Shareholder transactions: tax issues
- Catherine Gannon
- Updated: Sat, 17th Dec 2016
Our corporate team comprises solicitors experienced in tax issues that arise on corporate transactions. Our tax capabilities can reduce overall transaction costs by reducing the need for specialists.
Our shareholder tax service includes:
Our focus is corporate transaction tax issues for shareholders, investors, private businesses, partners and partnerships. We deliver tax advice and draft or review corporate transactions. Our tax team includes access to solicitors with specialist tax qualifications.
Advantages of working with us
Some advantages of working with us:
Legal professional privilege
A tax solicitors’ advice is covered by legal professional privilege. Our advice remains confidential. Accountants lack legal privilege. So accountants have to disclose their advice to the “other side”, i.e. to HMRC.
Up to date
Tax & law expertise
Unusually for a niche firm we have members of the Chartered Institute of Taxation and Chartered Accountants. The best advice combines tax and legal knowledge. It is a rare combination. Corporate transaction implementation is smoother, with no surprises.
With us, your transaction involves paying only the tax as you have to pay. We do not advise on artificial schemes which attract HMRC’s attention and an enquiry. Our emphasis is on tax planning and interpretation of tax law and legislation. Many clients are accountants, lawyers and other professionals. We resolve the specialist areas.
We advise investors and shareholders in UK companies on how to structure investments to qualify for the various beneficial tax regimes available such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). We also advise inward investors in the UK on the tax compliance and tax reporting obligations.
Tax on corporate transactions
There are areas where we are often asked to review the corporate documentation and can add real value to the corporate transaction. These include:
Business tax for entrepreneurs
We advise on Entrepreneurs Relief and how to maximise the attractive 10% rate of capital gains tax on the sale of shares or the disposal of assets. Our clients include privately owned companies, shareholders and partners in LLPs and partnerships. Transactions include trade sales, share sales, asset sales, joint ventures, mergers and de-mergers and corporate re-structuring.
Mix of shareholders
If the transaction involves the sale of shares by different classes of shareholders special attention may be required. We deal with transactions involving the sale of shares by founders and investors and also the exercise of EMI options, unapproved options and other share rights held by employees and directors which may need to be exercised pre-completion. The corporate transaction tax issues may not be the same between shareholders – we find a way to try and keep all parties happy so that the deal proceeds to completion.
Cash retained in the business may not always qualify for capital treatment which is a corporate transaction tax issue we can consider and discuss with you on what levels of cash may be acceptable to HMRC.
Trading company status
The availability of Entrepreneurs Relief depends amongst other matters on the company having a trading company status. Often the question is difficult to determine if, for example, the business has significant retained cash or a variety of operations some of which may not be actively traded. We are able to provide guidance to you to help with the pre corporate transaction tax planning. We have obtained many successful pre-transaction clearances from HMRC.
Often structures are needed to finance a business acquisition and support the new business’s cash-flow requirements. The type of funding can give rise to different tax issues which require consideration.
Holding and investment structures
Sometimes the transaction involves a hive up or hive down of group companies for various reasons. Our advice is often needed on issues relating to hold over relief, stamp duty and various anti avoidance tax rules which may affect the transaction.
We draft and negotiate with HMRC on pre-transaction tax clearances.
Deferred or contingent consideration
Often the consideration is not paid in one lump sum. Deferred or contingent consideration often throws up issues relating to preservation of Entrepreneurs Relief – this is where we advise.
Share buy backs
A share buy back can still offer an attractive means of extracting cash built up in the business. Corporate transactions tax planning often requires consideration of whether a share buy back can qualify for capital treatment out of distributable profits. There are a variety of tax hurdles to satisfy which we can take you through. We deal with many share buy backs where the company is not paying for the full consideration on completion and approve documentation with HMRC that nevertheless preserves capital treatment.
We calculate the likely value of shares held in private companies and partnerships. Advice also includes agreement of tax liabilities with HM Revenue and Customs.
HMRC’s power of investigation, the penalties they can charge and the resources that they are committing to tax investigations have increased substantially in recent years. Our team of tax solicitors are on top of the changes in legislation and HMRC practice and will ensure that your position is structured so as to avoid HMRC glare.
Avoiding an HMRC investigation
The way transactions are approached changes with the ever changing tax regimes and policies operated by HMRC. Our job is to keep you up to-date on the possibilities available to enhance your position.
Anti-avoidance legislation HMRC have in their armoury
HMRC have an extensive range of anti-avoidance tax legislation they can draw upon to increase the tax payable under any corporate transaction. The shareholders’ will usually be keen to bring the profits into the capital gains tax regime where the rates of tax payable are lower than rates of tax charged on income. HMRC will review to find areas where capital treatment should be denied.
Opening an enquiry into the tax on corporate transaction
Depending on the circumstances, HMRC can open an enquiry into a tax return reporting a corporate transaction within 12 months of submission of the tax return. HMRC have powers to go back more than 12 months in some circumstances.
Defending yourself in front of HMRC
One of the first questions from HMRC will be to ask for the supporting paperwork. Therefore, all of the documentation which includes matters such as board minutes and reporting at Companies House are not just routine compliance matters these days. In our experience, many of the problems encountered start with inadequate paperwork.
Tax indemnities & warranties negotiation
It is routine for corporate transactions to include tax warranties, indemnities and increasingly counter-covenants. They allocate the risk of an unforeseen tax liability between the seller and the buyer. The exposure under any transaction will depend upon the level of tax indemnities and warranties.
Risk with tax indemnities
Badly drafted tax indemnities give rise to unplanned additional tax liabilities where:
- A payment under an indemnity can be construed by HMRC as a reimbursement of the purchase price from the buyer to the seller so the seller will pay additional tax on the money received;
- An indemnity for certain taxes is illegal so the buyer will not be able to enforce it against the seller;
- The buyer may lose a right to any tax overpayment or the seller may lose the right to a tax relief;
- Tax indemnities need to be tailored to company’s accounts and financial statements. Otherwise they may be too broad or too narrow for your circumstances. Specialist tax and legal knowledge is required to make tax indemnities work; and
- Without review, tax indemnities may contain mitigation provisions which limit recoverability of tax loss from the seller to the buyer.
Risk with tax warranties
Importantly, not all tax matters will be covered by an indemnity. Certain important business information will be given in a form of the tax warranties, e.g. information about the base cost of an asset or information on whether a claim for a roll over relief has been claimed in the past.
Negotiation can exclude certain liabilities under a tax indemnity but not under tax warranty. Care is therefore required with tax warranties. When advising a seller, to reduce risk, we will always consider the matters to include in the disclosure letter. A disclosure letter puts the buyer on notice and under general principles of law, claim cannot be brought on a disclosed matter as “buyer beware” applies.
- For example, when acting for a seller who has created intellectual property we will flag up the need for disclose claims to corporation tax relief made in respect of the IP which forms part of the sale.
Deliberate failure to disclose a claim against tax warranties may give rise to a claim under FSMA 2000.
Solutions for risks
Tax indemnity litigation is currently on the rise as retrospective changes in taxation become more common. We review the tax indemnities and warranties and analyse in practice.
We do work with accountants in preparing tax indemnities, warranties and disclosure letters tailored to your corporate transaction. We will negotiate the position for you with the solicitors on the other side.
Dealing with HMRC
Negotiation includes obtaining pre-transaction clearances on matters capable of clearance. We also negotiate with HMRC on post transaction checks carried out for you. Our expertise and knowledge of HMRC practice will be applied to present your arguments in the most favourable light. HMRC are often persuaded by relevant supporting case law which we will select and apply to your case for you.
Deals are often cut with HMRC to settle matters and we draw on our past experience to guide you to the right level of settlement.
Track record on solving issues relating to tax arising on corporate transactions
Our recent instructions include:
- Restructuring a private limited manufacturing company in advance of a takeover from a competitor to ensure that entrepreneurs’ relief could be claimed by the shareholders.
- Seeking HMRC advance clearance for a share buyback to entitle our client, the departing shareholder, with a preferential 10% rate of capital gains tax on capital distribution.
- Incorporating a mobile application development company and preparing ancillary documents so as to permit the company to attract investors through offering EIS investment.
- Claiming roll-over relief on behalf of an electromagnetics company disposing of long-term fixed assets to enhance liquidity.
Our clients find that by including us at the early stages of a transaction, the risks of overlooking taxation issues which can be important in terms of overall liability and cost can be managed.