BIM72430 - Partnerships: Mergers: Examples

Example 1

Sole trader merging 2 businesses with the same essential characteristics

James Smith runs a take-away food business ‘Quick’. On 1/1/2010 he acquires a similar business, ‘Speedy’, as a going concern. The circumstances are such that ICTA88/S113 (1) applies to ‘Speedy’.

Accounts are prepared as follows

In 2009/10 you assess the original owner of ‘Speedy’ using the normal cessation basis of assessment rules (ICTA88/S63 as applied by ICTA88/S113 (1)) and deducting any relief for any overlap profit (ICTA88/S63A).

You assess James Smith using the mixed basis period approach. You assess the profits from that part of the business derived from Quick on a normal continuation basis. But you assess that part of the merged business derived from ‘Speedy’ on a commencement basis (ICTA88/S61 as applied by ICTA88/S113 (1)).

In 2010/11 the two components are brought into line as the basis periods (although given by ICTA88/S60 (3)(b) and ICTA88/S60 (3)(a) respectively) are the same for both

From 2011/12 onwards you no longer have to identify separate components. Instead you assess the business by reference to a single basis period.

Example 2

Partnership formed by the merger of two partnerships with the same essential characteristics

Two accountancy firms, Morstan & Co and Watson & Co, agree to merge on 1/1/2011. The circumstances are such that ICTA88/S113 (2) applies to both businesses.

Prior to the merger Morstan & Co made annual accounts up to 30 April each year and Watson & Co to 31 December. Both firms make up final accounts to 31/12/2010. The merged partnership adopts an accounting date of 30 April and the first accounts are prepared to 30/4/2011.

All the partners in both Morstan & Co and Watson & Co take part in the merger, and at the date of the merger they all have basis periods in alignment with the partnership accounting periods.

In 2009/10 the partners' basis periods are as follows

The merger takes place in 2010/11. You apply ICTA88/S113 (2) to both businesses and therefore a continuation basis applies for all the partners.

*Note: strictly there is a later accounting date in the year (31/12/10). But the temporary use of a ‘new date’ need not trigger the change of accounting date rules.

In 2011/12 the partners’ basis periods must be aligned with the new partnership accounting date.

For each partner from Morstan & Co the basis period for 2011/12 simply follows that for 2010/11 in the normal way. But the profit assessed will be a composite of the share allocated in the period 1/5/10 to 31/12/10 (Morstan & Co) and in the period 1/1/11 to 30/4/11 (Morstan, Watson and Co).

For each partner from Watson & Co there is a change of accounting date in their deemed profession (from 31/12/10 to 30/4/11) and an overlap between the basis period for 2010/11 and 2011/12. The ‘overlap profit’ is the profit of the period 1/5/10 to 31/12/10 and therefore is based solely on the share allocated to that partner as a member of Watson & Co

*assumes relevant conditions are met