Considerations for a merger or acquisition
There are many reasons why companies may consider mergers or acquisitions with competitors.
The reason may include
- Expand their market presence
- Improve financial efficiency
- Increase shareholder value
- Achieve economies of scale
Merger or acquisition – exciting or challenging!
A merger or acquisition transaction can be an exciting and challenging time. However, it is important to ensure that you or your clients take the time to fully understand the tax situation of the transaction you are undertaking.
Key Tax Considerations for a Merger or Acquisition
In this article, we have highlighted some of the key tax considerations when companies consider embarking on merger or acquisition activity.
While not all points are relevant to every business, this provides insight into some elements that should be considered once, or ideally before (!), a transaction reaches the terms stage. The earlier these points are considered, the better. Certain points may be used in negotiations and may impact valuation and any price paid for an acquisition.
1. Use trading losses
If a profitable company acquires another company that has accumulated business losses, those losses can generally be used to offset future taxable profits of the combined entity. This can result in significant tax savings. It is, however, important to be aware of the restrictions that may be placed on the use of these losses, particularly if the transaction results in a major change in the nature or course of the trade.
2. Group relief
Group relief allows the losses of one group company to be transferred against the profits of another group company. This reduces the group’s overall tax burden. Following an acquisition, if the acquired company becomes a member of the acquiring company’s group (by meeting the 75% shareholding requirement), it may participate in group relief. This can be particularly beneficial immediately after the acquisition, when integrating the two companies’ operations.
3. Stamp Duty and Stamp Duty Land Tax (SDLT) reliefs
Where shares are transferred as part of an acquisition, stamp duty (at 0.5%) of the value of the transaction will generally be payable. However, various exemptions and reliefs may be available. For example, if the acquisition is considered a ‘reconstruction’ or ‘merger’, a stamp duty exemption may be available.
Similarly, for real estate transactions, SDLT can represent a significant cost. However, group relief for SDLT may be claimed if the transaction involves companies in the same group, subject to certain conditions. This can result in substantial savings, particularly in property-intensive acquisitions.
4. Capital deductions
The acquisition of the assets of another company may allow the acquirer to benefit from a capital deduction on the newly acquired assets. This can generate a substantial tax saving. The ability to claim these benefits may vary. It varies depending on whether the transaction is structured as a stock purchase or an asset purchase. An asset purchase often allows the acquiring company to “step up” the cost basis of the assets to their market value. This then improves the available capital deductions.
5. Substantial participation exemption (SSE)
Where the substantial shareholding exemption (SSE) is available, no corporation tax on taxable gains will be paid by the selling company. To be eligible, the selling company must have held at least 10% of the capital of the company sold for a continuous period of at least 12 months during the two years preceding the sale.
6. Rollover Relief
Rollover relief allows businesses to defer capital gains tax on the disposal of certain business assets if the proceeds are reinvested in new qualifying business assets. This can be particularly beneficial in the context of mergers and acquisitions, where companies can divest non-core assets and reinvest in assets that better align with their strategic objectives. The deferred gain is effectively carried forward to the new asset, thereby deferring the tax liability until the new asset is disposed of.
7. VAT considerations for a merger or acquisition
In certain types of business transfers, VAT can be a critical factor. A transfer of a going concern (TOGC) can be considered outside the scope of VAT, meaning that no VAT is charged on the sale of the business. This can improve cash flow and reduce the administrative burden associated with VAT recovery. To be considered TOGC, specific conditions must be met by both the seller and the buyer and it is important to seek specialist advice.
Conclusion
Taxation can play a crucial role in planning mergers and acquisitions. If a seller understands the tax opportunities available to a buyer, it may allow them to negotiate a better price. Likewise, if a buyer is fully aware of some of the tax savings that may arise from the proposed transaction, this may make the opportunity more attractive.
Next steps
Companies should seek expert advice as early as possible to ensure that both parties can maximize the potential benefits of their M&A transactions. If you need assistance with any aspect of a merger or acquisition, please contact us. We would be happy to help you.
