Tax liability
Pre-sale Corporate Restructure – Employment Tax
Prior to completion of the transaction, one of the sellers of the UK target company had agreed to waive his shareholder debt, which was owed by Target and arose from a historic MBO.
There was some doubt whether the waiver would create a taxable credit for the target under the loan relationship rules.
There was also a concern that the waiver would indirectly increase the value of the other seller’s shares, which would create an income tax charge for the individual sellers/directors under the employment related securities rules.
As the waiver was in the context of the sale of their shares, there would also be a national insurance contribution and PAYE risk for the target. The amount of the combined risk was under £1 million, which was a sticking point in the negotiations between the sellers and the buyer.
NIX, however, were able to arrange a bespoke policy in a matter of a few days that covered the tax liabilities at stake, interest, penalties and defence costs of dealing with a challenge by HMRC.
The deal teams commented that the cover was the difference between the deal getting done.
Tax liability
TOMS – VAT Risk on Vehicle Hire
The deal
The target was the UK’s leading tech-driven business mobility provider, specialising in supplying temporary vehicles to businesses — alongside its industry-leading IRIS software for booking vehicles in seconds and managing drivers, fines and claims in real time. The business was being sold PE to PE.
The risk
Part of the target’s service involves buying in car hire from third-party rental companies and resupplying it to its customers. Buyside diligence highlighted a risk that these supplies could fall within the scope of the Tour Operators Margin Scheme (TOMS). If they did, it would lead to margin erosion — the target would still charge clients the same net amount to remain competitive.
The seller’s view was that it materially altered the supplies — a fully managed service. The buyer was not entirely convinced by that argument, but still considered it a low risk given this was a B2B supply.
The policy
The risk was insured with a policy limit of £12 million for a £144,000 premium — a rate of 1.2%.
W&I insurance
Buying from a Liquidator
BuyerJapanese conglomerate
SellerLiquidator
TargetGerman automotive manufacturer
Purchase price€30 million
Situation
- The Japanese buyer insisted upon warranty protection in the SPA.
- The selling liquidator was unwilling to provide any warranties or indemnities.
- Management were not receiving consideration and were not willing to accept liability.
Solution
- The seller’s lawyers contacted NIX to help facilitate the transaction.
- Management agreed to provide warranties provided they had no material liability.
- NIX offered a bespoke insurance policy with a limit of €15 million.
- The liability cap of the selling liquidator was reduced to €1.
Tax liability
Transactions in Securities – Group Restructuring
Background
Two shareholders each held c48.5% of a trading company. As part of a wider commercial restructuring to combine two complementary businesses into the same group, they intended to sell their shareholding to the group — receiving c£2.5m in cash and c£2.5m of redeemable preference shares, on a working valuation of c£5m.
The tax at stake
The default position was a capital gain on the cash consideration — CGT of c£300k assuming Business Asset Disposal Relief was available. However, HMRC could suggest the transaction fell within the Transactions in Securities (TiS) legislation. If successfully applied, the full c£5m of consideration — cash plus redeemable shares — could be taxed at up to 39.35%, an income tax liability of c£1,967,500. The estimated tax at stake was c£1.7m plus applicable interest.
The policy
NIX arranged a policy that would pay out should HMRC successfully claim the tax. The policy limit was £2m, which included provision for HMRC interest, penalties and defence costs. The cost of the policy was just over £48,000 including all fees and taxes.
Tax liability
Transactions in Securities – MBO Loan Note Redemption
Background
Prior to the MBO the founder owned 100% of the company. As part of the deal he sold down 60% of his shares, receiving c£31.6m in cash, retained 40%, and received £22.4m of loan notes representing the value he did not sell. Advance tax clearance was granted for the share-for-share exchange and for the cash consideration being treated as capital — but clearance was not sought for a future redemption of the loan notes.
The loan notes continued to accrue interest, so the group invested its excess cash to ensure it had the assets to repay them. Those investments were liquidated and the c£22.4m of loan notes repaid, with the founder retaining his 40% shareholding in the group.
The tax at stake
Capital gains tax at 20% — c£4.48m — would be paid on the loan notes, but the founder wanted to insure against the risk of HMRC applying the TiS provisions to the loan note repayment.
The policy
NIX arranged a policy that would pay out should HMRC successfully claim the tax. The policy limit was £5m, which included provision for HMRC interest, penalties and defence costs. The cost of the policy was £125,000 including all fees and taxes.
Legal contingency
Defective Share Buyback
NIX were approached by the seller’s lawyers on a transaction due to an issue with a historic share buyback.
The problem
Legal due diligence found that in 2013 the company had bought back a third of its shares from an existing shareholder. One of the conditions of the buyback was that the consideration be paid in full, in one payment. For reasons unknown, it was paid in two payments — one at the time of the buyback, the other a year later.
This compromised the buyback and, technically speaking, despite receiving consideration ten years earlier, the exiting shareholder still owned the shares. The PE buyers were understandably uncomfortable with this, and the sellers weren’t willing to stand behind the risk.
The solution
To help facilitate the deal, NIX arranged a buyside W&I policy covering the warranties relating to the buyback, with a sum insured of £12m at a cost of £116,000 including all taxes and fees — which the sellers paid for. The deal completed on time, without a price chip or the use of escrow.