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.