Tax has often been treated as a hygiene factor by private equity portfolio companies, a box to tick and rarely a growth lever.
However, that mindset needs to change in a challenging exit environment in which assets are under increased scrutiny.
Half of the 500 funds surveyed in our 2026 Private Equity Pulse Report said buyers have become more cautious, and we are seeing this playing out in the transactions on which we advise.
When deals were plentiful (think pre and immediately post-COVID), tax risk was sometimes overlooked. Now, highly selective buyers are placing it under the microscope.
They are hunting not only for exposure to risk but also for upsides, tax best practice that protects and even creates value.
Below, we discuss when businesses should start to get tax exit ready, and the strategy they can put in place to drive growth.
The consequences of due diligence uncovering tax risk are real. Buyers are pushing for tax risks to go against value or walking away from the process entirely (and we have seen this happen). Identify the same issue 18 months earlier, however, and there is time to remediate it, get a ruling, restructure around it, or at the very least, present it in the most favourable light possible.
We will even go one step further than that, proposing that tax exit readiness should begin on the day you invest. Step one is to ensure that every action recommended in the tax due diligence and structuring reports at acquisition is completed as part of the 100-day plan. It sounds obvious, but one of the first things a sell-side diligence provider will check is whether the buy-side recommendations from the original deal were ever actioned. If the answer is ‘no’, that raises a red flag for the quality of tax governance across the whole business.
From there, exit readiness should be woven into the regular compliance cycle. Corporation tax returns, VAT, payroll… these processes happen anyway. It does not take a great deal more effort to run them with an eye on risk, reviewing potential exposures quarterly or at least annually, and keeping the fund informed of anything material.
Ultimately, tax governance in a PE-backed business sits at the intersection of fund oversight and CFO responsibility. The CFO owns the execution, but the fund sets the tone and the expectations.
The most effective model is where the fund ensures its portfolio businesses have access to advisers who understand the PE context, including debt structures, exit timelines, and investor reporting requirements. They can be tasked with delivering ongoing compliance with a permanent eye on exit readiness. This repositions tax from an annual hygiene factor to becoming a genuine strategic asset.
For a fund, gaining meaningful oversight of tax compliance and risk across a large portfolio is inherently difficult. The data is spread across multiple businesses, multiple advisers, and multiple jurisdictions.
Technology is beginning to address this, with dashboard tools that can aggregate compliance status and highlight gaps, for example, identifying which portfolio businesses are claiming R&D relief and flagging those that should be but are not.
This is an area that will develop quickly (and indeed we are currently developing such tools for our clients). Funds that invest in better tax data infrastructure now will be better placed to manage risk and demonstrate governance at exit.
As well as source of risk, tax can be an active value driver throughout the entire holding period. For portfolio companies and the funds that back them, the opportunity is significant and, in many cases, underexploited.
For example, we often see one or more of the following, seemingly “obvious”, tax areas overlooked.
Poorly managed corporation tax payments can drain portfolio company value. This is not about overpaying but paying at the wrong time. In a highly leveraged business with active debt servicing obligations, this can amount to the same thing.
For example, CFOs can be caught off-guard when tax obligations change suddenly as the result of coming under private equity ownership. The business may suddenly find itself under the very large companies quarterly instalment payment regime which drastically changes the tax payment profile of the business.
The complexity compounds quickly for international businesses. Each jurisdiction carries its own payment and reporting calendar, instalment rules, and exposure to global minimum tax obligations. Integrating cash tax forecasting properly into the broader treasury function, alongside debt serviceability modelling and refinancing plans, is a fundamental part of running a PE-backed business well.
Relief optimisation is an area where we often see value slip through the cracks. Available reliefs are well-known: group relief, capital allowances, R&D tax credits etc.
However, in practice, they can go unclaimed or underutilised. This is often down to lack of ownership. The CFO of a newly acquired company might be focused on board reporting and investor data, while the remit of their tax advisors might be restricted to compliance reporting.
The good news is that a fix is not complicated. It requires someone, at portfolio or fund level to own and be accountable for relief optimisation. This can, of course, be in the form of an external adviser with a clear mandate to ‘own’ this area.
For a fund managing a large portfolio, a straightforward governance framework that tracks which businesses are claiming which reliefs, and flags anomalies, can surface material opportunities for value creation that would otherwise be missed.
For many portfolio companies, becoming PE-backed means carrying a significantly more complex debt structure. Most finance teams will be across the corporate interest rate restriction that can cap the amount of interest expense a UK business can deduct against its taxable profits and will have considered transfer pricing on any intragroup debt. But there is a further layer that is often overlooked: anti-hybrid rules.
Anti-hybrid legislation is designed to counteract mismatches that arise where a financing instrument or entity is treated differently for tax purposes in different jurisdictions and is often driven by the structure of the PE fund itself. In the context of PE-backed debt structures, this can mean that interest payments a business has been deducting perfectly legitimately under more traditional rules are, in fact, restricted under the anti-hybrid provisions and the business may have been overclaiming relief as a result. Over a four or five-year holding period, that overclaim can accumulate into a material liability.
Getting the right specialist advice on debt structuring from the outset, not just on the headline interest restriction, but on all the layers beneath it is one of the more high-value interventions a fund can make at the point of acquisition.
None of the insights above are individually revolutionary. But approached together, with proper ownership and a clear strategy, it compounds into something meaningful. A business that manages its cash tax efficiently, claims every relief it is entitled to, and has clean, well-documented positions on its debt structure is not just better prepared for exit; it is better run. It has more cash available for reinvestment, more financial flexibility, and a stronger platform for growth throughout the holding period.
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