One of the factors to consider in assessing an acquisition is taxation.
Typically, due diligence will be undertaken to assess if the tax liabilities as provided in the balance sheet are adequate, and that liabilities have been paid on time and to see whether there are any tax "skeletons" in the closet.
A due diligence review of taxation can take many forms, ranging from simple questioning of the management of the target business through to detailed testing and review of working papers / prior year returns / correspondence from HMRC. I have carried out all forms of due diligence and nearly always found issues which need further consideration. In my experience, the areas of tax which have thrown up risks are those where specialist input is required - for example VAT and customs duties.
In one potential sale, my team identified a significant customs duty underpayment on a fairly specialist point within the customs duty legislation. This type of finding can potentially be a deal breaker.
Corporate tax therefore is not the only tax on which to focus. VAT, customs duties, stamp duties, PAYE and NIC should also be risk assessed. The risk of each tax being wrong will depend upon the characteristics of the business, such as the nature of the activities carried out and whether it is an asset based, e.g. manufacturing, or a people based business.
If the business has an international presence, the overseas tax compliance position should also be reviewed. There may be a need to involve specialists with knowledge of the overseas tax system, although a very high level risk analysis can be carried out from the UK. That said, it does not follow that overseas tax law will work in the same way as it does in the UK. Having worked overseas I can say this with some certainty.
Owner managed businesses can be particularly risky from a tax perspective bearing in mind the blurring of lines between the company's funds and those of the owner. Careful attention should be paid to transactions involving the owner or member of the family and warranties sought to guard against potential claims from HMRC. In some situations, part of the purchase consideration may be set aside or put to one side to cover such eventualities.
On the whole, given the subjectivity of tax, it is important to ask for specialist help in assessing risks. In addition, it can also sometimes assist an acquirer in seeking a price reduction from the vendor, particularly where the tax issue at stake is a grey area.
Goldsmiths Corporate Finance can be contacted for help with buying and selling businesses on 01628 627 637