Corporate Insight: A tax on history...

There are two main tax questions when you sell your business.

3/1/2016 12:00:00 AM

Summary

  1. How much tax will you pay?
  2. Are there any tax problems in your business?

The first question can wait until next month but if you think that question 2 is not your problem - think again. Any well advised buyer will demand protection against having been sold a "poisoned chalice".

So what do you need to consider?

Are you selling your business or your company?

Are you selling your business (for example, the property from which you operate your business, all the stock and equipment your business owns and your customer lists) or the company that owns and runs the business?

If you are selling a business you have been running yourself, any tax liability will be yours and, apart from a few questions about stamp duties and VAT, a buyer is not likely to be interested in your tax affairs.

Selling a company is very different. A company is liable for its own tax and when you sell your company, you are selling its history.

Tax warranties

You are going to be asked to “warrant” (confirm the truth of) a large number of tax matters about your company. The warranties will cover matters ranging from whether the company has complied with all its tax obligations to how the company is treated for tax purposes.

If any of the warranties are not true, the buyer can come back to you later and say “If I had known that wasn’t true, I wouldn’t have paid so much for your company – I want a refund”. Therefore, it is important that you, or your accountant, look at these in detail and flag any matters where the warranties are not accurate. As long as you “disclose” any inaccuracies, the buyer will have to decide whether they affect the price he is prepared to pay. Once the sale has been completed, he cannot then claim against anything that has been fairly disclosed.

Tax covenant

The buyer is also going to ask for a tax covenant. In simple terms:

  1. Up to the point of sale, you are responsible for any tax – after that, it’s the buyer’s problem
  2. The buyer will have based his price on the company’s accounts.

The tax covenant is a technical legal document that ensures that, if some of “your tax” is not included in the accounts, the buyer can claim that amount from you on a pound for pound basis.

Mechanics

Once you have sold your company, it is the buyer who will control what it does. Therefore, you will need to agree the mechanics for filing tax returns for your period of ownership and agree what rights you have to make the company defend your position if HMRC come knocking at the door – the buyer has no interest in arguing about tax if it can simply claim from you under the warranties or covenant.

What should you do?

Tax lawyers can be a peculiar breed, living in a world of strange acronyms (VAT, SDLT, IHT …); however, it is worth sparing a moment or two on tax. If at first you don’t understand, ask – any good adviser should be able to translate the basic concepts from the language of tax to relatively plain English. You have worked hard to develop the business you are selling and you don’t want to return any of the money you receive when you sell it.

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