When one company buys another, the headline price is only the start. Tax due diligence is where buyers find the liabilities that sit beneath the accounts, and where sellers either defend their valuation or watch it erode. Whether you are buying or selling a UK business, understanding what tax diligence looks for — and preparing for it — is what keeps a deal on its original terms.
Share purchase vs asset purchase: the tax fork
The structure of the deal drives everything that follows:
- Share purchase. The buyer acquires the company itself, and inherits its entire tax history — known and unknown. This is why share deals carry the heaviest diligence and the most extensive warranties and indemnities.
- Asset purchase. The buyer cherry-picks specific assets and trade, leaving historic liabilities behind in the seller's company. Cleaner for the buyer, but often less tax-efficient for the seller, who may face a double tax charge (in the company on the sale of assets, then again on extracting the proceeds).
Sellers usually prefer a share sale (one capital gain, potentially relieved by Business Asset Disposal Relief); buyers often prefer assets. The negotiation between these positions sets the tone of the deal.
What buyers' tax diligence looks for
On a share acquisition, expect the buyer's advisers to examine:
- Corporation Tax — filed returns, open enquiries, the validity of losses being carried forward, and any aggressive positions.
- PAYE and IR35 — employment status of contractors, off-payroll working compliance, unreported benefits in kind, and any settlement exposure.
- VAT — registration history, partial exemption, the treatment of the transaction itself, and whether a transfer qualifies as a VAT-free transfer of a going concern.
- R&D tax credits — whether past claims were robust, given HMRC's heightened scrutiny of the merged scheme.
- Stamp Duty / SDLT — on the shares (0.5%) and on any property within the target.
- Employment-related securities — whether EMI and other share schemes were properly set up and reported.
Warranties, indemnities and the tax covenant
Diligence findings translate into the legal protections in the sale agreement. The tax covenant (or tax deed) is a promise by the seller to reimburse the buyer, pound for pound, for pre-completion tax liabilities that were not provided for in the accounts. Specific risks uncovered in diligence are often carved out into specific indemnities. The size and survival period of these protections, and any cap, are heavily negotiated — and a clean diligence report is the seller's best argument for limiting them.
Seller-side: vendor due diligence pays for itself
Sellers who wait for the buyer to find problems negotiate from the back foot. Vendor due diligence — running the same review on yourself before going to market — lets you fix or disclose issues on your own terms, present a clean data room, and resist price chips and aggressive indemnities. Resolving overdue filings, shoring up R&D claims, and tidying employment-status questions in advance routinely protects more value than it costs.
How PushDigits can help
We act for both buyers and sellers — running tax diligence on a target, or preparing a company for sale so it survives a buyer's scrutiny. With Big 4-trained advisers, we know what the other side will look for. Explore our Business Advisory service or book a call to discuss your transaction.