The value of tax assets in a business sale

Establishing the full value of your ‘tax assets’ can make a significant difference to the final sale value of a business. By reviewing the completion mechanics of a transaction from a tax perspective early in the process, value can be maximised by: 

• including tax assets inherent in the business
• reducing net debt items to reflect any tax savings arising

The sale completion mechanism, whether ‘locked box’ or ‘completion accounts’, should be reviewed from a tax perspective. The whole net debt schedule, and the ‘equity ticker’ in locked box transactions, should be reviewed, not just tax items in the debt schedule.  

Value from tax assets

The term ‘tax assets’ can have a wide meaning beyond any corporation tax refunds known to be due or deferred tax assets recognised.

A transaction provides the opportunity for tax assets to crystallise into cash tax savings. However, to ensure the value of these tax savings is reflected in the transaction price, careful and early consideration is required so that a robust and seller-friendly position is articulated to bidders.

Depending on the underlying nature of the business and its tax position, there could be several tax assets which could be priced into a deal, including:

Corporation tax creditor

The corporation tax creditor should be reviewed to ensure that it reflects any tax payments made, capital allowances and refunds which can reduce the liability. We frequently identify corporation tax creditor positions which are unnecessarily high.

R&D claims

Ensuring that the R&D relief under the new merged scheme is correctly accounted for in EBITDA can generate additional value in the transaction.

Corporation tax deduction on exercise of EMI and other options

Typically, share options will be exercised in advance of a transaction. The corporation tax deduction is calculated on the difference between the exercise price and the market value of the shares received. Given options are typically offered at a low exercise price, significant corporation tax savings can be crystallised on the transaction. However, you will need to model when this will become a cash saving to demonstrate that there is value to the purchaser.

Tax losses

The utilisation of tax losses has become more flexible and complex in recent years. Increasing restrictions on the tax deductibility of interest can mean tax losses present more value on a transaction. If the tax losses can be modelled to show their future utilisation, a seller could obtain value for the tax losses carried forward.

Accrued interest payable

Typically, in private equity-backed structures, there will be accrued but unpaid interest which could become deductible on the repayment of the loan notes on closing the transaction. Again, the tax deductibility of the accrued interest will need to be modelled to take into account the increasingly complex interest restrictions such as thin capitalisation, corporate interest restriction etc. However, once analysed, this can reduce the corporation tax liability in the net debt schedule - a cash-like item or a reduction in the tax included in the equity ticker on a locked box deal.

Bonuses

Often bonuses are paid on a transaction to reward staff for past performance. Not all bonuses will be corporation tax deductible, especially if they relate solely to the transaction. Bonuses should be reviewed to ensure that they are considered to be net of any available corporation tax saving in the completion mechanism.

Transaction costs

Provided that careful consideration is given to the engaging entity for vendor due diligence costs, there may be arguments to claim that the VAT incurred on these costs can be recovered.

Equity/profit ticker on locked box deals

The tax calculations within the equity/profit ticker or other daily profit compensation payment can sometimes be overlooked, however, ensuring an appropriate calculation is made for the corporation tax adjustment (eg the effective tax rate) can help drive additional value. Typical issues can include:

• Calculations are too simplistic and aren’t considered on a group basis  
• The effect of tax reliefs such as capital allowances/R&D are not considered