Tax consideration for the purchase and sale of companies
When you are buying or selling a company there are plenty of tax opportunities and potential tax pitfalls to consider. Cathy Corns and David Hadley of Mercer & Hole’s Corporate and Business Tax team are authors of the chapters covering these subjects in Tolley’s Tax Planning 2016-17. Below they summarise just a few of the key issues it is wise to consider.
Buying a Company
The first thing to decide is what it is that is going to be purchased. It could be the purchase of the shares in the company or the purchase of the business, or just the business assets. A variation is that the existing company transfers the business to a new, clean subsidiary and that the new company is purchased.
If purchasing the business any tax losses brought forward are likely to be lost. If purchasing the company, the purchaser would also acquire the tax losses brought forward, though care is needed as there is plenty of anti-avoidance legislation to stop a purchaser benefiting from those losses.
On the purchase of shares, stamp duty will be payable at 0.5% of the consideration paid for the shares. If purchasing a property then Stamp Duty Land Tax will be payable which for a commercial property can be as high as 4%. The rate can be higher for residential properties.
If buying a company the purchaser would also acquire the inherent tax liabilities both known and unknown. It is therefore important to carry out a tax due diligence review to cover, amongst other things, corporation tax, PAYE and National Insurance and VAT. Further protection should be sought by obtaining from the sellers, comprehensive and specific tax warranties and indemnities.
In structuring the purchase, consideration needs to be given to the ownership structure going forward. If individuals purchase the company they may get Entrepreneurs’ Relief and only pay Capital Gains Tax (CGT) at 10% on the taxable profit from any subsequent sale of their shares. If a company acquires the shares, it may pay corporation tax on any chargeable gain at a rate of 20% (though the rate is going down to 17%) arising on a future sale; although the acquirer may be eligible for Substantial Shareholding Exemption (SSE) and then be able to sell the shares tax free.
Care is also needed with how the acquisition is financed to maximise tax relief on interest costs.
Selling a Company
It needs to be considered whether you are selling the company or otherwise the business and assets owned by the company. An individual selling shares will normally be subject to CGT at 20% or 10% if Entrepreneurs’ Relief is available. A company selling shares will be subject to corporation tax on its chargeable gain but no tax may be payable if SSE is available. A company selling its business will have to pay corporation tax on the profit in the transaction. Note, however, where a company sells shares in a company or its business assets, the proceeds will be held in the company and there will then be an additional tax charge to extract the profits to its shareholders if they are individuals or held in Trust.
Consideration payable on a sale of shares for cash, including any deferred consideration, will generally be taxable and be payable for an individual on the 31st January following the end of the tax year that the sale is made, even if the deferred consideration has not yet been received. In the case of a corporate vendor the tax is usually payable nine months after the end of the financial year that the sale is made, though payment dates can be different for large companies or groups.
Special care is needed with earn-outs (i.e. deferred consideration dependent on future results) payable in cash. In this case, it is not normal to bring the full deferred consideration into charge for tax on sale, but only the value of the earn-out. This will normally be based on the consideration expected, discounted for the uncertainty of hitting the targets and for the delay in receipt. If the actual earn-out received proves to be more than expected, initially taxed, a further additional taxable gain arises. The problem with this is that the additional gain may not be eligible for some reliefs such as Entrepreneurs’ Relief and SSE, even if the initial gain was. Tax planning can sometimes help. If the earn-out received is less than initially taxed this creates a loss that can be carried back to the initial gain, so tax will be based on the actual consideration that was received.
Where the vendor wishes to defer the payment of the tax, it may be possible for the consideration to be payable in shares or loan notes so the tax is not paid until the new shares are sold or the loan notes redeemed. This however, will often lead to the loss or reduction of tax reliefs for the vendor.
A further issue that often arises is under the employment-related security legislation. Under certain circumstances, a proportion of the sale proceeds received by employees or director shareholders, can be subject to PAYE and National Insurance. This is preferably dealt with by careful tax planning before the employee or director acquires his shareholding. Care is also needed with the structuring of earn-outs so that HMRC cannot attack them as “disguised salaries”.
These are just some of the tax issues to consider when buying and selling companies. We would always encourage you to seek professional tax advice as soon as possible when a purchase or sale is envisaged.
Date: 28th November, 2016
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