Three owner managers had paid themselves from the target by invoicing through their respective PSC’s for 5 years prior to the sale; they had paid themselves no PAYE or dividends during this period.
Buyside due diligence flagged this and calculated a potential employment tax exposure of nearly a third of the EV. The sellers were not prepared to indemnify such a large amount, nor were they willing to negotiate further on price and as HMRC clearance was not favoured by either side, a tax indemnity policy was taken out to facilitate the deal.
The sellers paid for the policy; however, the buyers owned it. Should HMRC successfully challenge in the future, the policy will pay the tax, interest, penalties and defence costs.
Both sides of the deal are quoted to have said the insurance was the difference between the deal going ahead, and not.