It’s safe to say that there is never a dull moment in the world of tax, but transaction tax is on another level. Every deal is different and every transaction presents its own tax issues, complexities and risks – that’s why we love it (someone has to!).
For Claritas, 2021 has been a busy year of advising on transactions. We have advised on 30 buy and sell side transactions with a combined value of £577m and implemented 19 corporate reorganisations. We completed 4 deals in the last week before Christmas and bagged an award for the Insider Midlands Deal of the Year.
Irrespective of Covid and the way it has impacted our lives (and continues to do so) it has not abated the appetite for deal activity. If anything, 2021 has been one of the busiest years we have experienced which demonstrates how resilient and adaptable the business word is despite the very challenging conditions.
So, on New Year’s Eve when the clock strikes 11:59:50pm and the final countdown to midnight begins, we thought it was only right to celebrate the successes of 2021 but also to think about the key transaction tax issues faced for those considering the prospect of selling or buying a business in 2022.
10 – Importance of Good Tax Advice and Implementation
Good tax advice (and advice in general) will always pay off. This doesn’t just apply to the transaction itself but also prior to the transaction. We have seen it time and time again where businesses have received poor advice or cut corners and paid the price on the sale with material amounts of consideration that would otherwise be paid to the vendors being held in escrow at completion, or worse, paid over to HMRC.
The key when it comes to the transaction itself is that it is implemented in the intended way and that there are no unexpected tax liabilities that arise for any parties involved.
9 – Get Your House in Order
When considering a transaction, it is vital to have all of your tax matters and records up to date as far as possible. It may even be worth considering a vendor due diligence process to flag and resolve any issues before going to market. This would then make the transaction process smoother, less uncertain and provide some confidence to the buyer.
8 – Tax Due Diligence Process
Whether you’re a buyer or a seller, the tax due diligence process is key to the transaction process. Effectively it’s a health check on the company and its tax history, considering all taxes but notably corporation tax, VAT and employment tax issues.
No-one likes to find a skeleton in the closet at a point where it can have a dramatic impact on the transaction. The due diligence process ensures all parties are fully aware of the tax risks and any associated liabilities that are to be inherited which ensures there are no “nasty” surprises. Appropriate action can be taken prior to completion to rectify any errors discovered which can be in the favour of the seller or buyer.
7 – Employment Related Securities Traps
The Employment Related Securities (ERS) legislation is every tax adviser’s nightmare. Where shares are acquired by reason of an employment or office, the shares are considered as ERS. This includes former, prospective or current employments and the net is drawn so wide that most shares are considered as ERS, even ‘founder shares’, being those held by a company’s director(s) on its incorporation. ERS issues are considered on every deal, and we’re finding that many material mistakes have been made.
Where shares are ERS, there are reporting obligations, s431 election requirements and potentially tax exposure for the employing company and employee or director. The tax exposure can arise in multiple different scenarios including if value is received which is not paid for, in restructures where value flows between shareholders, on an exit when restrictions are lifted or where the sale consideration received is more than market value. This is just the tip of the iceberg.
The charges often amount to more than a sting in the tail especially when the shares are considered as readily convertible assets on a sale and the value charged to tax is subject to PAYE and NIC (not just income tax). The tax then becomes a liability of the target and will need to be factored into the completion accounts.
6 –Manage Your Tax Position on a Transaction in Advance
There is little good which can be done about a tax charge once the horse has bolted so to speak. Therefore, it is worth being fully aware of the tax charges at stake, prior to the transaction process, and to consider whether there is anything that can be done to structure the transaction differently and more tax efficiently. This applies to every element of the transaction from advising on deal fees, to maximise corporation tax relief and VAT recovery, to claiming Capital Gains Tax reliefs for shareholders and taking advantage of elections available to do so.
With enough time and forethought, it is often the case that a transaction can be structured to both meet the client’s commercial objectives and do so in a tax efficient manner. Therefore, proactive tax structuring advice is key.
5 – Pre-sale Restructures
There is often a pre-sale restructure or reorganisation that can be implemented to accompany the transaction, whether this is at shareholder level or within the corporate structure itself. Often this may involve separating out property, businesses or assets that are to be retained post-deal, transferring shares to family members or into trust or hiving businesses up and down within a group structure.
From a tax perspective this can be an expensive process without sound tax advice as most of these transactions are between connected parties where the default is that the transaction is treated to occur at market value, before any relieving provisions are considered. It is usually possible to achieve pre-sale restructuring without a charge to tax but timing and tax advice is key.
4 – Consider Inheritance Tax (IHT) and Long-Term Plans in Advance
On a transaction the focus is always on completion, but we always keep an eye on the post-completion position too. Once shares are sold and they are replaced with cash proceeds this creates an inheritance tax issue. A sale process converts an asset which often attracts IHT relief such as Business Property Relief (BPR) into an asset which is now exposed to IHT at 40%.
We often consider tax strategies to mitigate IHT risks associated with sale. These can be in the form of using trusts and/or a Family Investment Company.
It is too short-sighted to focus on the immediate goal and we always look beyond this to the future to make sure every angle is covered.
3 – Incentivisation of Management
Transactions always mark a period of transition and are often the time where companies decide to incentivise, retain and reward key people in the business ahead of the next phase. Where the company already has an existing share incentivisation scheme in place, these will often vest and come to fruition.
There are tax efficient share schemes that are often used such as Enterprise Management Incentive (EMI) schemes or growth share structures. These fall squarely within the aforementioned ERS rules and it is important that the design and implementation of schemes are done correctly. If not, the tax costs can be painful in future and the intended tax benefits and incentivisation are lost.
2 – Timing is Everything
Whether it is taking advantage of current tax rates before the inevitable tax hikes in future or making sure that the net asset adjustment takes into account tax reliefs of the latest year end, there is always a pertinent time to consider a transaction from a tax perspective.
Starting the conversations early is always beneficial because building in 30 days (minimum, and preferably 60 days if possible in case of queries) for HMRC clearance where it needs to be sought, or the additional time to implement a pre-sale restructure can see transactions spanning months and certainly a lot longer than expected. There is no need to rush and risk errors, and it’s never too early to plan. While some pre-sale tax efficient structuring is often possible, there are almost always more options for achieving a tax-efficient exit if it is considered well in advance of any formal sales process.
1 – Post-transaction Actions
In the flurry of the completion celebrations, it is always easy to forget the follow-up actions that every deal requires and on-going tax considerations. Whether it is ensuring s431 elections are signed so that a shareholding’s future growth is taxed as capital rather than income, completing your personal tax returns to report the gains made, or dealing with all of the issues identified in the tax due diligence. We will always look at what comes next and won’t just say goodbye at the finish line. We also ensure that you are fully aware of the ongoing tax considerations post-transaction.
So let’s raise a glass to the success of 2021 and to what 2022 will bring; a year we all strive to be bigger and better than ever before irrespective of Covid and whatever else is around the corner.
The world of tax is constantly changing, so keep up to date on all our news, views and opinions
6 December 2023
To find out more about what we do, please get in touch.