Features - Business

Just When Business Thought it Couldn’t get Worse



Ongoing Brexit negotiations and a second national lockdown have added to the economic uncertainty many business owners are currently experiencing. With the recent Office of Tax Simplification (OTS) report doing little to lighten the mood, Simon Hughes, partner at leading law firm Taylor Walton, says owners should exercise caution before selling their business.

The report, the first to consider Capital Gains Tax (CGT) specifically, was undertaken in response to the Chancellor’s request ‘to identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.’

In other words, the Government is looking for new sources of tax revenue to replace the billions expended on addressing the coronavirus pandemic and its impact on the UK’s economy. In the current political climate, targeting wealth creators is probably a vote winner, so be warned.

Tax grab to pay the COVID bill?

The OTS report makes suggestions that will fundamentally change the capital gains tax rules in the UK if adopted and any outcry proves no deterrent. One suggestion is to align CGT rates with income tax rates, which will significantly increase the tax paid when a business is sold.

There have already been mutterings from within Government that the money to pay the COVID-19 bill will have to come from somewhere and it’s unlikely to be another round of austerity, so we have to accept CGT rates will probably increase in the new year.

The news is another blow to those business owners considering a sale, having only just recovered from the reduction in March of the entrepreneurs’ relief (now Business Asset Disposal Relief) limit from £10 million to £1 million, with any balance of CGT payable at a rate of 20%.

If as suggested in the OTS report the rates are aligned in the Budget, this 20% rate would be increased to 45% and owners will pay a huge increase in tax following the sale of their business.

Keep calm and sell wisely?

Whilst the uncertainty around Brexit remains and the economic impact of the pandemic is expected to extend into 2021 and beyond, it may not be the easiest time to sell a business, but for those ready to sell, there remains a window for still extracting maximum personal reward from any deal.

There are many considerations for any owner wishing to sell, but if you are already in discussions with a potential buyer, it’s important at an early stage to require them to execute a Non-disclosure Agreement.

You should then only proceed to full legal documents once the prospective transaction is well-described in a ‘heads of terms’ agreement.

If you are trying to sell now before the potential hike in CGT, it’s critical to get the advice of experienced corporate lawyers who will ensure that as the seller you do not make easy or unnecessary concessions early on in the ‘heads of terms’ before the deal becomes binding.

With the right advice at an early stage, there is more likelihood of being able to get the buyer to commit to key points crucial in maximising the value you can generate, which might include:

  • Cash at Completion: this maximises the up-front payment made to you and minimises any extended earn-out;
  • Security for deferred payments: if any payments are to be deferred, it is important to establish what security the buyer can offer;
  • Clarifying what the price really means: it is also crucial from the outset to properly describe the interdependence of price i.e., whether it assumes a cash-free, debt-free asset and whether a target level of working capital is required;
  • Locked box vs Completion Accounts: proposing a Locked Box structure instead of completion accounts. This generally favours the seller by accelerating any asset-value disputes to a point, before signing the share purchase agreement, when you have more bargaining power, rather than after completion when the buyer arguably has greater leverage;
  • Liability limitations: establishing the level of financial-based and the duration of time-based limits on the seller’s warranty liability;
  • Buyer’s ability to fund: establishing whether the buyer requires third-party financing to complete the deal and whether that introduces greater uncertainty to the prospect of a deal;
  • Timetable: setting timetable expectations and limits on any exclusivity period

These are just a few considerations and a conversation with an experienced corporate law team is likely to throw up a host more, but the key thing is to seek advice early in the process, long before you mention to anyone the possibility of selling your business.

If you hope to sell your business before any rise in CGT is announced next year, a law team will talk you through the process and explain what is possible in the time available to ensure you extract the maximum value from the sale, whilst making the process as painless as possible.

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