Andrew Mosby – International Inbound Partner
The market has seen a recent increase in foreign investors whom are looking for a stake in innovative UK businesses, this means that is it crucial those looking to attract such interest are ready for any post-acquisition tax and HR-related implications, which could get in the way of a smooth integration process.
By looking ahead, SMEs seeking a sale can structure their businesses to encourage foreign investment, while preparing for any changes that could impact their way of working, particularly if they are acquired by a much larger overseas company.
Where are buyers looking?
International buyers are looking for innovative UK companies, many of which are situated in the tech sector, as they wish to gain the key tech know-how or are looking to gain closer access to the UK marketplace. Other multinationals are looking to extend their global footprint, so they have local teams serving specific global regions, providing timely support when needed, across time zones.
Think about the tax implication early
Companies that are open to offers or actively pursuing a sale, it would be wise for those companies to consider the tax implications early on. Looking into whether the business would remain eligible for R&D tax credits under the SME scheme would be a good start, for example, there could be some restrictions if they are subsequently acquired by a larger group. Detailed HMRC guidance is available regarding ‘linked’ and ‘partner’ companies and this should be consulted carefully.
Depending on the size of the group making the acquisition, corporation tax changes may also need to be considered. For example, if the UK company is acquired by a larger group, it may be required to make payments on a quarterly instalment basis, rather than nine months after the year end – impacting on cash resourcing.
Additional reporting requirements
Known as Country-by-Country reporting, this may also be triggered for UK companies acquired by an international group, with a worldwide turnover exceeds Euro 750 million. The acquired UK company may not be aware that they are obliged to check whether a full report of the group’s activities is prepared elsewhere and to notify the UK tax authorities.
International groups looking to acquire innovative UK businesses will recognise that often they are negotiating with both the founder shareholder and perhaps external initial investors (who may have benefited from favourable tax reliefs under EIS and SEIS schemes). Existing employee share options schemes may already be in place, so they could be dealing with multiple parties. Existing employees holding share options under UK approved schemes, such as EMI, may share in the sale proceeds as well as receive favourable tax rates. To retain and motivate existing talent, international groups may be required to offer UK employees new options, in the overseas parent. Although care is required to ensure new options are approved by the UK tax authorities, to provide similar favourable tax treatment in the future.
What cultural changes could the acquisition bring
The acquisition of you firm by a large international group is highly likely to bring significant cultural challenges too. The changes should be introduced gradually rather than addressing them all in one day. New processes or ways of working may need to be adopted, particularly if the group operates a more structured reporting system with tighter timescales and reports on a country-by-country basis and the UK subsidiary may be subject to UK audit for the first time. The UK has strict disclosure regimes, meaning the purchaser may need to consider additional obligations around disclosing ultimate group ownership and control outside of the UK, with an annual requirement to declare any ‘Persons of Significant Control’ at Companies House.
Maximise the value of your business
Looking ahead, there is an opportunity for UK-based SMEs to review their strategic plans and for some, considering a sale to a global entity, may be an option. With the right professional advice and international understanding, businesses can ensure they have the right structures and information in place to maximise value and support the integration process, whilst ensuring employees also benefit from the process.