Volumes of activity will grow, but with that will come greater scrutiny by the tax authorities.
Last week we promised to send you our thoughts on what the new EOT arrangements (tax!) mean for valuations work, so here goes.
For Employee Ownership Trusts (EOTs) the change to CGT relief and the tax implications for future sales may cause some owners to re-evaluate an EOT as an exit option. In principle, a sale to an EOT becomes more costly for business owners on day one. But it is still possibly the best way to withdraw capital from a company from a tax perspective. In that regard the Budget was the best possible advert for the scheme.
We think that this greater awareness will lead to more EOTs being set up. In turn the tax sacrificed will become a larger number – and in turn this will attract the attention of HMRC’s tax investigation team. For example, they will be looking for evidence that could imply an EOT was set up only for tax planning by the seller rather than for the benefit of the employees.
The valuation to support the transaction will come under great scrutiny.
Making sure that everything lines up, and is recorded before the transfer to the trust, is going to becoming increasingly important. This includes documentation that shows the intent for the business to continue for the benefit of the employees for the long term.
Our favourite adage that valuations are about arguments to justify the numbers, as much as the numbers themselves, will increasingly hold true. Omitting to record how the EOT came about and why it has been done will leave a hole for an HMRC investigator to enter. Please encourage your clients to document properly everything to do with the EOT from conception onwards.
As valuers we will be making doubly sure that, inter alia:
The valuation established is in the best interests of the trust, as well as the seller/s (we have an arms’ length independent valuer who reviews our report on behalf of the trustees – if he isn’t happy, we listen!)
Any deferred consideration arrangements are really carefully considered, including accounting for the time value of money where payouts are over five years or more. After all, why would a seller accept a long-term payout which does not consider the effect of inflation on the later payouts? Equally, why would a trustee accept a valuation where the payout over time was unaffordable to or severely constraining upon the business?
For all work that involves a valuation, the new reality is that a clear explanation of why decisions have been taken needs to be on record.
As ever, our role is supporting lawyers, business owners and investors to unpick the threads of the new changes and ensure that valuations are adjusted appropriately to ensure the optimum outcomes for clients and maximum defensibility in the face of HMRC scrutiny.
