Table of contents

Table of contents. iii

Tables of authorities. xi

Acts of Parliament xi 

Regulations. xiv

Rules and Codes. xiv

OECD model conventions. xv

Cases  xv

1.       Introduction.. 1

1.1.         Introduction.. 1

1.2.         What is tax due diligence – a definition.. 1

2.       The Principal Types of Due Diligence. 5

2.1.         Pre-acquisition or buy-side tax due diligence. 5

2.1.1.     Whether to do the deal in its entirety or even at all?. 6

2.1.2.     How to do the deal? Implications for the acquisition structure. 7

2.1.3.     At what price? Implications for value, price and purchase consideration   7

2.1.4.     On what terms? Implications for the contract 10

2.1.5.     What are the implications for managing the target’s tax affairs post-acquisition? Implications for future management of the target’s tax affairs. 10

2.2.         Vendor or sell-side tax due diligence. 10

2.2.1.     Vendor assistance reports. 15

2.2.2.     Exit readiness. 15

2.3.         Long form due diligence. 19

2.3.1.     When is long form due diligence commissioned.. 19

2.3.2.     Main Market of the London Stock Exchange. 20

2.3.3.     The Alternative Investment Market (‘AIM’) of the London Stock Exchange  21

2.3.4.     Long form tax due diligence. 22

2.4.         ‘Twin track’ exits. 24

2.5.         Buy-side tax due diligence where the seller provides a vendor tax due diligence report 25

3.       The Tax Due Diligence Process. 27

3.1.         Instruction.. 27

3.2.         Scope. 28

3.3.         Fieldwork. 28

3.4.         Reporting tax due diligence findings. 30

3.5.         Review of the contract for the sale/purchase of the target 30

3.6.         Timing. 30

4.       Defining the Scope of a Tax Due Diligence Review... 31

4.1.         Introduction.. 31

4.2.         Defining scope. 32

4.2.1.     Type of due diligence. 32

4.2.2.     Value. 32

4.2.3.     The existence and extent of reliable tax warranties and indemnities. 34

4.2.4.     The existence and extent of any vendor due diligence or vendor assistance report provided by the seller  35

4.2.5.     The existence and extent of any tax losses or other tax assets within the target company or group   36

4.2.6.     Audit file review... 36

4.2.7.     Materiality. 37

4.2.8.     Jurisdictions to be included within scope. 38

4.2.9.     Legal entities to be included within scope. 38

4.2.10.   Tiered approach.. 39

4.2.11.   Taxes to be included.. 43

4.2.12.   The period(s) to be reviewed.. 43

4.2.13.   How much tax due diligence will actually be possible?. 44

4.3.         A Generic/Proforma Scope for a Full Scope Tax Due Diligence Review... 44

4.3.1.     Pre-acquisition or buy-side tax due diligence. 44

4.3.2.     Vendor or sell-side tax due diligence. 46

4.4.         A Generic/Proforma Information Request for a Tax Due Diligence Review    48

4.4.1.     Pre-acquisition or buy-side tax due diligence. 48

4.4.2.     Vendor or sell-side tax due diligence. 49

4.5.         A Generic/Proforma Scope/Information Request for a Limited Scope Tax Due Diligence Review    50

4.5.1.     Corporate income tax. 50

4.5.2.     Employment taxes and Value Added Tax/sales tax. 50

4.5.3.     Tax in accounts. 50

4.6.         A Generic/Proforma Information Request for a Stamp Taxes Due Diligence Review    51

4.6.1.     General 51

4.6.2.     Stamp Duty/SDLT on UK real estate. 51

4.6.3.     SDRT/Stamp Duty on securities. 52

4.6.4.     Other property. 52

4.6.5.     Partnerships. 52

4.6.6.     Sundry. 52

5.       Publicly Available Information.. 53

5.1.         UK.. 54

5.2.         Australia. 58

5.3.         Austria. 58

5.4.         Belgium... 59

5.5.         China. 59

5.6.         Czech Republic. 59

5.7.         Denmark. 59

5.8.         Finland.. 60

5.9.         France. 60

5.10.        Germany. 60

5.11.        Greece. 61

5.12.        Hong Kong. 61

5.13.        Hungary. 61

5.14.        India. 62

5.15.        Ireland.. 62

5.16.        Italy. 63

5.17.        Japan.. 63

5.18.        Luxembourg. 64

5.19.        Mexico. 64

5.20.        Netherlands. 64

5.21.        Norway. 65

5.22.        Poland.. 65

5.23.        Portugal 66

5.24.        Russia. 66

5.25.        Slovak Republic. 66

5.26.        Spain.. 66

5.27.        Sweden.. 67

5.28.        Turkey. 67

5.29.        United States. 67

6.       Reporting Tax Due Diligence Findings. 69

6.1.         Reporting language. 69

6.2.         Classification of tax risks. 70

6.2.1.     Certain exposures. 71

6.2.2.     High risk. 71

6.2.3.     Medium risk. 71

6.2.4.     Low risk. 72

6.3.         Reporting emphasis for each type of due diligence. 72

6.3.1.     Pre-acquisition or buy-side tax due diligence. 72

6.3.2.     Vendor or sell-side tax due diligence. 73

6.3.3.     Long form tax due diligence. 75

7.       Buy-side Tax Due Diligence where the Seller Provides a Vendor Tax Due Diligence Report   77

7.1.         Review of the scope, independence and quality of the vendor tax due diligence report to identify any limitations or restrictions which detract from its quality and which may need to be supplemented by additional pre-acquisition tax due diligence. 77

7.2.         Review of the vendor tax due diligence report to identify any differences of opinion   78

7.3.         Explanation of how the issues and exposures identified in the vendor tax due diligence report might affect a specific purchaser and recommendations as to how that purchaser should address them in the context of the transaction   79

7.4.         Request for further information.. 79

7.5.         Interrogation of the advisers who prepared the vendor tax due diligence report (the ‘bidder meeting’) 80

7.6.         Format of report to a potential purchaser on a vendor tax due diligence report 81

8.       Tax Due Diligence: Implications for the Contract.. 87

8.1.         Is a review of the contract part of tax due diligence?. 87

8.1.1.     Pre-acquisition or buy-side tax due diligence. 87

8.1.2.     Vendor or sell-side tax due diligence. 88

8.2.         Brief outline of the key contract provisions relevant to tax due diligence. 89

8.2.1.     Tax warranties. 89

8.2.2.     The tax indemnity. 91

8.3.         What should such contract review comprise?. 98

8.3.1.     The scope of the contract review by the tax due diligence provider. 98

8.3.2.     Review of the tax indemnity or covenant by the tax due diligence provider  100

8.3.3.     Review of the tax warranties by the tax due diligence provider. 112

8.3.4.     Tax assets (losses and other reliefs) 113

8.3.5.     Reviewing the contract in auctions and contract races. 114

8.4.         Assignability of the benefit of tax warranties and indemnities. 115

8.5.         Extending and supporting tax due diligence with warranties. 116

8.6.         Limitations on claims under tax indemnities and warranties. 117

8.6.1.     Exclusions or carve-out clause of the tax indemnity. 118

8.6.2.     Matters disclosed by the seller to the purchaser via the formal process of disclosure  118

8.6.3.     Time limits for making tax claims. 118

8.6.4.     Financial limits on tax claims. 119

8.6.5.     Limitation of warranties by awareness or knowledge. 120

8.7.         Tax disclosures. 121

8.7.1.     The disclosure process. 121

8.7.2.     Reviewing disclosures. 122

8.7.3.     Voluminous or late disclosure. 122

8.7.4.     Limiting disclosure. 123

8.7.5.     Forcing disclosure. 123

8.7.6.     Attempts to disclose against tax indemnities. 124

8.8.         Other contractual means of addressing tax risks identified by due diligence  124

8.8.1.     Retentions, withholdings and escrow... 125

8.8.2.     Warranty and indemnity insurance. 126

8.9.         What tax risks are suitable for contractual protection?. 126

8.10.        Purchase price adjustments: completion accounts versus ‘locked box’ balance sheet 127

8.11.        Standard tax warranties which are generally included in a typical UK contract for the sale/purchase of the shares of a target company or group.. 127

8.11.1.   General 128

8.11.2.   Tax in the accounts. 128

8.11.3.   Compliance. 128

8.11.4.   Concessionary or informal tax treatments. 130

8.11.5.   Deductions and withholdings of tax. 131

8.11.6.   Tax planning. 131

8.11.7.   Residence and foreign tax matters. 132

8.11.8.   Secondary liabilities. 132

8.11.9.   Distributions. 133

8.11.10. Close companies. 133

8.11.11. Loan relationships. 133

8.11.12. Capital gains. 134

8.11.13. Tax groupings etc. 134

8.11.14. De-grouping charges. 135

8.11.15. Transfer pricing and transactions not at arm’s length etc. 135

8.11.16. Appropriations to or from stock. 136

8.11.17. Depreciatory transactions. 136

8.11.18. Value shifting. 136

8.11.19. Tax depreciation (capital allowances and intangible assets) 136

8.11.20. Reorganisations, reconstructions, changes of ownership, changes to trades or businesses etc. 137

8.11.21. Period between the date of a defined set of financial statements and completion   137

8.11.22. Employment taxes. 138

8.11.23. Bonus, share and option schemes. 138

8.11.24. Value Added Tax. 139

8.11.25. Customs duty. 141

8.11.26. Stamp taxes and transfer taxes. 141

8.11.27. Inheritance tax. 141

8.11.28. Other. 142

9.       Dealing with Specific Risk Areas. 143

9.1.         Tax losses and other assets. 143

9.1.1.     Tax losses. 143

9.1.2.     Tax written down value of expenditure qualifying for capital allowances (i.e. tax depreciation) in future periods  144

9.2.         De-grouping charges. 146

9.2.1.     The basis of the UK de-grouping charge. 146

9.2.2.     De-grouping charges in the context of tax due diligence. 147

9.3.         Substantial Shareholdings Exemption (‘SSE’) 150

9.3.1.     The exemption.. 150

9.3.2.     The key conditions which must be satisfied for the SSE to apply. 150

9.3.3.     The SSE in the context of tax due diligence. 153

9.4.         Roll-over and hold-over of chargeable gains into replacement business assets  159

9.4.1.     Roll-over and hold-over of chargeable gains into replacement business assets in the context of tax due diligence  161

9.5.         Transfer pricing. 162

9.5.1.     Generally. 162

9.5.2.     Transfer pricing in the context of tax due diligence. 164

9.5.3.     Private equity investments. 171

9.6.         Permanent establishments (‘PEs’) 172

9.6.1.     PEs in the context of tax due diligence. 173

9.6.2.     The existence of a PE.. 174

9.6.3.     Attributable profits. 174

9.7.         Tax residence. 175

9.7.1.     The position in the UK.. 176

9.7.2.     UK tax residence in the context of tax due diligence. 178

9.8.         Special pension contributions. 181

9.8.1.     Special pension contributions in the context of tax due diligence. 182

9.9.         Tax treatment of self-employed consultants. 183

9.10.        Employee share/security ownership.. 184

9.11.        VAT treatment of a target’s historical transaction costs. 187

9.12.        Tax planning arrangements disclosable under Part 7 Finance Act 2004 and the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543) 188

9.12.1.   The seven hallmarks of notifiable tax planning arrangements. 189

9.12.2.   Disclosable tax planning arrangements in the context of tax due diligence  192

9.13.        The general tax control environment of the target company or group.....         193

9.14.        Completion accounts versus ‘locked box’ balance sheets to determine purchase price  194

9.14.1.   Purchase price adjustments based on completion accounts. 194

9.14.2.   ‘Locked box’ price determination.. 196

9.15.        Money laundering and proceeds of crime. 202

9.16.        Stamp taxes. 203

9.16.1.   Background.. 203

9.16.2.   Stamp Duty. 203

9.16.3.   Stamp Duty Reserve Tax (‘SDRT’) 205

9.16.4.   Interaction of Stamp Duty and Stamp Duty Reserve Tax. 206

9.16.5.   Stamp Duty Land Tax (‘SDLT’) 207

9.16.6.   Stamp taxes in the context of tax due diligence. 210

10.     Tax Due Diligence in Asset Acquisitions. 213

10.1.        Pre-acquisition tax matters with regard to business assets which can affect the post-acquisition tax position of a third party purchaser of those assets: UK.. 213

10.1.1.   The seller’s practices, processes and procedures in relation to tax compliance  213

10.1.2.   Tax treatment of the assets acquired in the hands of the purchaser...         214

10.1.3.   VAT: Transfer of a going concern (‘TOGC’) 219

10.1.4.   VAT: Options to subject land and buildings to tax. 221

10.1.5.   VAT: Capital Goods Scheme (‘CGS’) 221

10.1.6.   VAT: Transfer of assets into a VAT group ‒ anti-avoidance provisions  222

10.1.7.   PAYE liabilities: income tax and National Insurance contributions (‘NIC’) 223

10.1.8.   Stamp taxes. 224

10.1.9.   Tax warranties and indemnities in relation to an asset acquisition...         225

10.1.10. UK asset acquisition information request list 225

10.2.        Does a third party purchaser of business assets (rather than shares of a company) assume any tax liabilities of the business in which the assets were formerly employed by the previous owner (jurisdictions outside the UK)?  226

11.     Disclosure of Due Diligence Reports to the Tax Authorities   231

11.1.        UK.. 231

11.2.        Jurisdictions outside the UK.. 232

12.     The UK Tax Treatment of the Costs of Due Diligence......         235

12.1.        Corporation tax. 235

12.1.1.   Expenses of management of a company with investment business..         235

12.1.2.   Costs of obtaining loan finance. 236

12.1.3.   Due diligence costs incurred in relation to the acquisition of certain assets qualifying for specific tax relief 237

12.1.4.   Due diligence costs which do not qualify for tax relief on any of the above bases  238

12.1.5.   Vendor or sell-side due diligence. 238

12.2.        VAT.. 238

12.2.1.   Share purchases. 238

12.2.2.   Asset deals. 240

Acknowledgements. 243

Index   247