Are you thinking of buying or selling your business? A new tax rule comes into effect on 1 July 2021 that will have an impact on the way you negotiate.
The new rule is designed to create more certainty in purchase price allocation, which is the way the purchase price is divided up between the various types of assets.
Currently, buyers and sellers have been avoiding an agreed allocation, then often allocating different prices to the same asset in their tax returns. This tends to mean underpaid tax, so Inland Revenue (IR) has introduced new legislation to prevent mismatched allocations.
Under these new rules, the buyer and seller of a business should agree on the asset price allocation and then both follow it in their tax returns. If they can’t agree, the seller can set the allocation and notify IR (who can agree or or dispute it). If the seller misses the three month deadline to do this, then the buyer has their chance to set the allocation.
You can read more about the new rules here.
This should now be part of your negotiations
For all sales after 1 July, you should now be negotiating purchase price allocations along with everything else during the sales process. An agreed allocation will be much more straightforward if you can achieve it.
The new rules are quite complex and detailed and it is possible that they will increase compliance costs. If you’re in the process of buying or selling, or are soon to be, you may want to consider the timing. SME Financial is here to guide you through your decision-making-process.
As IR says: “It’s best to talk early with a tax professional to make sure you get the details of your sale right from the start,” so do get in touch with us immediately if you’re considering buying or selling a business.