Buying or selling a business involves multiple steps, particularly when it comes to share sales. For purchasers, conducting a Tax Due Diligence is a crucial part of the process to assess potential risks associated with the target company's tax history. Without a proper review, unforeseen liabilities such as underpaid Corporation Tax, VAT, or Payroll Taxes could emerge after the transaction, leading to unexpected financial exposure.

A Tax Due Diligence helps identify and mitigate these risks, ensuring that you have a clear understanding of the company’s tax compliance history before proceeding with the acquisition.

Below, we provide an overview of how this process works.

How is a Tax Due Diligence Conducted?

Scope of the Review
The scope of a tax review should be tailored to each transaction, considering factors like company size, industry, and number of employees. Typically, a minimum two-year review is conducted, covering key tax areas such as Corporation Tax, VAT, and Payroll Taxes. In some cases, other tax aspects like Relevant Contracts Taxes and Stamp Duty may also be relevant.

Timeline of the Review
A well-structured due diligence process benefits both the Purchaser and Seller by keeping transaction costs in check and minimising disruptions. To ensure efficiency, both parties should agree on:

• The date for initial query lists to be provided by the Purchaser
• The designated contact for queries on the Seller’s side
• Deadlines for the Seller’s responses to tax-related inquiries
• The format for follow-up queries and information requests
• Agreed timelines for calls or meetings to discuss outstanding issues

While Sellers may see Tax Due Diligence as a burden, proactive engagement helps streamline the process and minimises its impact on day-to-day operations.

What Does a Tax Due Diligence Report Include?
Upon completion, the Tax Due Diligence report provides:

• A summary of tax areas reviewed and compliance findings
• An assessment of whether the documentation provided sufficiently supports tax compliance
• Identification of any tax risks or unresolved compliance issues
• A risk evaluation (low/high) and potential financial exposure, including penalties and interest

This report is critical for:

• Negotiating the transaction price based on identified risks
• Determining if a Seller should make a voluntary disclosure before the sale
• Structuring the tax warranties and indemnities in the transaction agreement
• Deciding for a Purchaser whether to proceed with a share sale or seek an alternative structure, such as an asset sale or to instead have the trade transferred to a new company prior to any purchase.

Preparing for a Future Sale? A Pre-Sale Tax Review is Key

If you or your clients are considering selling a business, conducting a tax due diligence review in advance can help avoid last-minute surprises. This proactive approach:

• Identifies and resolves tax compliance issues ahead of time
• Ensures the business is prepared for a buyer’s due diligence process
• Can improve the attractiveness of the business to potential purchasers
• May highlight opportunities for tax-efficient restructuring before a sale

Long-standing businesses may have historical tax or legal complexities. In some cases, a corporate restructuring such as transferring a trading business to a newly incorporated company can create a more attractive and tax-efficient structure for potential buyers.

How We Can Help

Managing a Tax Due Diligence process can be complex and time-consuming, but with tax compliance becoming increasingly intricate, a thorough review is more essential than ever. Whether you are a Purchaser assessing risks or a Seller preparing for a transaction, our team can provide expert guidance to ensure a smooth and efficient process.

If you would like to discuss how we can assist with Tax Due Diligence or Tax Structure Reviews, please do not hesitate to reach out. We would be delighted to support you.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.