Taking over an existing business: what to watch for in tax terms

Assets and liabilities, or shares

With a sole proprietorship or partnership you can only buy the business itself: the equipment, the stock, the trade name, the client base and the goodwill. That is called an asset transaction. You then formally start your own business, register with the Chamber of Commerce and put the purchased assets on your own opening balance sheet. Debts and old claims stay with the seller, unless you expressly agree to take them over.

With a private limited company you can also buy the shares. You then buy the whole company as it stands, including everything still inside it: running contracts, staff, but also old tax debts and claims that have yet to surface. For the seller that is often attractive, for the buyer riskier. What a private limited company means for your own situation is covered in sole proprietorship or private limited company.

The VAT rule that saves you thousands

If you take over a business as a whole and continue it, for VAT purposes that is not a supply. No VAT is then charged on the takeover price, not even on the equipment and the stock. As the buyer you step into the seller's shoes: running adjustment periods on investments carry over, as if the business simply continues. That saves you not only cash but also a discussion with the tax authorities about wrongly invoiced VAT.

If you buy separate parts, for example only the machines or only the client list, that rule does not apply and VAT is simply due. So state clearly in the purchase contract whether the whole business is transferring. For more on the adjustment periods you take over, see VAT adjustment on investments.

Goodwill and depreciation

If you pay more than the value of the assets, you are paying for goodwill: the clients, the name and the fact that the business already runs. You capitalise that goodwill on your balance sheet and depreciate it at a maximum of 10 per cent a year, so over at least ten years. Other business assets are depreciated at a maximum of 20 per cent a year. The remaining rules are covered in depreciation.

So split out in the purchase contract what you pay for what: this much for the equipment, this much for the stock, this much for the goodwill. That split determines your depreciation for years ahead, and also whether you qualify for the investment deduction on the assets you take over. Goodwill does not count towards it.

What to check before the takeover

Ask for the annual figures of the last three years, plus the VAT returns and the income or corporate tax returns. Look not only at the profit but at what it is made of: how much revenue comes from one client, how much of it hangs on the seller personally, and which costs disappear or appear when you take over. How to read those figures is covered in reading a balance sheet and profit and loss account.

Also go through the contracts: the lease on the premises, subscriptions, supplier agreements and running assignments. If you take over staff, on a transfer of undertaking the employees come with their rights, so with their accrued years of service and terms of employment; that is not a choice. What that involves is covered in hiring your first employee and the payroll tax system.

Finally, arrange your own formalities: registering with the Chamber of Commerce under the right industry code, agreements on using the trade name, your own business account and your VAT number. Bear in mind that you only count as an entrepreneur for income tax once you really run the business yourself; what that means for your deductions is covered in the self-employed deduction and the hours criterion and the starter's deduction.

Frequently asked questions