5 Tax Considerations When Buying a Company

Buying a company means that you are buying the tax history of that company too. The downside to this is that you might be acquiring some historical tax problems, but the upside is that you may also be acquiring new sources of tax reliefs. It is sometimes not just a case of bolting the new business on to your existing company – the acquisition might change the tax affairs of your existing business.

All this means that proper tax advice is usually required to identify any tax pitfalls and opportunities arising from the acquisition. Listed below are some issues to be considered when acquiring a company.

1. Should we buy the company or just the trade and assets of the business?

If you buy the company, you inherit any historical tax issues too and don’t tend to get tax relief on the price you pay unless you sell the company in future. If you buy the trade and assets, you can get tax relief immediately on the cost of some of the assets and don’t inherit any liabilities. Acquiring the company might allow you to inherit losses though which you may be able to use in future.

2. Due diligence – identify any historical tax problems

If the company to be acquired has skeletons in the closet in terms of tax liabilities that would arise if HMRC ever investigated the company’s affairs, then it is better to know this in advance of acquiring the company. This allows you to either alter the price to be paid or seek legal indemnities from the sellers to ensure that you don’t end up picking up the bill for past mistakes.

3. Has the company claimed all available tax reliefs?

If the company has failed to claim certain tax reliefs in the past, you might be able to go back two years and claim these post acquisition. I once helped a client acquire a company that had not claimed R&D tax reliefs which we claimed post acquisition generating an unexpected £70,000 tax repayment. Other reliefs which might be overlooked include capital allowances, land remediation relief and patent box. These may also be available to claim on future activities.

4. How do we integrate the new company into our existing structure?

Having multiple companies can result in tax payments being accelerated and produce additional compliance work. You should therefore ask yourself:

Should you acquire the company as a new subsidiary or acquire it then merge it with existing companies?
Should you also form a new group holding company to make the acquired and existing companies all subsidiaries to create a proper group structure? If funding has been obtained to acquire the company, what tax relief will be available on this funding and how can it be optimised?

This exercise is basically considering what the tax affairs of the merged business will look like if you just acquire it without any planning, see whether there are any issues arising and then plan accordingly to achieve a better result.

5. Rewarding employees of the acquired company

Do the reward packages of employees of the acquired business need to be aligned with employees of the existing business? Is it appropriate to offer share and other incentives to existing and new staff to retain them if they are perhaps unsettled by the acquisition? Would the senior management of the combined businesses benefit from re-focussed incentives based on the performance of the merged business?

This is by no means of comprehensive list of issues to be considered but hopefully the above illustrates that buying a company is not a simple matter and that thorough tax advice is required.

We have lots of experience advising clients in this area and work closely with our in-house Corporate Finance Team to ensure company acquisitions are completed in the most appropriate and tax efficient manner. If you wish to discuss this with us, please get in touch with a member of our team.