Selling a business? The structure of the deal can have huge tax implications

One good reason why professional advice should always be obtained before selling a business is that the structure of the deal can have very significant tax implications. In a case on point, a tax-efficient tweak to a share transaction achieved a multi-million-pound tax saving.

An information services business agreed in principle to sell its shares in a company for a total of $80.44 million, of which $21 million would be cash, the remainder consisting of ordinary shares in the purchasing company. Only after striking the deal did the seller realise it could be structured in a more tax-efficient manner.

The receipt of $21 million in cash would have triggered a £2.8 million tax liability in respect of the resulting chargeable gain. However, in reliance on professional advice, the seller agreed that, instead of the cash, it would receive redeemable preference shares in the purchaser to the same value.

The advantage of that arrangement was that it benefited from an exemption contained in Section 135 of the Taxation of Chargeable Gains Act 1992. The exemption applies to share-for-share exchanges. So long as the seller retained the preference shares for 12 months prior to redemption, the proceeds would not be treated as a chargeable gain.

In asserting that the arrangement was ineffective for tax purposes, HM Revenue and Customs (HMRC) relied on Section 137 of the Act. It contended that the main purpose, or one of the main purposes, of the arrangement was the avoidance of liability to Capital Gains Tax or Corporation Tax. That argument, however, failed to persuade the First-tier Tribunal (FTT).

Whilst accepting that the avoidance of tax was one purpose of the arrangement, the FTT found that the seller’s main subjective aim was a commercial one and that it did not view tax considerations as particularly important. The tax advantage was significant in absolute terms but, in relative terms, it represented less than 5 per cent of the total value of the transaction. The FTT noted that the time, effort and expense that the seller had devoted to tax issues was not significant in the context of the overall deal.

In dismissing HMRC’s appeal against that outcome, the Upper Tribunal found that the FTT correctly focused on the seller’s subjective intentions and that there was no basis for disturbing its factual conclusions. It was entitled to find on the evidence that the transaction was entered into for bona fide commercial reasons and that, so far as the seller was concerned, the tax advantage was not particularly significant when viewed in context. The avoidance of tax was not its main purpose, or one of its main purposes, in entering into the transaction.

The Commissioners for Her Majesty’s Revenue and Customs v Euromoney Institutional Investor PLC. Case Number: UT-2021-000100