The disposal of a business may be a once in a lifetime event for its owners and a critical point in the business’s lifecycle. A key element for achieving a successful disposal is to ensure a smooth due diligence process.

From a tax perspective, a due diligence process is wide-ranging, as tax affects so many areas of a business. Historical tax issues, such as compliance failures or lack of support for subjective positions taken in tax filings can lead to buyers lowering their offer. To protect value, businesses need to plan and prepare for any tax queries that arise during due diligence. Detailed preparations should begin at least a year before a potential exit, even for businesses that believe they are fully compliant

A well prepared seller can streamline due diligence, maintain credibility with buyers, and protect or even enhance, deal value by identifying tax risks early and ensuring tax reliefs are correctly quantified and recognised by the buyer.

Establishing the transaction perimeter for a business sale

Any reorganisation to extract non-core assets or to prepare the business for sale should be done carefully to minimise tax costs. The tax impact needs to be properly considered and documented and, where possible, businesses should obtain clearance in advance from HMRC, or other relevant tax authorities. Making effective use of statutory tax reliefs will also improve the business’s exit value.

Cross-border tax issues

International tax issues can emerge during tax due diligence, even when a business has no overseas branches or legal entities. Simply having overseas customers, suppliers, contractors or employees can lead to potential overseas tax obligations and liabilities.

Risk areas include:

Overseas customers – where goods are moved internationally, customs duties and VAT can be complex and lead to material risks. With careful planning of operating models and processes, many of these can be mitigated. Some territories are particularly complex. For example in the US, sales tax thresholds, criteria and requirements may vary by state. Significant tax liabilities, penalties and interest can arise from compliance failures, such as failing to register or submit required forms on time. If a business sells overseas, especially to US customers, we recommend local tax advice is sought.

Cross border transactions – transfer pricing policies should be up to date and documented according to local country requirements. Different countries can impose withholding tax on different types of payments, and this lack of consistency can result in withholding tax obligations being overlooked. Issues can also arise if administrative requirements are not fulfilled.

Cross-border working – employees, directors and contractors working overseas can create payroll tax, VAT and corporation tax obligations and liabilities for the business. This can be significant depending on the number of people working overseas and the nature of their work, and the territories they operate in. Certain services, such as works relating to land, events or software, are particularly likely to give rise to indirect tax obligations, depending on local rules, many of which apply with a nil threshold.

Understanding and optimising the VAT profile

Each sector has its own specific VAT rules which can cause complexities. Therefore, businesses should ensure that they understand the VAT treatment that applies to their supplies and the basis for this, as well as what evidence or processes might be required to support this. Non-core income streams in the business, or one-off significant transactions, can often be over-looked until a deal process is underway, and relatively minor revenue streams can create significant VAT liabilities.

Off-payroll workers: what businesses need to know

The off-payroll working rules, including IR35, are complicated and businesses are responsible for determining a worker’s employment status. Failure to comply can lead to penalties. New rules relating to umbrella companies may also make customers liable for the pay as you earn (PAYE) failures of the umbrella company. It is vital to conduct due diligence checks on labour supply chains.

How employee equity incentive schemes are affected by a business sale

The sale of a company can trigger specific events under employee share schemes, including:

• Acceleration of vesting/exercise of options.
• Lapse or cancellation of outstanding options.
• Cash-out or rollover of shares/options into the acquiring company.

The tax treatment depends on the type of scheme, the scheme rules, and the nature of the sale. Clear communication with employees is essential to ensure they understand the impact of any exit.

The UK ‘employment related securities’ rules are complex and represent one of the most common risk areas on due diligence for owner-managed or private equity backed companies.

Identifying and unlocking tax assets before a sale

Corporation tax assets can give rise to additional value for shareholders but securing that value from purchasers can be difficult. These tax assets include corporation tax losses, capital allowances pools, unclaimed research and development tax reliefs, corporation tax deductions on the exercise of share options, accrued unpaid interest expenses and unamortised costs of raising debt finance.

The steps a business should undertake to maximise the chances of realising value for a tax asset are as follows:

1. Identification of the type of asset.
2. Analysis of whether relevant criteria is met and the asset can be realised by the purchaser (for example, a change of control may result in a restriction in the way tax losses can be utilised).
3. Quantification of the asset and ascertaining when it will crystallise into a cash saving.
4. Documentation of the position and presenting this to a buyer.

Improving internal processes to support a smooth transaction

Collation of information for a due diligence process can be onerous, and we often work with finance teams that:

• Know they have received tax advice on particular topics but struggle to locate the advice.
• Have taken a view on a tax matter but have not documented the position.
• Have simply not stored all their tax return filings, advice received and tax authority correspondence in one place.

The transaction process can be time consuming but improving internal processes within the finance function can help make it much more efficient.

How to prepare for a successful business exit?

It is important to engage tax advisers with experience supporting transactions. For businesses that operate internationally, engaging an adviser with strong credentials in cross-border tax advice can help to ensure that UK and overseas advice is aligned.

The key tax priorities when planning for an exit should include:

• Identifying risks and valuable tax assets prior to entering into a deal process.
• Documenting tax positions to ensure a smooth due diligence process and help to protect value.

During the transaction process, well‑drafted tax warranties and indemnities are also critical, so experienced tax advisors and lawyers can be invaluable in this regard.

To avoid complications or surprises through the due diligence or wider transaction process, businesses should seek specialist tax advice as early as reasonably practicable. If you are considering an exit and want to ensure that your business is well-prepared, please get in touch with James Hunt or your usual RSM contact.

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