Companies which rushed to sell assets before the April tax rate changes could risk losing millions through unchecked sales agreements.
Ian Smith, chairman of accountants Rabjohns, estimates that more than £150m of deferred payments is at stake for small and medium-sized business deals completed in the Midlands before April’s change of regime.
“The mass of mergers and acquisitions activity before April 5 may have been done to save tax, but have now placed many companies in a dangerous situation,” he said.
“Many deals, completed in a rush, skimmed over the usual due diligence process, with purchasers relying more heavily on deferred payments.
“Those who have opted to sell through the earn-out route, of an initial down payment followed by deferred payments contingent on company performance, will now be feeling the pressure.
“Not only will general market conditions and the worsening economy mean that the performance criteria will be under severe pressure, but purchasing companies may be looking for ways of minimising their pay-outs under the deferred consideration, as they may be under pressure themselves.
“If the purchaser is reliant on sourcing external funding for the deferred consideration, the market for this will have severely hardened in the meantime and they might struggle to get that funding.”
Mr Smith said Rabjohns had already seen evidence of purchasers trying to manipulate accounting policies to minimise the profit levels of purchased groups and knock the overall price down.
“The accounting policies within the Sale and Purchase agreement are not a glamorous part of the deal process, but can have an enormous impact on the net cash received, and this is why it is essential that vendors monitor the application of these policies throughout,” he said.
With the majority of sales driven by taper relief falling within the £2 million to £10 million bracket, and deferred consideration often being 50 per cent or more, the amounts at stake are significant.
Mr Smith added: “A typical deal of £4m with £2m deferred would have created a tax saving of eight per cent for getting the deal done quickly, however, this pales into insignificance compared to the £2 million that is reliant on the profit results and the accounts supporting those results.
“With this in mind, it is essential for vendors to ensure their accountants are all over the sales agreement and all accounts are buttoned down – saving tax is irrelevant if the company proceeds go up in smoke.”