Business Sale Report Blog - News and views on buying and selling businesses

First there was retirement relief, then there was business asset taper relief, and now there is entrepreneurs’ relief. No doubt the next government will try something else! The latest relief has been introduced following the uproar from small business owners who felt that the proposed 18% CGT was an unfair tax levied when they sold their businesses to fund their retirement.

The new relief, available from April 6 2008 will be available in respect of gains made on the disposal of all or part of a business or on disposals of business assets.

The first £1 million of gains that qualify for relief will be charged to capital gains tax at an effective rate of 10 per cent. The £1 million is a cumulative lifetime relief and as such can be used on a single transaction or on a series of transactions. Gains in excess of £1 million will be charged at the normal 18 per cent rate. Of course, this is not so great for entrepreneurs who will buy and sell businesses through out their lifetime. So perhaps entrepreneurs’ relief is a bit of a misnomer.

As such, the new relief is a kind of resurrection of the old retirement relief, which was phased out between 1998 and 2003. The new rules, to be enacted on April 6, are simpler. There is no minimum age limit for entrepreneurs’ relief (under retirement relief you generally had to be 50 plus to get relief). And in general, entrepreneurs’ relief will be available where the relevant conditions are met for a period of one year, instead of the retirement relief qualifying period of up to ten years.

There will be no minimum age limit for the relief. In general the new relief will be available where the relevant conditions are met for a period of one year.

Where a business simply stops trading, rather than is sold, relief will be available on gains on assets formerly used in the business and disposed of within three years of the cessation of the business.

The rules are quite complex and in order to qualify for the relief there a number of conditions that need to be met. We do take a closer look at the draft legislation in our subscribers section of the report. If you are not already a subscriber then please join us and subscribe.

It should be noted that the final legislation has not been seen so there may be some small amendments. We will take a look at the legislation and if there are any relevant changes we will post them here on this blog.

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There exists a glaring omission in the new Capital Gains Tax rules - they did not address earn-outs. Thousands of entrepreneurs who sold their businesses in 2005/06 have until 31st January to sort out a CGT tax nightmare for which HMRC issued no guidelines whatsoever.

This affected those people who are receiving part of their payment for their business in shares or loan notes as an earn-out (deferred payment). They had to tell HMRC before the end of January whether they were paying the CGT immediately or deferring it until they are able to cash the shares/loan notes in. The consequences of making a wrong decision can be enormous.

Thanks to PKF (UK), who provided the following illustration of this problem:

• A qualifying business was sold in 2005/06, half for cash and half for an earn-out right in the form of loan notes redeemable in 2009.
• The owner had to pay 10% CGT on the cash part by 31 January 2007 but 18% on the other half of the proceeds received when a loan note matures after 5 April 2008.
• The owner can elect, by 31 January 2008, to treat the loan note proceeds as received in 2005/06 to get the 10% tax rate but will have to pay the tax now, long before he gets the final cash (and pay interest because the tax should have already been paid!).
• If the owner does make the election it cannot (currently) be revoked at a later date - for example, when the position on the new Entrepreneurs’ relief is known.

In a further twist, the Institute of Chartered Accountants of Scotland have claimed that the government’s latest CGT changes could have broken European law.

The EU law states that changes to tax legislation must provide a reasonable time period to claim the money. From the date of Alistair Darling’s announcement, business owners had less than ten weeks to arrange their assets or even sell their businesses to protect some of the indexation relief accruing because of inflation.

Previous tax decisions made under European law have indicated that even by having a transitional period of three months would be insufficient. Icas called for the chancellor to defer implementation of the legislation for two years to give businesses enough time to rearrange their affairs.

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Well, what a surprise. Several hours after the chancellor announced the changes to the capital gains tax regime yesterday, a few very nasty details emerged.

The first startling discovery was that ‘entrepreneurs’ relief’ is in fact a misnomer. The 10% CGT rate turned out to be a lifetime allowance, an effective kick in the teeth for all serial entrepreneurs for whom a one-off £80,000 tax concession will not make a huge difference. They are more concerned about the 80% tax hike they will have to wear for all their hard work for the end of their days.

Secondly, this new two-tier system will require a whole raft of new anti tax avoidance legislation to be drawn up - so much for the supposed objectives of creating a simple system.

Thirdly, the government is striking out one of the chief incentives for retention of key staff. Any employee with less than 5% of the company they work for is ineligible for the Entrepreneurs’ Relief. Not many can lay claim to that level of stake-holding. The vast majority of employee shareholders will therefore face a near doubling of tax rates on share gains.

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Alistair Darling today issued a major concession to the forthcoming capital gains tax changes due to come into effect on 6th April.

A new 10% Entrepreneur’s Relief is to introduced (similar to the old Retirement Relief), for business owners selling up and making gains of less than a million pounds. Under the CGT plans announced at the end of last year, the existing taper relief would have been replaced with an across-the-board flat 18%, meaning an effective 80% hike in tax rates for vendors. This will now be lowered to 10% for business sale gains of under one million pounds.

Small business owners should welcome these changes, as it certainly goes some way to reclaim the ‘entrepreneur spirit’ many outraged business pressure groups have said the government had damaged with the new proposals.

Nobody I have spoken to about this has yet manged to locate the fine print on the government website, so watch out for the devil in the details!

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Getty Images, the market-leading stock photography vendor, is up for sale. Or, at least, it admitted it has hired Goldman Sachs to explore strategic options.

The US-based company was founded in 1995 by Jonathan Klein and Mark Getty, grandson of John Paul Getty, the philanthropist.

Having grown at a cracking pace, mainly through acquisitions, Getty is now the world’s largest supplier of video and digital pictures to ad and media agencies, posting a profit of $130.4m in 2006 on a turnover of $807m. Getty Images owns the UK-based Tony Stone Images, Image Bank and the Hulton Archive.

However, in August last year the company said it was cutting its forecasts, precipitating a slide in the stock price from $50 down to $22 last week.

The cause? The internet, which has done so well for Getty over the years, has fathered a swathe of digital image suppliers who have undercut Getty’s prices and eroded its market share. Nevertheless, the company is still expecting to post higher sales in 2007 of around $850m and is believed to be holding out for a $1.5bn sale price.

Whoever buys Getty Images, and it is thought that private equity groups Bain Capital and Kohlberg Kravis Roberts are circling, will have their work cut out holding up profits in our view, and Getty will be fortunate to achieve this price.

As an occasional Getty Images customer, we pay around £430 for use of an image for use on a website. And this only covers a licence for a 2 month period! Contrast this to most of Getty’s fast-growing competitors, where you can download and use a high resolution image, on a permanent basis, for about £5. And it’s not just the price. There is an arduous, fiddly and non-standardised order process on Getty where you need to specify exactly how and when the image is to be used, the territories it will appear in and more. Other sites have a simple pricing system across all images; the only variable is the image resolution.

Getty has been buying up some of the stronger online competitors (iStockphoto, for instance) and have an absolutely huge media bank. The average quality of its images are, I would have to admit, higher than any of its competitors. But the pricing differential cannot be sustained for long, cheaper competitors are now sprouting up everywhere, and Getty can no longer rely on the assurance of juicy corporate contract renewals from large media owners.

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It’s prediction season again; one just has to glance through any financial or business publication for lists of what’s going to be hot or cold in 2008, which shares are going to explode and where to buy or not to buy your next investment property.

As far as I can see, the only sure thing is that there will be a massive shakeout of futurologists.

But on closer inspection, if we limit our assessment to the more sober UK publications, we soon realise that not many have much confidence in the present state of the British economy.

So it was no surprise to learn of the results of a survey of 55 of the country’s leading economists by the Financial Times. Around 90% thought that the nation’s finances are in a poor condition. Over 60% thought that there will be significant falls in house prices this year.
The determining factor will be the availability of credit to banks and businesses, together with the impact of economic conditions in the Americas, Asia and Europe.

Any continued downturn in the UK economy will have a immediate impact on those businesses that have a higher reliance on debt.

Already we are seeing a rise in the number of corporate insolvencies – I predict a five year peak this year, with smaller businesses and the services sector dominating the figures.

Later this month the Business Sale Report will be releasing figures for administrative receiverships for the last quarter of 2007, and early signs are that the credit squeeze has had and will continue to have a sudden and fatal effect on many medium-to-highly geared private businesses.

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It looks like the Chancellor is going to have a busy New Year with the Northern Rock crisis and problems over the business community’s opposition to the CGT reforms.

Continuing uncertainty over the scope of the Capital Gains Tax reforms have been exacerbated by the Treasury’s decision to delay any announcement until the New Year. Whilst uncertainty is never a good thing in any market, we feel that more considered reforms are a step in the right direction. It was obvious that the Treasury had not thought through the reforms properly before and if Alistair Darling needs a few more weeks to properly consult on the tax changes and so come to a better decision, then that is no bad thing.

Rumours of delays until April 2009 and more concessions to serial entrepreneurs abound. However, our view is that it is inevitable that generally higher CGT taxes on business will stick. Particularly hard-hit will be smaller companies who also face an increase in corporation tax from 19p to 22p in the pound in 2009.

Not unsurprisingly, the Tories have moved fast to place bold business tax cuts at the top of their election manifesto.

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Hi everyone. Hopefully, before too long I will be using this blog to shout about some of the many issues facing buyers and sellers of businesses. I will be covering a range of topics from business taxation through to post-merger integration.

Please do pop back from time to time, and if you like what you read, do add this blog to your rss reader.

Regards

Chris St Cartmail
Publisher

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