More changes to Capital Gains Tax to come?
July 5, 2021
The first report of the Office of Tax Simplification (“OTS”) when it was published in November 2020 caused headlines with its recommendations around increasing the rate of Capital Gains Tax (“CGT”). Unsurprisingly, this caused press headlines and a strong response from the business community.
In contrast, the publication of their second report into CGT has seemed almost to have slipped under the radar – which is a shame as the recommendations being proposed by the OTS have the potential to be really beneficial – with one even changing the basis of how future M&A transactions are undertaken.
In terms of UK businesses, two particular recommendations stand out.
Firstly, and to our mind, most importantly, the OTS has recommended a change in the way that “deferred consideration” on the sale of businesses are treated.
Deferred consideration is simply any amount of money from the sale of a business which is not paid on completion of the transaction. Under the current and somewhat complicated rules, the tax on these deferred amounts will typically be taxed “up front” unless tax planning is undertaken to avoid this. In addition, to the seller having less net monies on day one, there are issues if the later amounts are not paid over to the seller for any reason.
Given all these complexities, the OTS is recommending that tax only becomes due when cash (or similar payment in kind) is actually received by the seller. This will particularly be welcomed in those situations where the deferred payment is not fixed but is, instead, based on an agreed formula and/or a performance condition being met (frequently termed an “earn out”).
One should definitely credit the OTS for taking a bold stand on what is an obvious simplification, especially as it will likely mean a delay in tax collection to the Government coffers and this recommendation should be fully supported.
One further effect is that it may also see changes to the structure of company sales in the future. At the moment, the complicated rules plus the risk of a “dry” tax charge push business owners towards wanting to receive all their money upfront. Whilst many owners in the future will still prefer getting paid up front if possible, the simplifying of the rules and in particular the link of taxation to receipt of payment may make sellers more open to agreeing a staged approach to payments. It will be interesting to see what happens going forwards around this.
The second relevant change from the OTS is that they wish to help and encourage investment in early stage businesses with a simplification around the administration of the Enterprise Incentive Scheme. Whilst not as far reaching as some might have hoped, anything which improves the chances of investment into new businesses will be good for the UK economy as we come out of the current economic climate.
If you would like further information about the points raised in this article, please do contact Stuart James.