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Management buyouts – The tax perspective
A business’ leadership team may decide to pursue a management buyout (MBO) for a number of reasons, including:
- As a planned exit strategy for the original business owner
- Assuming the risk of a struggling business to turn it around
- Taking over a division of a larger business as a separate company
Whatever the reason you choose an MBO, it can be a busy period in your professional life with little to think beyond the business changing hands.
However, this is not an approach you can afford to take from a tax perspective.
The tax implications of an MBO can be significant and complex to navigate, which is why it’s important to understand what taxes you may be liable for and how to ensure your new business is tax-efficient.
Capital Gains Tax
Capital Gains Tax (CGT) is the most significant tax you’ll need to consider when undertaking an MBO.
It is the tax you pay on the profit when you sell or ‘dispose of’ an asset – not the entire income from the sale. Taxable business assets include:
- Land and buildings
- Plant and machinery
- Trademarks
- Shares
- Some non-tangible assets, such as a business’ reputation
Typically, CGT liabilities will be calculated based on the difference between what you paid for the asset and what you sold it for.
However, if the seller of a business sells for less than the business is worth to assist the buyer, then this can increase the seller’s CGT bill.
This will depend on how much the business is worth at market value, which is used to calculate CGT, and how much it was initially worth when the seller took ownership.
It is also particularly important to understand for shareholders who are selling their shares in the business as part of an MBO. If these have increased in value, then these shareholders may be liable to pay CGT.
Business Asset Disposal Relief
Sellers in an MBO transaction may be able to pay less CGT on gains if assets qualify for Business Asset Disposal Relief (formerly Entrepreneur’s Relief).
The relief can apply to the sale of all or part of a business or to selling shares.
Qualifying gains will be taxed at the lower rate of 10 per cent.
Individuals can claim up to £1 million in Business Asset Disposal Relief throughout their lifetime and it must be claimed within two years of the financial year in which the sale was made.
The overlooked details – VAT and Stamp Duty
While CGT considerations are crucial to a successful MBO, other taxes apply and are often overlooked during the initial planning stages.
Many business sale transactions will be considered to be a Transfer of a Going Concern (TOGC) and will therefore not be subject to Value Added Tax (VAT) – but there may be exceptions.
Input VAT can be reclaimed against output VAT in the context of an MBO.
In other words, the VAT a business pays on services such as legal support during an MBO can be offset against the VAT it charges on its own goods or services when it comes to pay the VAT bill.
It’s important to seek advice when preparing VAT claims as MBOs can be a source of challenge for VAT claims.
Stamp Duty Land Tax may also apply if property is being transferred or sold as part of the MBO process.
Structuring the sale for tax efficiency
The structure of your MBO can make a considerable difference to tax efficiency.
For example, an earnout agreement in which the seller receives a portion of the company’s earnings as part of the sale, may appeal to the seller as it can help to spread out the tax liabilities of the sale.
There are also a number of ways that buyers can make an MBO tax-efficient and reduce the overall liability of the sale:
- Debt financing – Financing an MBO through a loan or other debt can lead to tax savings, as interest payments are typically deductible from profits before tax.
- Shares – Through the Enterprise Management Incentive (EMI), management teams can acquire shares in a business with significant Income Tax and National Insurance savings.
- Investment – Using schemes like the Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCT) can provide tax reliefs to investors funding the MBO.
Whatever your motivation for pursuing an MBO and however you finance it, you will benefit from our expert advice and practical support.
To get started or get ongoing guidance, get in touch with us today.
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