As we have highlighted on several occasions, HMRC enquiry and or investigation activity is increasing, there is no leniency, which is supported in recent data released by accountancy group UHY Hacker Young, showing a 23% surge in tax recovery per investigation, with small businesses and individuals now averaging of £24,700 per investigation (previous data showed the figure was £20,100). The increase is not so much Tax Evasion, but increased complexity in the UK Tax system, which continues to increase.
Outside of HMRC activity, Tax risk is now high on the agenda of buyers, when it comes to selling your business, buyers are becoming more cautious, and once again Tax risk is receiving far greater scrutiny. The last time Tax risk was high on a buyer’s agenda, was following the aggressive Tax Avoidance schemes mass marketed in the noughties, which had a long tail, but now it is more about as correct advice been taken, implemented correctly, as the tax system has become more complicated.
Tax needs to be thought about in advance:
- in preparation for the sale, to minimise risks on the sale;
- and your position as a seller post sale.
For sellers the question may not be when to exit, but how prepared are they for exit. A buyer is always seeking a business with solid growth prospects, but buyers appear more cautious about what they’re willing to accept. Tax appears to be playing a big part of this, with something that might historically have been tolerated is now much more likely to be challenged and require resolving. We have raised the point before how long and detailed the due diligence process is, and issues uncovered during diligence are more likely to lead to price reductions, delays as they are resolved or the buyer walking away. The businesses that handle due diligence best, are usually the ones that have prepared well in advance, having identified risks in advance. For many businesses, the biggest risk is not that tax issues exist, it is that they are identified too late.
Examples of situations Harbour Key have come across:
- The incorrect advice and implementation of Senior Management Incentive Arrangement using dividend income only shares, which the buyer determined was a breach of PAYE obligations, resulting in the buyer requiring a full disclosure to be made to HMRC before any sale would complete, and the sellers now having to pay additional tax on their sale proceeds, with the increase in Business Asset Disposal Relief from 14% to 18% on 6 April this year.
- A couple of businesses with international supply chains and/or trading outside the UK not seeking local Tax Advice in jurisdictions they operate from with permanent establishment, Indirect Taxes, Local Employment Taxes and Transfer Pricing. The buyers picking these issues up as part of their Due Diligence and requiring the sellers to make disclosures in the local jurisdictions, creating significant delay.
- A family business where shares had been transferred between family, and non-family, share rights changed, with nothing properly recorded, errors at Companies House register, resulting in the whole share history of the Company having to be corrected, employee shareholders being subject to Income Tax, and family shareholders missing out on Business Asset Disposal Relief.
In addition to actual Tax issues, as most businesses have built up complexity over time, their structure is complicated, the business may hold assets, for example property that the shareholders would rather keep. Reviewing the structure of the business and what is to be sold, and tidying up in advance so addressed correctly, so that changes are not rushed and dealt with incorrectly, resulting in a Tax costs.
In addition to the actual sale, sellers should think post sale, well in advance of completing the transaction. It may be the case that a seller post transaction doesn’t want all the cash personally from the sale, they might want to reinvest, enter a new venture, or consider Inheritance Tax Planning. A holding company, above the trading company enables proceeds to be retained and reused which if certain conditions are met, an immediate personal Tax charge is avoided, with Tax only arising when proceeds are extracted from the company.
As Tax has become more complicated, and the risk of HMRC intervention is higher, together with cautious buyers, Tax is now an important consideration for anyone wishing to sell their business.
