTA88/S113 (1) and (2), apply only if the trade, profession or vocation continues. If it is so fragmented as to cease to exist, it has been permanently discontinued and old ICTA88/S63 applies. Old ICTA88/S61 will apply to any new trade, profession or vocation.

If one of the trades, professions or vocations carried on after the changes can be seen to be the original business, even if it has lost a part of its assets or customers, old ICTA88/S113 (1) and ICTA88/S113 (2), may apply to it.

If it is contended that the merger of two or more businesses of the same nature results in a new business, so that the provisions of old ICTA88/S61 (4), do not apply, the case should be submitted to Business Tax (Technical).