Caveat emptor? Or to put it more colloquially – make sure you are not buying “a pig in a poke”!
If you buy a company, you take over not only its trade, assets and goodwill but all of its history, including any skeletons in closets.
Cathy Corns, Mercer & Hole.
The sellers may not realise they have a problem - which makes unearthing details and disclosure somewhat challenging. Just as a reminder, liabilities to corporation tax and PAYE fall on the company, at least in the first instance.
Due diligence normally goes back around three years and any earlier issues
are covered by tax warranties, indemnities and possibly a Tax Deed. In reality however, recovering monies from sellers can be challenging, especially if they
have, say, emigrated to sunnier climes or even just spent the money paid to them.
HMRC is taking an aggressive stance on tax recovery in relation to what they regard as unacceptable tax planning (the definition of which is a little loose) and have an armoury at their disposal to recover tax – Accelerated Payment Notices (APNs), Partner Payment Notices (PPNs) and Follower Notices (FNs) as well as the right to direct recovery from bank accounts.
HMRC has the right to issue an APN where a company has entered into planning that was required to be disclosed under the Disclosure of Tax Avoidance Schemes (DoTAS) regulations. In advance of any ruling by the courts as long as an enquiry is open (or validly opened) HMRC can issue a demand for payment of the tax purported to be avoided. APNs may not be appealed, although the amount or validity may be challenged; otherwise the tax is due after 90 days with penalty interest on late payments.
PPNs are worse as the partner (which could be a company) may not even know an enquiry into the partnership of which it is a member is ongoing (no-one has to tell them). If a company made a film investment, say, the first it may know of any issues on an investment that could have been made over ten years ago is when it receives a tax demand.
FNs work on a similar basis where, in HMRC’s view, a court decision finding against the taxpayer is based on facts, analogous to planning undertaken by the company. It can request withdrawal of the claim and payment of the tax. FNs can be appealed but the penalty for failure could be a surcharge of up to 50% of the tax disputed.
Add HMRC’s new right to take money from the company’s account if there is a failure to pay into the mix and you can see why there may be reason to be concerned about unknown liabilities. Commercially, buying a company may well be absolutely the right decision but it is not something to be done lightly. Proper research and advice is crucial or the outcome could be unfortunate.
As Donald Rumsfeld said “there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don't know we don't know”.