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Early tax planning is key to successful deal-making, argues John Cullinane of the Chartered Institute of Taxation

M&A shapes the profile of a business for many years to come – how it makes money, its funding and operational cost structure, the calibre and morale of its management and people. And so it is with tax. Is the cost of goodwill deductible? What deductions are being obtained for funding or transaction costs? How do these differ between jurisdictions? And are these deductions of maximum effectiveness in reducing current tax liabilities?

The answers to these questions are determined by the structure of the transaction itself. It is as if the acquisition writes the DNA code for the pattern of the business and the weight of its tax burden for its later life.

And if your business’ DNA embodies a tax-efficient structure, it is typically hard for tax authorities to challenge this – funding costs, for example, are demonstrably incurred to pay for a commercial acquisition. Conversely, if the DNA dictates heavy tax liabilities in subsequent years, it is no use expecting to make good what has been lost by artificial tax planning – the risks and rewards of this will never be as appealing as tax planning for a commercial transaction.

But the future tax DNA of the business is not created in a vacuum, but in the storm of the frenetic and competing activities that characterise M&A. Leave aside price, timing, commercial warranties, competing bids – even in the narrow world of tax, there is no free hand in designing the structure.

On the vendor side

The tax a vendor suffers on a deal will be fundamentally driven by its structure. So the more tax vendors suffer, the higher the price they generally require. As well as looking to the future, purchasers need due diligence to ensure that they are not acquiring hidden tax liabilities in the business – from events or periods in the past or previous tax planning not yet settled, taxable presences in foreign jurisdictions not recognised, employees treated as self-employed contractors, shaky compliance on share schemes, and so on.

With such complexity, it is tempting to get the deal done and worry about tax later. But then the opportunity is missed – to exclude from the deal corporate entities with uncertain or hidden liabilities, while acquiring the businesses that are sought. Or to identify a tax saving for the vendor that gives one bidder an advantage over another. Or to build in a secure basis for deducting goodwill, funding and transaction costs.

Certainly it makes sense to try to identify the key elements of the likely deal structure in time to brief the commercial lawyers before professional time is wasted drafting unviable structures, or before commercial negotiators unwittingly concede important tax sensitive points.

Tax planning benefits

Chartered Tax Advisers have always believed in the benefits of early planning, but now HM Revenue & Customs (HMRC) appears to agree. It has been piloting the greater use of clearances for transactions where there is doubt over the tax treatment – including more use of pre-transaction clearances in some circumstances.

The philosophy is not to waste their – or the taxpayer’s – resources on endless enquiries after the event, but to review as much as possible when a deal is taking place. While it will not be possible or always desirable to get clearance for every transaction, it will certainly be worth considering this, and generally working with the grain of this new philosophy – which will only be possible if tax is thought about early on.

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