Mergers And Acquisitions » Acquisition doesn’t have to be taxing

With more foreign investors looking for a stake in innovative UK businesses, it is especially important that those attracting such interest are ready for any post-acquisition tax and HR-related implications, which could get in the way of a smooth integration process.

By thinking ahead, SMEs pursuing a sale can structure their businesses with foreign investment in mind and make sure they are prepared for any changes that could affect their way of working, particularly if they are acquired by a much larger overseas company.

Innovative UK companies, including many in the tech sector, are attracting a high level of attention from international trade buyers, many of whom want to acquire key tech know-how or need closer access to the UK marketplace. Other multinationals may be looking to extend their global footprint, so they have local teams serving specific global regions, whilst eliminating issues related to operating across time zones.

Tax implications

For companies that are open to offers or actively pursuing a sale, it is wise to consider the tax implications at an early stage. If the business is currently eligible for R&D tax credits under the SME scheme for example, there could be some restrictions if they are subsequently acquired by a larger group. Detailed HMRC guidance is available regarding ‘linked’ and ‘partner’ companies and this should be consulted carefully.

Depending on the size of the group making the acquisition, corporation tax changes may also need to be taken into account. For example, if the UK company is acquired by a larger group, it may be required to make payments on a quarterly instalment basis, rather than nine months after the year-end.

Additional reporting requirements, known as country-by-country reporting, may also be triggered for UK companies acquired by an international group, with a worldwide turnover exceeding Euro 750 million. The acquired UK company may not be aware that they are obliged to check whether a full report of the group’s activities is prepared elsewhere and to notify the UK tax authorities.

International groups looking to acquire innovative UK businesses will recognise that often they are negotiating with both the founder shareholder and perhaps external initial investors (who may have benefited from favourable tax reliefs under EIS and SEIS schemes). There may also be an existing employee share option scheme in place, so they may be dealing with multiple parties.

Existing employees holding share options under UK approved schemes, such as EMI, may share in the sale proceeds as well as receive favourable tax rates. In an attempt to retain and motivate the existing talent, international groups may look to offer UK employees new options, potentially involving options in the overseas parent. Care is needed to ensure new options are approved with the UK tax authorities, to gain similar favourable tax treatment in the future.

Cultural challenges

Being acquired by a large international group is likely to bring significant cultural challenges too. Instead of trying to address everything on day one, most purchasers see the value of introducing changes gradually. New processes or ways of working may need to be adopted, particularly if the group operates a more structured reporting system with tighter timescales and reports on a country-by-country basis and the UK subsidiary may be subject to UK audit for the first time. The strict disclosure regime in force in the UK also means that the purchaser may need to bear in mind additional obligations around disclosing ultimate group ownership and control outside of the UK, with an annual requirement to declare any ‘Persons of Significant Control’ at Companies House.

Looking ahead to 2020, there is an opportunity for UK-based SMEs to review their strategic plans and for some, pursuing a sale may be an option. With the right professional advice and international understanding, businesses can ensure they have the right structures and information in place to maximise value and support the integration process, whilst ensuring employees also benefit from the process.

Andrew Mosby, advisory partner at accountancy firm, Menzies LLP. Andrew specialises in advising on all aspects of inward investment.

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