The Gazette 1979

GAZETTE

JULY-AUGUST

1979

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.

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

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.

(

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.