5 tax considerations when buying a company

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

All this means that proper tax advice is essential to identify any tax pitfalls and opportunities arising from the acquisition.  Listed below are some issues you should consider 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. Additionally, you 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 receive tax relief immediately on the cost of some of the assets without inheriting 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

As they say, "knowledge is power". Knowing in advance whether the company you're acquiring has any tax liabilities enables you to either alter the price to be paid or seek legal indemnities from the sellers. This ensures that you don’t end up paying 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; we claimed post-acquisition and generated 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 ask yourself:

• Should you acquire the company as a new subsidiary, or obtain it and 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? How can it be optimised?

This exercise considers what the tax affairs of the merged business will look like if you just acquire it without any planning. Identify 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-focused incentives based on the performance of the merged business?

The questions above outline only a few considerations of the purchasing process. Buying a company is not a simple matter and thorough tax advice is required to avoid any pitfalls.

Shorts has lots of experience advising clients in this area and we 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.