The sales process of a business will generally include significant due diligence over financial performance, security and longevity of income streams, litigation risks and tax risks amongst others.
Uncertainty in risk areas reduces the value of a business and its attractiveness to purchasers. Testing your businesses risks will allow you to prepare the business for sale, maintain value and respond quickly through the due diligence process.
Due Diligence: Common Tax Problems
One of the biggest due diligence items will be tax. The following are common tax problems found during the due diligence process:
- Structure: The structure of businesses may not be what either the vendor or purchaser want. For example, the purchaser might not want to acquire a commercial freehold and the vendor might not want to sell the investments held within the company. It may be that a company undertakes several trades and only one is to be disposed of. The wrong structure can affect the availability of reliefs from capital gains tax (CGT) while reorganising a structure too near a disposal can be problematic.
- Employment status: Companies often seek to engage self employed persons rather employ and this may give rise to tax risks where the employment status is questionable.
- Termination payments: Tax free payments that are given when they are arguably taxable.
- Profit extraction: The shareholders have implemented methods to extract funds tax efficiently, which may constitute tax avoidance.
- VAT compliance: The treatment of recovering input tax is incorrect.
- Expenses and benefits: No policies are in place and there are only weak procedures to enforce policies.
- CT compliance: The allowable deductions against profits have been overstated.
- Overclaims: Capital allowances or research and development costs are over claim or the basis of the claim is flawed.
- Transfer pricing: There is no policy in place.
- Poor tax compliance: Tax returns are filed late and penalties are incurred.
- Lifestyle: The company has been run as a lifestyle business meeting personal expenditure of the shareholder/director.