How to save tax when selling a business

Any serious entrepreneur or business person knows that planning correctly and minimising the amount of tax he or she pays to HMRC when selling a business can be the difference between a profitable sale or a disastrous one. What is more it is clear that higher earners are likely to be taxed even higher in the future with the announcement of the 45% tax band.

In most circumstances, structuring a business sale for the benefit of either the buyer or the seller is to the detriment of the other. In essence the nub of the problem is that vendors prefer to sell shares as opposed to selling assets. This is because it is more tax efficient, as a seller, to sell the shares of a business. In the case of assets, when the proceeds are taken out of a company either as property or cash the owner needs to pay income tax or corporation on the transfer. However, on the other side of the deal, buyers often prefer to avoid purchasing the shares and instead, cherry pick the best assets and so avoid taking on the liabilities of the business.

In the event of selling assets of a business, what are the options.? Thankfully, paying the full rate of corporation or income tax is certainly not the only option. There are several applications of current tax legislation, supported by recent case law, that afford the vendor a wider range of alternatives.

The Problem

Firstly, let us imagine a situation where the vendor is happy to sell the assets of the firm which is effectively a complete asset strip for the purchaser: This might be for example: the purchase of a publication, intellectual property, commercial property, customer databases, plant and equipment.

Of course, the purchaser is happy as they have the deal they want and have combined their existing operation with the newly acquired one without taking on the legal responsibility of another corporate entity. One legal responsibility might be to pay compensation to claimants against the company for faulty products or services.
The problem for the vendor is that typically they are left with an empty firm full of cash. When this is removed from the company by the director(s), it will be subject to either corporation or income tax, or most likely, a bit of both! Either way, the vendor, is looking at potentially paying 50% of the profits to the taxman in getting the cash out of the company.

The Solution

Traditionally, the two options in getting profit out of the company are to either take it as a wage (and pay PAYE) or draw a dividend (and pay Corporation Tax and Income Tax).

The technical basis (or the 'loop hole' ) of the tax benefits from an EBT is roughly as follow: The payment into the EBT is treated as an expense of the Company, as salary costs would be, although with EBT's, the person does not then have to pay income tax or employers NI contributions. The EBT can be used for just one employee (or director), or as many employees as the board wish to reward.
In this way, the purchaser has now got the transaction they wanted and the vendor has in effect sold the business and still managed to be tax efficient in taking the profits from the sale. So everyone has achieved what they wanted and no one pays tax to HMRC.

Even if the purchaser wants to buy the shares of the firm, EBTs can still be used to extract retained profits and cash prior to sale with no income tax. This also makes the company far more attractive to a potential suitor.
There are numerous technical twists to the model that must be put in place that cannot be covered here. Amongst other things, ever since the case of W T Ramsay Ltd v CIR, a valid commercial justification is absolutely essential. However one should always remember that the implementation of the planning is by far the majority of the process.

To this end, an experienced and reliable planner is essential for executing an EBT or any tax planning for that matter.

When looking for advisers there are number of things that you need to look out for;

- Adviser's need to fully disclose tax planning to HMRC. This effectively reduces your exposure to retrospective tax legislation. Furthermore it affords you peace of mind that if anything is challenged by HMRC you should only pay the tax you would have done initially without any interest or penalties.

- Defending the planning - Because of the inherent nature of tax planning, HMRC may enquire into the planning. Advisers need to be able to handle any enquiries on your behalf.
Credibility - Any tax planning put forward is only ever as good as the planners. Needless to say, they need to be a professionally accredited firm with expert third party corroboration on the planning.

- Fees reflecting the risk to the client - Charging fees without any guarantee of success has an inherent risk as well as the inevitable question over how robustly the planning will be defended if the fee is non-refundable. Refundable fees are always a good indicator of the confidence the firm has in the quality of their planning. This also helps to substantially reduce the risk to the client when carrying out the planning! Of course in the event of any problems enquiries should be made into the financial strength of the business.

Special thanks to Qubic Associates who are a niche advisory firm specialising exclusively on bespoke tax mitigation planning for both high net worth individuals and private companies.

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