8 crucial tax considerations you will need to be thinking of in a corporate acquisition

It is easy to lose sight of tax considerations in the middle of a corporate acquisition, but you can minimise surprises with forward thinking and a good idea of what the key issues might be.  Read below to understand the 8 points to keep in mind. Just click on any of the expandable sections for a short summary, or click here to view the 2 page, print friendly version >

1. Tax pitfalls with earn-outs

 

Earn-outs can be a good way to bridge price expectation gaps, especially if founders are selling, but can cause material tax charges if treated as employment income. Red flags include only employees benefitting from the earn-out and dependency of the earn-out on personal performance.

 

 

2. Avoid paying upfront for tax losses

 

 

Many targets will have tax losses that could in theory be valuable in future, and sellers may want to monetise those immediately.  However, there are many restrictions on the use of tax losses after a sale and buyers should avoid paying for losses upfront or assuming these will be available when pricing.

 

 

3. Tax and W&I insurance – know what you're paying for

 

W&I insurance can be helpful, but policies typically limit tax coverage. Most insurers exclude some tax risks entirely, e.g. transfer pricing, as well as excluding known risks. This means insurance provides less cover than a typical tax covenant. Extra cover may be available, but at higher cost.

 

 

4. Debt restructuring pre-sale

 

 

Pre-sale restructuring of distressed targets is common, but it is critical to look at the detail to ensure no tax charges arise. Even on a relatively simple debt for equity swap there are numerous hurdles to a tax-neutral result – tax charges can leak considerable value.

 

5. Know your risk appetite

 

 

 

Lots of targets won't necessarily be "clean" in tax terms. If an acquisition is competitive it is important to know in advance your appetite for tax risk, what cover you will realistically get from sellers/insurers, who needs to approve taking on a risk and how fast your internal processes can move.

 

 

6. Equity incentives – beware setting hurdles too low

 

 

Depressed equity valuations offer an opportunity to set up incentive plans without triggering tax charges, but take care not to set performance hurdles too low. Low hurdles combined with a swift recovery could lead to equity vesting unexpectedly rapidly – and call into question the original tax valuations.

 

 

7. Cherry-picking assets

 

 

Buyers might only want part of a business. When splitting up a corporate group it is important to bear in mind the tax de-grouping charges that can arise, the tax treatment of any reorganisation that is needed pre-sale, and secondary liability exposure to unpaid taxes of entities not acquired.

 

 

8.Don't forget tax liabilities may have been deferred

 

As part of its Covid-19 response the government allowed businesses to defer tax liabilities, under general schemes and bespoke "time-to-pay" arrangements. If your target has deferred a tax bill clearly it is important to know exactly what has been deferred, when it is due and how the cost will be funded.

 

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To find out what else we're seeing in the current environment and what steps you should be taking to maximise your chance of success, get in touch:

Paul Concannon

Paul Concannon

Partner, Tax & Structuring
United Kingdom

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