188体育

TCGA92/S138A

In this example the conditions for an earn-out right being treated as a security by TCGA92/S138A are not met - the deferred consideration could be satisfied either in shares or in cash. The right cannot be treated as a security even though the deferred consideration is actually satisfied in shares. The possibility of the receipt of cash means that the right is not an 鈥榚arn-out right鈥� - section 138A(1)(d).

NOTE From 6 April 2008 only companies and other concerns within the charge to Corporation Tax may be able to claim indexation allowance, see CG17207.

In year 0 V Ltd acquires all the shares in T Ltd for 拢100,000.

In year 10 V Ltd sells all the shares in T Ltd at arm鈥檚 length to P Ltd.

The consideration is

• cash 500,000, and
• 80,000 shares in P Ltd at market value of 拢2.25 each (total 拢180,000), and
• the right to two payments of future consideration, the amount depending on future profits of T Ltd, to be satisfied either by the issue of shares in P Ltd, or in cash if P Ltd so decides. The market value of the right to deferred consideration at the time of disposal is agreed by Shares and Assets Valuation at 拢300,000.

The further consideration is paid in the form of shares. In year 11 shares in P Ltd to the value of 拢202,940 (73,000 shares at 拢2.78 each) are issued to V Ltd in part satisfaction of the right to deferred consideration. The market value of the remainder of the right at year 11 is agreed by Shares and Assets Valuation at 拢90,000.

In year 12 shares in P Ltd to the value of 拢118,440 (47,000 shares at 拢2.52 each) are issued in full satisfaction of the remainder of the right to deferred consideration.

P Ltd is a quoted company. But the conditions for the earn-out right to be treated as a security by section 138A are not met.

COMPUTATIONS

A) IMMEDIATE CHARGEABLE GAIN

Cash consideration plus value of right to receive deferred payments (拢500,000 + 拢300,000)

Description	Multiply	Calcualtion/Amount	Amount
Consideration	-	-	拢800,000
Less apportioned cost	-	-	-
Cost	x	Cash + 鈥榬ight鈥�	-
-	-	-鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�	-
-	-	Cash + 鈥榬ight鈥� + shares	-
拢100,000	x	拢800,000	-
-	-	-鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�	拢81,633
-	-	拢800,000 + 拢180,000	-
-	-	-	-鈥斺赌斺赌斺赌�
Unindexed gain	-	-	拢718,367
Less indexation 拢81,633 x 0.250	-	-	拢20,409
-	-	-	-鈥斺赌斺赌斺赌�
Chargeable gain year 10	-	-	拢697,958

B) COST OF SHARES IN P LTD

Calculation	Amount
Cost 拢100,000 - 拢81,633	拢18,367 at year 0
Indexed rise to year 10	-
拢18,367 x 0.250	拢4,592
-	-鈥斺赌斺赌�-
Indexed pool of expenditure	拢22,959
-	-鈥斺赌斺赌�-

This is the base cost and indexed pool of expenditure relating to the 80,000 shares in P Ltd acquired in year 10.

C) COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED

PART DISPOSALS OF RIGHT TO DEFERRED CONSIDERATION

Description	Calculation	Amount	Amount
Year 11 鈥� consideration received	-	-	-
(value of 73,000 shares in P Ltd)	-	-	拢202,940
Apportioned cost	-	-	-
拢300,000	x	拢202,940	-
-	鈥斺赌斺赌斺赌斺赌�-	-	拢207,831
-	拢202,940 + 拢90,000	-	-
Allowable loss	-	-	(4,891)

Indexation can鈥檛 create or increase an allowable loss, see CG17700.

Description	Amount
Year 12 鈥� consideration received	-
(value of 47,000 shares in P Ltd)	拢118,440
Less cost 拢300,000 - 拢207,831	拢92,169
-	-鈥斺赌斺赌斺赌�
Unindexed gain	拢26,271
Less indexation 拢92,169 x 0.051	-
(indexation year 10 to year 12)	拢4,701
-	-鈥斺赌斺赌斺赌�
Chargeable gain year 12	拢21,570
-	-鈥斺赌斺赌斺赌�

D) SHARES IN P LTD

Description	Shares	Qualifying Expenditure	Indexed pool of Expenditure
P Ltd Shareholding	No Of	Qualifying	Indexed pool of
-	Shares	Expenditure	Expenditure
As at year 10	-	-	-
(see computations at B)	80,000	拢18,367	拢22,959
Indexed rise to year 11	-	-	-
拢22,959 x 0.025	-	-	拢574
-	-	-	-鈥斺赌斺赌�-
-	-	-	拢23,533
Acquired year 11 on part disposal	-	-	-
of right (see computations at C)	73,000	拢202,940	拢202,940
-	-鈥斺赌斺赌�	-鈥斺赌斺赌斺赌�	-鈥斺赌斺赌斺赌�
Pool at year 11	153,000	拢221,307	拢226,473
Indexed rise to year 12	-	-	-
拢226,473 x 0.025	-	-	拢5,662
-	-	-	-鈥斺赌斺赌斺赌�
-	-	-	拢232,125
Acquired year 12 on final disposal	-	-	-
of right (see computations at C)	47,000	拢118,440	拢118,440
-	-鈥斺赌斺赌�-	-鈥斺赌斺赌斺赌�	-鈥斺赌斺赌斺赌�
Pool at October 1993	200,000	拢339,747	拢350,575
-	-鈥斺赌斺赌�-	-鈥斺赌斺赌斺赌�	-鈥斺赌斺赌斺赌�

EXPLANATION

The existence of a cash alternative in the sale agreement means that the right falls outside the terms of section 138A. This applies whether or not shares are actually received in satisfaction of the right.

A. IMMEDIATE CHARGEABLE GAIN

There is an immediate chargeable gain on both the cash element and the value of the right to receive unascertainable deferred consideration.

B. COST OF SHARES IN P LTD

The normal rules of TCGA92/S135 apply to the immediate issue of shares in P Ltd in exchange for shares in T Ltd.

C. COMPUTATIONS WHEN DEFERRED CONSIDERATION RECEIVED

Even though the deferred consideration is actually received in shares section 138A does not apply.

A chargeable gain or allowable loss is calculated for the part disposal of the right to receive unascertainable deferred consideration. As section 138A does not apply the `right鈥� is not treated as a notional security and there is no exchange of securities.

D. SHARES IN P LTD

All of the acquired shares go into the same pool of shares. The 80,000 shares acquired in year 10 have their base cost (and indexation) calculated in accordance with the normal rules of section 135. The shares to which section 138A did not apply go into the pool at market value at the date of acquisition.