Buying and due diligence

Tax due diligence is a review of a target's tax affairs before you buy it. When you buy a company's shares, you take on its past tax liabilities, so the review looks for underpaid tax, weak processes and risky planning. The findings help you decide whether to proceed, negotiate the price and agree the protections you need in the sale agreement.

It depends on the size and complexity of the target and how quickly the seller provides information. A focused red-flag review is quicker than a full report. Delays usually come from missing records or slow answers to questions, not from the review itself. Agreeing the scope early and asking for the key documents upfront helps keep the deal timetable on track.

It stays with the company. If you buy the shares, the company remains liable for any tax it underpaid before the sale, even though you now own it. HMRC can pursue the company for those amounts. That is why buyers rely on due diligence to find the risks and on warranties and a tax covenant or indemnity to recover the cost from the sellers.

Much less. In an asset purchase, most historic tax liabilities stay with the seller's company, which is why buyers often prefer this route. You still need to check areas such as the VAT treatment of the transfer, the tax value of the assets you acquire and employment matters for staff who move across. Sellers often resist asset sales because they can mean more tax for them.

That depends on the sale agreement. Usually the sellers give tax warranties and a tax covenant or indemnity, so they pay for pre-completion tax liabilities that were not provided for. Claim periods are commonly 4 to 7 years. Some buyers also use warranty and indemnity insurance. Without these protections, the cost normally falls on the company and so on you as the new owner.

Common warning signs include poor or incomplete records, late filings, contractors who may be treated as employees, share option schemes that were not set up correctly, large or aggressive tax credit claims, complex VAT positions and past restructuring without HMRC clearance. None of these is necessarily fatal to a deal, but each needs to be understood and priced or protected against.

A tax adviser carries out or reviews tax due diligence, advises on whether to buy shares or assets, designs the acquisition structure, and helps negotiate the tax warranties and covenant in the sale agreement. They can also plan how the target will fit into your group after completion, including group relief and how any acquisition debt and future exit will work for tax.

The form of consideration changes the sellers' tax, so it affects what they will accept. Sellers often prefer cash upfront, while buyers may want earn-outs, deferred payments or rollover shares to share risk. Some structures can help sellers defer tax, which can make an offer more attractive. Earn-outs linked to continued employment can be taxed as income and create payroll obligations for the company.

Clearances are mainly a seller's concern, but buyers are often involved. If you pay for a company with your own shares, the sellers will usually want clearance under section 138 TCGA 1992 so their gain is deferred. A buyer may also want comfort that any pre-sale restructuring by the sellers was cleared. HMRC responds to the main statutory clearances within 30 days.

Transaction Tax Partners advises buyers on UK deals worth £1m to £50m, including tax due diligence and structuring. Work is senior adviser led, and we reply within one working day. You can book a call, email taxadvisory@aswatax.co.uk or call or WhatsApp +44 7537 143695 with a short outline of the deal and your timetable.