Date13 Aug 2021
CategoryTax, Corporate Tax, VAT & Indirect Tax
When a business acquires a new entity or is sold to a new investor, there is often a significant amount of costs incurred. These costs include legal advice, due diligence and tax structuring.
Often no corporation tax relief is claimed for these costs, due to being treated as capital in nature, or capitalised on the balance sheet. Furthermore, there is often an element of the costs that are treated as being irrecoverable for VAT purposes.
This expenditure incurred by a business also extends to aborted acquisition costs, with the potential to claim up to 100% of the aborted costs as deductible for corporation tax purposes.
What are the benefits?
By undertaking an analysis of costs incurred from a corporation tax perspective, the company could expect the corporation tax deductibility of these costs to be in the region of 30-70% depending on the fact pattern of the transaction. However, in absence of this additional work, it is likely that no deduction would be achieved.
As an example, a 50% tax deductibility on costs of £250,000 would result in a cash tax benefit of £23,750 at a corporation tax rate of 19%.
Whilst this opportunity will be primarily looking at current and future accounting periods, there is also an opportunity to consider the prior year to the extent the tax return re-submission window is still open (i.e. two years after the end of the accounting period).
Furthermore, to the extent that costs have been included in a company that would not be able to support a deduction, but if included within another they would, there may be possibility to recharge these costs in the subsequent year accounts to still achieve a tax deduction. Where possible, having input on the accounting entries for these costs is ideal, as depending on the structure of the transaction it will vary where the costs should be included in order to achieve the optimal tax deduction.
How can Azets help?
At Azets, we can help your business understand whether the expenditure incurred qualifies for corporation tax relief.
We are also able to provide assistance with determining the optimal VAT recovery of these costs, and ensuring invoices are raised to the appropriate company to support this position.
Get in touch
If you have any queries regarding the areas discussed throughout this insight or would like to arrange a call with a member of the team, please get in touch with your local Azets contact or please contact Matt Randle, Senior Tax Manager, directly using firstname.lastname@example.org.