Considerations for a merger or acquisition

Considerations for a merger or acquisition


There are many reasons why companies may consider mergers or acquisitions with competitors.

The reason may include

  • Expanding their market presence
  • Enhancing financial efficiency
  • Increasing shareholder value
  • Achieving economies of scale

Merger or acquisition – exciting or challenging!

A merger or acquisition transaction can be an exciting and challenging time. Still, it is important to ensure that you or your clients take time to fully understand the tax position 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 are considering undertaking merger or acquisition activity.

Whilst not every point will be relevant for every company, this gives a flavour of some things that should be considered once, or ideally before(!) a transaction reaches the head of terms stage. The earlier these points are considered the better. Some points can be used in negotiations and may impact valuation and any price paid on an acquisition.

1. Utilising trading losses

If a profitable company acquires another company that has accumulated trading losses, those losses can usually be used to offset the combined entity’s future taxable profits. This can result in significant tax savings. However, it’s important to be aware of the restrictions which may be imposed on the use of such losses, particularly if as a result of the transaction there is a major change in the nature or conduct of the trade.

2. Group Relief

Group relief allows losses from one group company to be surrendered against the profits of another group company. This reduces the group’s overall tax liability. Following an acquisition, if the acquired company becomes a member of the acquiring company’s group (meeting the 75% ownership requirement), it can participate in group relief. This can be particularly beneficial in the immediate post-acquisition period when integrating the operations of the two businesses.

3. Stamp Duty and Stamp Duty Land Tax (SDLT) Reliefs

When shares are transferred as part of an acquisition, Stamp Duty (at 0.5%) of the transaction value will usually be payable. However, there are various exemptions and reliefs which may be available. For example, if the acquisition qualifies as a “reconstruction” or “amalgamation” relief from Stamp Duty may be available.

Similarly, for transactions involving property, SDLT can be a significant cost. However, group relief for SDLT can be claimed if the transaction involves companies within the same group, provided certain conditions are met. This can result in substantial savings, particularly in property-intensive acquisitions.

4. Capital Allowances

Acquiring the assets of another company can allow the purchaser to claim capital allowances on the newly acquired assets. This can provide a substantial tax saving. The ability to claim these allowances can vary. It varies depending on whether the transaction is structured as a share purchase or an asset purchase. An asset purchase often allows the acquiring company to “step-up” the base cost of the assets to their market value. This then enhances the capital allowances available.

5. Substantial Shareholdings Exemption (SSE)

Where Substantial Shareholdings Exemption (SSE) is available no corporation tax on chargeable gains will be paid by the selling company. To qualify, the selling company must have held at least a 10% interest in the company being sold for a continuous period of at least 12 months within the two years before to disposal.

6. Rollover Relief

Rollover relief allows companies 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 advantageous in the context of M&A, where companies may dispose of non-core assets and reinvest in assets that align better with their strategic objectives. The deferred gain is effectively rolled over into the new asset, postponing 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 consideration. A transfer of a going concern (TOGC) can be treated as 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 qualify as a TOGC, specific conditions must be met by both the seller and the buyer and it is important to seek specialist advice.

Conclusion

Tax can play a crucial role in the planning of mergers and acquisitions. If a seller understands the tax opportunities available for a buyer this can allow them to negotiate a better price. Likewise, if a buyer is fully aware of some of the tax efficiencies which may arise as a result of the proposed transaction this may make the opportunity more attractive.

Next Steps

Companies need to seek expert advice as early as possible so as to ensure that both sides can maximise the potential benefits of their M&A transactions. If you need any help with any aspect of a merger or acquisition please do contact us.  We would be happy to help.



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