A Management Buyout (MBO) involves a company’s managers purchasing either:

• The shares of the company, or
• The trade and assets of the company (to become shareholder-directors).

The management team must decide between:

• Buying shares of the company (retaining the company’s history and allowing the use of any existing tax losses), or
• Setting up a new company to purchase the trade and assets of the target company.

Capital gains/loss considerations for a management buy out

• Share disposal for the individual selling their shares/assets.
• Seller might be able to benefit from Business Asset Disposal Relief (BADR) if conditions are met.
• For the company being sold, there is no break in their accounting period and it continues to trade as normal.

Buying at less than market value (shares)

• If employees (management) pay less than market value for shares, the discount is treated as employment income.
• They’ll be taxed on the difference between market value and the price paid.
• The shares are likely considered readily convertible assets, therefore subject to Class 1 NIC.

Buying at less than market value (trade and assets)

• If employees (management) pay less than market value for trade and assets, the same employment income tax rules apply as above.
• The taxable amount is the difference between market value and the amount paid.

Cost adjustment – CGT base cost

• Any employment income taxed due to undervalue will be added to the capital gains tax base cost of the shares/assets for future disposal calculations.

Loan to fund purchase

• Management will likely need to borrow funds to finance the share purchase.
• This is treated as a qualifying loan if it’s used to buy shares in a close company or employee-owned company.
• Interest on the loan is deductible for income tax purposes.

Hive down

A hive down is another method to acquire a company.

It provides a way for a buyer (either a third party or the MBO team) to acquire a clean company (i.e., without historical liabilities) whilst still purchasing shares rather than the trade and assets directly.

This approach also allows the buyer to acquire only part of the target company.

Example

For example, say Mr A owns A Ltd. The management want to buy A Ltd. A new company is set up by Mr A, called Newco Ltd. A Ltd transfers its trade and assets to Newco Ltd – this is a normal transfer of trade and assets which would be a succession as 75% ownership is unchanged as Mr A owns at least 75% in both A Ltd (the seller company) and Newco Ltd (the buyer company).

The losses can transfer with the trade. In addition, as the history of the old company is not transferred, Newco Ltd is a clean company.

The management team (or third party) then buy the Newco Ltd shares from Mr A – this is a normal sale of shares. The management team (or third party) have purchased shares but in a clean company.

Next Steps

Please get in touch of you have any further questions regarding management buy outs

ADR Success

Introduction

Our client was a non-UK resident individual whose tax affairs were subject to a COP8 enquiry initially raised by HMRC in 2019 into a payment which took place in 2007/2008.

Issue

The client had been assessed by HMRC in respect to a large amount of income (in excess of £500k) which he was clear he had not actually received. The assessment has also resulted in significant interest and penalties and the amount at stake was in excess of £250k. This understandably left our client feeling incredibly anxious particularly as the enquiry had been dragging on for some years.

How we solved it

We approached HMRC to suggest that they consider alternative dispute resolution (ADR) in order to bring matters to a conclusion. We find that this is often a much better option for clients as it avoids the need to attend tax tribunal or similar and often helps resolve disputes more quickly and cost-effectively.

The outcome

During an ADR meeting held at our offices our client was able to verbally explain the situation and to address any areas of confusion. Whilst these had already been raise in correspondence with HMRC, dealing with them within the forum of ADR allowed HMRC to better understood the client’s position.

So much so that the ADR resulted in HMRC withdrawing all of their assessments on our client on the day of the ADR hearing – something which is incredibly rare as, even on occasions where assessments are withdrawn by HMRC, this is usually actioned several days or weeks later after HMRC have had time to reflect.

An amazing outcome for both our disputes team and the client!

How HMRC changes are transforming R&D Tax Relief: What does it mean for your business?

Fuelling Innovation with R&D Tax Relief

Research and Development (R&D) tax relief has long been a critical source of financial support for businesses driving innovation in science and technology. This incentive has empowered companies—especially SMEs—to push boundaries, develop new technologies, and stay competitive. However, recent changes by HMRC are reshaping the landscape, introducing new compliance measures that impact how businesses claim tax relief.

Key Changes to R&D Tax Relief: What You Need to Know

Unfortunately, recent years have seen a surge in R&D claims with numerous “specialist” R&D claim firms springing up and, in some cases, exaggerating the amount that could be claimed as genuine R&D. Therefore, since 2021, to crack down on fraud and enhance transparency, HMRC has rolled out stricter rules. These include:

• SME claim cap – R&D tax credits are now tied to a company’s PAYE and NIC liabilities, limiting the tax relief available.
• Named officer requirement – A designated senior officer must oversee each claim, ensuring accountability and full disclosure of any tax advisers involved.
• Advance notification rule – Companies must notify HMRC of their intent to claim within six months after their accounting period ends.
• Mandatory digital filing – All claims must be submitted online with comprehensive supporting documentation.
• Elimination of nominee payments – R&D tax credits can only be paid directly to the claiming company, not third-party nominees.

The Business Impact: A Tougher Road to Relief

These shifts have made the claims process more complex, resulting in a noticeable decline in applications. According to HMRC’s R&D statistics and report (released Winter 2024):

• R&D tax relief claims dropped from 83,240 in 2021/22 to 65,690 in 2022/23.
• SME claims were hit hardest, falling by 23% from 71,905 to 55,325.
• The HMRC enquiry rate surged from 10% to 17% within a year, with average enquiry resolution times now exceeding eight months.

These figures obviously raise critical questions: Are fewer businesses engaging in R&D, or is the increasingly complex process discouraging genuine claims? For SMEs relying on tax relief to fund innovation, these new hurdles could slow progress and growth.

Maximising Your R&D Tax Relief in a Changing Landscape

While HMRC’s goal of preventing fraud is valid, it’s essential that eligible businesses continue to access the support they deserve. R&D tax relief should be a driver of innovation, not an administrative roadblock.

If your company is engaged in qualifying R&D activities, our team can help you navigate the new claims process with ease. We ensure full compliance while optimising your claim, so you don’t miss out on valuable relief.

Next Steps

Get in touch today to see how we can help you in claiming relief to allow your business to continue innovating and thriving.

Share Valuation

Valuing shares is essential for anyone involved in business or investment decisions. Whether you’re an investor seeking to determine the worth of a potential investment or a business owner considering the sale of shares, the method of valuation you choose can significantly influence the outcome of your financial decisions. In this article, we will examine four of the main methods for share valuation: maintainable earnings, recent transactions, net assets, and dividend yield.

Maintainable Earnings Approach: Focusing on Sustainable Profitability for your share valuation

The maintainable earnings method is one of the most commonly used approaches for valuing shares. It centres on assessing a company’s ability to generate consistent, long-term profits. This approach involves analysing past earnings and adjusting them to remove any irregular, one-off events that might skew the company’s true earning potential. For example, extraordinary gains like asset sales or rare losses such as legal settlements are excluded from the calculation.

The main goal of this method is to determine the company’s true earning power, how much it can consistently generate in the future based on its current operations. After calculating the maintainable earnings, this figure is typically multiplied by an industry-specific multiple to estimate the value of the shares. This method works particularly well for businesses with stable earnings, such as established manufacturers or retailers, whose financial history follows a predictable pattern.

Recent Transactions Approach: Reflecting Current Market Activity

Another method for valuing shares is the recent transactions approach, which looks at the prices at which shares have recently been bought or sold. The idea behind this method is that recent market transactions offer an accurate snapshot of a company’s value. If a company has undergone a transaction, such as a share sale, merger, or acquisition, this method can serve as a real-time reflection of the company’s worth.

However, the recent transactions method has limitations. If there have been few transactions, or if those transactions occurred under unusual circumstances (such as during a market downturn or distressed sale), the resulting value might not accurately reflect the company’s true worth. This method is particularly useful for private companies or businesses that have recently been involved in significant deals, as it offers insight into what buyers and sellers have agreed upon in the market.

Net Assets Approach: Assessing the Value of Physical Assets

The net assets approach, or asset-based valuation method, provides a more straightforward way to value a business. It calculates the company’s worth by subtracting its liabilities from the total value of its assets. This method is ideal for businesses that have substantial physical assets, such as real estate, machinery, or inventory. Essentially, it asks: what is the company worth if all of its assets were sold off and its debts were paid?

While this method is useful for asset-heavy businesses, it doesn’t always capture the full value of a company, particularly in industries where intangible assets, like intellectual property, brand reputation, or customer relationships, are crucial drivers of value. The net assets approach is often used when companies are being liquidated or for businesses focused primarily on tangible assets, most usually property-investment companies.

Dividend Yield Approach: Valuing Shares Based on Income Generation

For businesses that regularly distribute dividends to shareholders, the dividend yield method offers an alternative way to value shares. This approach focuses on the income that shareholders can expect to receive from their investment in the form of dividends. It compares the annual dividends paid by the company to the current share price, giving investors an idea of the return they can expect.

This method is particularly valuable for companies with a strong track record of paying dividends, such as utilities or established businesses with stable cash flow. However, it’s less applicable to high-growth companies that reinvest their profits into expansion rather than paying dividends. The dividend yield approach gives investors insight into the immediate income potential of the shares, rather than their long-term growth prospects.

Choosing the Right Valuation Method

The right method for valuing shares depends largely on the circumstances of the business in question. Each of these methods provides a unique perspective on a company’s value, and in some cases, combining multiple approaches can offer a more complete and accurate valuation. As a tax adviser or investor, understanding these different methods is essential for making informed decisions about investments, mergers, acquisitions, and tax planning. The key is to select the method that best reflects the company’s financial health and aligns with your investment goals.

Next steps in share valuation

If you find yourself needing a share valuation, don’t hesitate to reach out. Our team can guide you in selecting the most suitable valuation method, perform the valuation, and, if necessary, assist with applying for clearance from HMRC to ensure compliance and peace of mind. Please contact us here.

How to navigate the online selling risks: A guide for online sellers.

Selling online has never been easier, but with convenience comes responsibility—especially when it comes to taxes. Online platforms are now sharing transaction data with HMRC, making it crucial for sellers to understand tax risks and compliance rules. Whether you’re casually selling a few items or running a full-scale online resale business, staying ahead of tax obligations will save you from unexpected penalties and stress.

When selling online you should pay attention to taxes 

HMRC is cracking down on undeclared online income, and if you regularly sell for profit, you may be classified as a trader and required to report your earnings. If you sell high-value items, you might also be subject to capital gains tax. Additionally, if your sales exceed the VAT threshold, you’ll need to register for VAT and start charging it. Failing to report your income properly can result in penalties, backdated tax bills, and possible investigations from HMRC.

How HMRC is Tracking Online Sales

As of 2024, online platforms are required to report seller transaction data to HMRC. This global initiative is designed to ensure tax compliance by flagging individuals or businesses that may be hiding income.

If you frequently sell items, operate a drop-shipping business, or use online marketplaces as a steady income source, expect scrutiny. However, casual sellers clearing out old belongings or selling the occasional item for less than £6,000 will likely be left alone.

What to Expect from HMRC in the Future

HMRC now has access to data from 2024 and is actively cross-checking tax returns. Over the next year, it’s expected that HMRC will send “nudge letters” to sellers who haven’t reported income but appear to be running a business. Their priority will be investigating high-earning sellers, but even those with smaller transactions could eventually come under review. If HMRC determines that you’ve been avoiding taxes, penalties could reach up to 70% of your unpaid tax, and in serious cases, debt collectors may get involved.

How We Can Help

Navigating HMRC compliance as an online seller can be overwhelming, but ETC  is here to help. We can ensure that your income and capital gains are properly reported, making tax filing easy and stress-free. If you’ve unknowingly underreported past sales, we can also assist with voluntary disclosures to minimise penalties with HMRC.

The era of “hidden” online income is over. HMRC is actively monitoring online transactions, so now is the time to get compliant. Whether you’re unsure about your tax obligations or need professional advice, reach out to us today to protect your business, avoid penalties, and stay on the right side of tax laws. Do not hesitate to get in touch with us.