Huge, multi million pound merger and acquisition corporate deals are few and far between in a hard hitting recession. However, on a more local level, the current recession has actually triggered a lot of smaller scale deals across the UK where businesses are merging with each other to save costs and take advantage of economies of scale or where businesses that are doing okay are rescuing others that are not doing so well.

It's not every business involved in such a situation that can afford the huge fees for a belt and braces due diligence review. Even where a full-scale due diligence is carried out on the business being bought/merged with/taken over, PAYE tax and staff matters are so often ignored or not given enough thought (usually by some self important corporate tax specialist who believes corporate tax is the be-all-and-end-all of deals).

We therefore focus on some of the key areas to be aware of around taking on employees of another business

Terms and conditions of employment

In the vast majority of cases involving a change of business ownership, the TUPE rules come into play, that is the Transfer of Undertakings (Protection of Employment) Regulations, which are in place to protect the employment rights of existing employees.

What TUPE effectively means is that the new employer must agree to pay the transferring employees under the same (or better) terms and conditions within existing contracts of employment. What this means in reality is that:

  • The historical Ts&Cs of the transferring employees may be overly expensive for the new business
  • There may be impracticalities to consider in maintaining elements of the TS&Cs e.g. in relation to company cars, working hours, etc
  • There could be a number of different arrangements for employees across the workforce in terms of pay and staff benefits where businesses are being merged. This may lead to unhappy workers and many HR issues for the new business to deal with

Of course, there are solutions to most of the above problems. For example, a flexible benefits scheme can often be a very effective, and cost efficient, method of harmonising pay and benefits across the entire workforce. However, great care needs to be taken around any change to Ts&Cs when a business changes hands as failure to comply with TUPE can be very costly and damaging to the business.

At the very least, the new business owners need to be aware of the potential issues around this, and importantly any financial costs involved. before signing on the dotted line.

PAYE tax risk

The specific nature of the business change, i.e. whether this is a merger, takeover or transfer of some/all of the business, and the entities involved, all have a bearing on who is responsible for what in relation to PAYE and National Insurance on historical, current and future payments to employees.

However, it is absolutely crucial in any deal to be aware of what risks exist from a PAYE and NI point of view on payments made and existing processes, procedures and arrangements, and get any necessary legal indemnities in place where necessary to ensure that the new business will not be landed with an unexpected liability further down the line.

Some crucial areas to consider, no matter what size of business, or the deal, include:

  • Payments to self employed workers - could there be an employment status issue ?
  • Existing arrangements to compensate the current owners if a deal goes through. What are the tax consequences ?
  • Ongoing disputes with HMRC
  • Any large termination settlements paid to ex employees that could be scrutinised by HMRC

Construction Industry Scheme implications

An often overlooked, but significantly important, area when a business changes is the impact from a Construction Industry Scheme point of view.

Gross payment status is coveted by many businesses who perform work defined as 'construction operations' within the CIS rules as it allows them to be paid gross, without any CIS tax deductions, which is a huge cashflow advantage compared to subcontractors who suffer 20% or 30% tax deductions at source from all CIS work.

However, when a business changes ownership, it is usual for CIS gross payment status to be withdrawn which leaves the new business with the task of reapplying to HMRC for gross payment status going forward. The difficulty with this is that many new businesses and their owners are unable to meet the tests required to qualify for gross payment status specifically in relation to the turnover test which is based on the previous 12 months of trading (which there may be none if the business is a new entity) and/or the compliance tests if the new owners have not been up to date with their business or personal tax affairs. We have seen this last point being a particular issue where the new owners are not from the UK and there is no previous record of tax filing with HMRC.

Notwithstanding the cashflow disadvantage of not obtaining gross payment status, the potentially biggest issue for the new business is that many large contractors insist on their subcontractors having gross payment status before they agree any contracts as they don't want the hassle of making CIS deductions at source. In some cases we have been involved in, this has potentially been catastrophic for the business as no contract = no income = no business ! We should say that it is sometimes possible to build a successful business case to obtain gross payment status in such circumstances, even where the statutory tests are not met, but it is essential that you have someone who knows what they are doing (like us for example !) fighting your corner otherwise you will be unlikely to succeed.

Other issues

A few more issues that spring to mind here that often crop up are:

Salary sacrifice - it could be that a change to the business could have an adverse effect on the tax effectiveness of existing salary sacrifice arrangements, e.g. around childcare vouchers

Other HMRC agreements - existing agreements, e.g. P11D Dispensations and PAYE Settlement Agreements may be invalid once the business change goes through

Owners tax - if there is a change to the structure of the business and any of the previous owners remain but their individual status changes, it can be difficult for behaviours to change which can lead to tax problems. The biggest problem around this is when previously self employed owners are made directors of a new incorporated company but fail to recognise that directors are taxed completely differently under the PAYE rules and continue to treat the company's money as their own.

 

Conclusion

Employee issues should be at the forefront of anyone looking to buy/rescue/merge with another business as the stakes can be high if errors are made - despite what other 'learned' advisors may lead you to believe !

Do your homework upfront on the above areas and you should be fine. Ignore them at your peril though !

You don't have to spend a fortune on upfront costs to get to the bottom of most of this - at least not when  you come to Optimum PAYE anyway ! - so give us a call if you need any assistance when you're next on the takeover/merger trail.

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