Buying and selling a business is rarely straightforward. There's a lot to think about, including current and historic tax liabilities. Now we're in a period of increased transactional activity, David Francis explains why you need to check your compliance before trying to sell.
As a seller, ensuring your employees' job security and the continuation of a reputable brand may be important. But, your primary consideration is likely realising the maximum value for the business and mitigating the tax liabilities on any future transaction.
For the buyer, it's ultimately an investment decision that requires careful consideration to mitigate the key risks and potential pitfalls. An important part of that decision making process for the buyer is understanding whether the tax affairs of the business could cause future problems. Ordinarily, they get this through the tax due diligence process undertaken by the buyer’s tax advisers.
Tax legislation is vast, complicated and frequently changing. It's for these reasons that mistakes are made. And mistakes can be made.
For example, the Coronavirus Job Retention Scheme was very different from other policies and evolved over time, increasing the likelihood of administrative errors.
There are many other areas of tax where mistakes are commonly made, these include the following:
the tax treatment and reporting of benefits provided to employees and directors
transfers of shares and implantation of share incentive arrangements
the availability of corporation tax deductions and distinguishing between capital and revenue expenditure
the rate of VAT to be charged and how much can be reclaimed.
These are just a small number of general errors, before even considering pitfalls in specific sectors (such as construction or innovation), intra-group transactions and international trading.
A tax health-check can help you understand your level of compliance.
What happens if your tax affairs aren’t in order?
If the tax due diligence identifies that the business is not or has not been tax compliant before a transaction, a range of consequences are possible.
Firstly, the value of the deal being negotiated down, ie, subject to 'price-chip'. Provision for the potential tax liabilities can also be made in the tax warranties and indemnities. A proportion of the seller’s sale proceeds being held in escrow until it's been agreed with HMRC how much is payable to rectify the tax position, thus delaying the receipt of the funds.
In these circumstances, the buyer’s advisers generally handle the disclosure to HMRC – not the seller’s advisers. As the settlement is payable out of the seller’s funds held in escrow and there's little or no financial impact on the buyer, there's less incentive to obtain the best possible financial settlement. So, it may not be as favourable as if the seller’s advisers had dealt with it.
If the buyer is particularly comfortable with the tax compliance and potential exposure (both financially and reputationally), the deal may be restructured to acquire the business's trade and assets, as opposed to the entity itself. This may result in a less favourable tax treatment on the sale proceeds.
In the worst-case scenario, it could lead to the transaction being aborted.
All of the above would result in delays, stress, and additional professional fees.
The best way forward: voluntary disclosure prior to sale negotiations
Mistakes are easily made and what’s important is coming forward and rectifying them 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 and a voluntary disclosure should be made to HMRC.
You can get a tax health check on your current and historic tax compliance from our experts. It will either assure you of your compliance, or give you the opportunity to regularise your business's tax affairs. We can be by your side in a voluntary disclosure, leveraging our experience and network of connections at HMRC to help minimise any tax and penalties you may have to pay.
If you're interested in our tax health-check service or concerned about compliance issues, get in touch with David Francis.