TAX PLANNING

Considering the tax implications of your exit plan should form a key part of your strategy. Remaining both compliant and efficient requires robust planning and foresight.

You’ll need to consider tax implications at every step of the way throughout your exit plan. Knowing what to expect and where an advisor can add value will stand you and your business in good stead.

DOCUMENTING YOUR TAX AFFAIRS//

Before you sell your business, it’s essential to ensure that all documentation is in order.

Your records should be clear, detailed and evidence your trading activity. Any valuations you receive should also be recorded. The earlier you do this, the easier it will be for a third party to assess risk.

Tax records which will be required ahead of your sale included:

// VAT history

// Payroll taxes

// Corporation tax

// International tax considerations

Your accountant should be able to help with this. HMRC can investigate any tax liabilities you hold, years after the initial payment. This can deter a buyer from committing to your business.

Insufficient documentation can cause major issues, especially in the due diligence process. It can create more in-depth risk reviews, delaying the sale process or bringing it to a halt.

Additionally, if any warranties are added to your contract, they could lower the value of your business and your initial purchase offer. You’ll need to scrutinise your existing documents to identify any potential gaps, obligations or issues.

Capital Gains Tax

When you come to sell or dispose of business assets, you’re likely to be faced with a Capital Gains Tax (CGT) liability if you make a gain on disposal.

CGT is charged at variable rates depending on the rate of income tax you pay. However, there are some exemptions and reliefs which may apply, such as Business Asset Disposal Relief (BADR).

You could also benefit from a tax-free CGT annual exemption on any gains that you make. This depends on whether you have already made a chargeable gain in the current tax year. These rates can vary from year to year.

You can find out more about the CGT rates and tax-free exemptions that apply to you by scanning the QR code at the end of this section.

Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (BADR), formerly known as entrepreneurs relief, offers a significant discount on CGT up to the available lifetime allowance.

Qualifying for BADR will typically make the sale of assets less tax efficient than the sale of shares. This is because any proceeds can be subject to both corporation tax and personal tax when funds are extracted from your company. This depends on the type of asset.

To be eligible for BADR you need to meet the following criteria:

If you are selling all or part of your business:

// You’re a sole trader or business partner

// You have owned the business for at least 2 years

If you are selling shares or securities:

// Your business is a going concern (has been trading for at least 2 years before the point of sale)

// You have held the shares for at least 2 years and

See the latest tax rates by clicking here

Capital Gains Tax

// You are an employee or office holder of the company

// You own at least 5 percent of the ordinary shares and voting rights

// You are entitled to at least 5 of either the profits on winding up or disposal proceeds if the company is sold

Depending on the type of shares, for example if they are from an EMI, the above rules may be different.

Business Earnout Agreements and CGT

If you’re struggling to reach an agreement over the initial price of a business buyout with a third party, a provision for future earnouts could be used.

This would involve you, as the seller, coming to a legal agreement with your buyer, allowing you to receive additional remuneration post-sale. This could be dependent on whether the business achieves certain financial goals. A percentage of gross sales can be used as a benchmark for future earnings.

However, the contract will establish the exact form of future remuneration post-sale.

Of course, with future earnings there are tax considerations:

// Consider a share-based agreement rather than cash remuneration or a salary. This is because shares are usually taxed at a maximum of 20% for non-residential property assets. Which is significantly below the upper thresholds for taxation on income.

// Ensure you specify the remuneration you want in the sale contract. This needs to include the definition of your role and the payment structure that will be the most tax efficient to you post-sale.

VAT

VAT plays a big part in the process leading up to a sale and it is important to ensure that your arrangements are structured correctly. Forward planning can significantly reduce any irrecoverable VAT costs associated with the sale, whilst ensuring you are compliant with HMRC.

This is where an early conversation with a specialist VAT advisor can add real value if you’re planning to sell your business.

What’s the transaction & VAT treatment?

Sale of shares.

The sale of shares in your business will be exempt for VAT purposes. Even though you won’t need to charge VAT on the sale, it could mean that VAT may not be recoverable on costs associated with the sale, such as legal and professional fees.

Sale of business and assets.

If you’re planning to sell individual assets, the starting position is that VAT will be due at the applicable rate. If certain conditions are met, it may also be possible to treat the sale as a Transfer of a Going Concern (TOGC). Meaning that VAT would not be due on the sale price, and the stamp duty land tax can be reduced if land and property are involved.

Sale of assets.

If you’re only selling the assets of the business, rather than the trade, you will need to consider the VAT treatment of the asset sale. This is particularly important if you are selling land and property assets.

Where land and property assets are involved, the VAT implications associated with the transfers can be complex.

You will need to ask yourself the following:

// Do you need to charge VAT?

// Is the property subject to an option to tax?

// Would any option to tax be dis-applied?

// Is the property subject to the VAT capital goods scheme (CGS)?

The VAT Capital Goods Scheme.

Have you incurred more than £250K plus VAT in costs on expenditure relation to the acquisition, alteration of renovation of the property? If so, CGS is likely to apply.

The CGS means that you have to monitor the taxable use of the property for the following 10 years. If the taxable use changes within this time period, you will have to adjust any initial VAT recovery. This can result in additional VAT recovery or VAT repayments to HMRC.

Reviewing the sale and purchase agreement (SPA).

It’s important to have a robust Sale and Purchase Agreement (SPA) in place that accurately covers the sale of your business. From a VAT perspective, this needs to appropriately cover the VAT treatment you are looking to achieve, particularly where a TOGC is involved.

Indemnities and warranties should be reviewed to appropriately protect your position. This helps to ensure that the buyer is clear on the VAT position and where responsibility and liability for any debts would lie if challenges arise from HMRC, post-completion.

Your advisors should support you in capturing the content for disclosure letters. This is where the more detailed information relating to the VAT affairs of your business are dealt with. If a buyer purchases the shares of your company, this is particularly important, as it acquires the VAT history of the business.

Your VAT recovery position.

In order to reclaim any VAT incurred on the costs associated with the sale of your business, it’s important to review your engagement letters.

As a rule, you’re only entitled to reclaim VAT if it can be directly attributed towards making taxable supplies and if you can evidence that your business received the service.

There are scenarios where you may not be entitled to full VAT recovery:

// Third party costs – If you are selling your shares and the advice you receive relates to your personal affairs. These costs are not for the benefit of the business, so the VAT in relation to ‘third party costs’ should not be reclaimed.

// Due diligence – Careful consideration is needed to review whether the services you receive provide a genuine business benefit. Where this can be demonstrated, you could achieve partial VAT recovery for the costs of the due diligence exercise.

// Engagement letters and VAT invoices – You need to be able to evidence that your business has received the services in question. It is critical that the engagement letters are addressed to your business and the invoicing narratives are clear and accurate in describing the services supplied.