article banner

M&A due diligence: tax-risk governance

David Francis David Francis

With high levels of transactional activity and HMRC’s increasing focus on opening enquiries, you need to address historic tax irregularities or shortfalls in tax-risk governance procedures as soon as possible. David Francis explains the key considerations.

The commercial, legal, and tax implications of acquiring a business always require careful consideration. For you as a buyer, it's an investment decision and there are several steps involved in mitigating the key risks and potential pitfalls during the transaction. An important part of that decision making process is getting to grips with its tax affairs: understanding if it has met its historic and current tax obligations.

This is ordinarily part of tax due diligence. The more challenging question is: what happens if you do identify a historical tax irregularity or a shortfall in the business’s tax risk governance procedures?

Potential tax irregularities

Numerous common errors can result in historic tax irregularities. These are ultimately a financial cost that needs to be factored into transaction negotiations.

Errors can span various taxes to include corporation tax, VAT, customs duty, and stamp duty land tax. Errors could also be in relation to the operation of PAYE, claims made through the Coronavirus Job Retention Scheme (CJRS), shortfalls in the application of the national minimum wage and claims for creative sector tax reliefs, such as research and development, or patent box.

This is all before considering rules relating to specific industry sectors (such as construction or innovation), complex intra-group transactions, and international trading.

Tax irregularities can arise for various reasons: genuine errors, incorrect professional advice, or dishonesty. How the error arose will determine the liability, next steps in the transaction and, potentially, whether it's in your best interest to proceed with the transaction

The increasing importance of tax-risk governance

In recent years it's become increasingly important for companies to be mindful of tax-risk governance. This stems from legislation including the Senior Accounting Officer (SAO) regime, the requirement to publish a Tax Strategy Document and the Corporate Criminal Offence for tax evasion (CCO). Failure to meet the requirements set out in this legislation and mismanaging tax-risk governance has a financial cost and can cause significant reputational damage.

Although the CCO legislation is relevant to all entities, the SAO legislation and requirement to publish a Tax Strategy Document is currently only relevant to certain entities, ie, a 'large company'. However, HMRC intends to expand it to medium sized companies in the short term. Furthermore, there's rising social and political pressure for entities to implement measures governing their tax risks.

What happens if you do identify tax-compliance errors?

If the due diligence identifies that the business you're acquiring is not or has not been tax compliant, this will inevitably impact the negotiations. There are various options to continue moving forward: from negotiating the overall purchase price downwards, holding funds in escrow pending the settlement of any liabilities with HMRC agreement, or restructuring the deal. But, in the worst-case scenario, you may decide to abort the transaction. 

Historic tax irregularities can arise across various taxes and for a number of different reasons. What’s important is approaching HMRC and rectifying the position as soon as possible. It may be the case that there's still time to amend the original filing position. However, it's often the case that this window of opportunity has closed, leaving a voluntary disclosure to HMRC as the quickest way to resolve a historic error.

With HMRC increasing their activities around tax-risk governance procedures and with the likely extension of the regime to capture more entities, it's important to address any identified errors in tax before being asked for evidence that appropriate measures are in place.

For more insight and guidance, get in touch with David Francis.

Our services
Our services

Tax dispute resolution

We make it simple to stay compliant with HMRC