The Gazette 1979

GAZETTE

JULY-AUGUST

1979

connected with either firm but for emotional and some- times good business reasons it is usually desired to retain something of the existing names. (e) Taxation Implications It will be important to consider the taxation implications of a proposed merger. ( 1) Cessation: The old partnership will be treated on a cessation basis. The tax assessment for the tax year in which the old partnership ceased will be based on the actual profits earned between the 6th April in that year and the date of cessation. There may also be a revision of the tax assessments for the two previous years. If actual profits for the two tax years exceed the profits on which the assessments for those two years were based, the assessment for each of those years will be adjusted to the actual profit for the year. In a period of rising profits, this is likely to result in additional assessments for each of the two income tax years prior to that in which the partnership ceased. (2) Assessment of New Partnership: The new partner- ship will be assessed on a commencement basis. The profits for the first year will form the basis on which tax is assessed for either two or three income tax years depend- ing on the date of commencement and the date to which accounts are made up. The profit in the first year will probably be reduced due to the disruptive effect of amalgamation. It is inevitable with the loss of time spent in arranging the merger, the loss of time in changing offices and bringing in new systems, etc., that profitability over that period will be reduced. If the profits in the first year are low, this is very advantageous as these form the tax basis for assessment to tax in the first two years and in some cases for a third year also. For example: if the partnership commences on the 1st May 1978 and prepares annual accounts to the 30th April 1979, the profit for the year to the 30th April 1979 will form the basis of assessment for the tax years ending 5th April 1979 (1 l/12ths will be assessed) and the years ending 5th April 1980 and the 5th April 1981. If the partnership commenced on the 1st April 1978 and prepares accounts to the 31st March, 1979, the profits of the year to the 31st March 1979 will form the basis of assessment for the tax years ending the 5th April 1979 and the 5th April 1980. For the year ended the 5th April 1981 tax will be assessed on the profits for the year to the 31st March 1980. It can be seen therefore that the choice of dates for ending the financial year of the new partnership can materially affect the tax that will be payable. (3) Transitional Tax Arrangements: It is normally advisable to agree these in advance with the tax inspector. He is entitled to look for an assessment of work in pro- gress up to the date of cessation of partnership. In practice, provided he receives co-operation he will normally not insist on this, provided the new firm agrees to be assessed on a fees furnished basis rather than a fees received basis and provided he receives appropriate undertakings that work in progress will be brought into the accounts of the new firm. I do not propose to go into the taxation details, partly because I am not competent to do so. It is I think sufficient to draw your attention to the fact that it is extremely important to get the best taxation advice before making a decision to merge. It is not unknown for prospective mergers to be called off on account of the taxation advice.

many factors involved in a merger and indeed in general practice with your future partners where an attitude that each person's contribution or share must be measured exactly will be disastrous and a recipe for failure. There must be a sense of giving and sharing in the fullest sense if the new firm is to succeed. Ideally, the partners' shares in the new practice should be equal but this is not always possible.

EXPLORATORY TALKS Having decided that you wish to merge and having selected the other firm, exploratory talks with the partners in the other firm must then begin and assuming that they are attracted by the reasons for merger and wish to proceed a wide range of topics will need to be covered before a decision can be made to merge. Having decided that you wish to merge and having selected the other firm, exploratory talks with the partners in the other firm must then begin and assuming that they are attracted by the reasons for merger and wish to pro- ceed, a wide range of topics will need to be covered before a decision can be made to merge. (a) Type of Business It will be necessary for the prospective partners to make a fairly full and complete disclosure of their major clients and also of their accounts for a number of years past. This is of course to see whether or not the businesses are likely to be complementary and whether the levels of profitability are similar or whether they vary. This will have a crucial bearing on whether the prospective partners will agree to share equally or not. (b) Staff It would be a mistake to take the attitude that the only persons concerned in the proposed merger are the prin- cipals. The Assistants, Secretarial Staff, etc. in the two firms should also be considered. Are they likely to get on with each other. In relation to the choice of new premises it is alos necessary to consider staff and whether the loca- tion is likely to cause difficulties for staff. It may be necessary to arrange a function to enable the senior staff in each office to meet to see that they are likely to get on with each other. (c) Sharing Proportions The proportions in which the new partners will share profits and losses will have to be agreed. I have already in- dicated that in my opinion equality of shares is the ideal arrangement. This however is not always possible due to some prospective partners being very much more senior than others or having much better business connection than others. This aspect is one of the most delicate topics on which to reach agreement and is likely to be an early test bf the open mindedness or otherwise of the prospective partners! (d) Name for the Partnership This is one of the most difficult aspects of all. It is very difficult to get agreement on a name that does not involve a combination of the names of the respective firms. Ideally, I feel it is desirable to have a single name not

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