The sale of a business is a significant milestone for any business owner, but it is not as simple as exchanging contracts and handing over the reins. With increasing tax rates and the decrease in available tax reliefs, business owners considering a sale of their company should be mindful of the tax issues that can arise and how they can structure the disposal of their business in a way that achieves their objectives in the most tax efficient manner, ideally with the process beginning many months - or even years - in advance.
The role of vendor tax due diligence
A vendor tax due diligence (“TDD”) exercise may be of particular interest to business owners and is becoming an increasingly popular option for proactive business owners intending to sell their business either imminently or further down the line.
A TDD will typically involve a review of the company’s business operations (from a tax perspective), tax filings together with the accounts and any other supporting information. This review is carried out to check that the business is compliant with HMRC in relation to all relevant taxes and that all necessary filings have been made.
The TDD process can also identify potential tax risks, which can then be addressed or mitigated in advance of sale and can lead to a smoother sales process with business owners having increased confidence over their business’ tax position before going to market; thus, putting them in a better position for negotiations.
By carrying out the TDD process, sellers can gain an increased confidence in the business and gain a deeper understanding of the finer points which may lead to enhanced tax savings, improved financial planning and increased investment in growth, hence ensuring that every penny spent is towards maximising the value of the business.
Planning ahead—even without a sale in sight
Even without the expectation of a sale in the short term, a periodic review of a company’s tax position and structure (from a tax perspective) can be of good practice. Such a review can help give focus to ensuring tax compliance is up to date and prepared for future tax changes and confirm that the business structure is fit for purpose to meet an owner’s objectives and/or growth plans.
Tailoring the structure to your goals
The structure and planning in relation to the business owner’s objectives will vary largely depending on individual circumstances, however consideration should be given to whether there is a requirement or desire to reinvest sales proceeds, the format of these proceeds, whether the entire shareholding is sold or a majority/minority shareholding, if an asset transfer would be more suitable than a share sale, if there is any element of the business that the owner wants to retain or perhaps any assets the owner wants to extract from the business prior to the sale.
Any pre-sale considerations such as those noted above may be largely impacted by tax considerations and could lead to shareholding reorganisations or corporate restructuring. These in turn may require planning and a sale could be delayed as a result or brought forward to take advantage of disposal reliefs. However, understanding a business owner’s objectives is the first step in determining what should be done and this usually means that a ‘one size fits all’ approach is not advisable.
Engage advisers early for best results
Regardless of how and when the sale is structured, it is imperative that business owners start this thought process and discuss with their tax advisers, accountants and legal advisers at an early stage to ensure that, not only are their objectives achieved, but they are achieved in the most tax-efficient manner.
Speak to our tax team to ensure your business is structured for a smooth and tax-efficient sale.
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