How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask bigduckontax Your Own Question
bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4425
Experience:  FCCA FCMA CGMA ACIS
75394688
Type Your Tax Question Here...
bigduckontax is online now

I am a 32% shareholder in a business which I and two others

Customer Question

I am a 32% shareholder in a business which I and two others have grown over 17 years, I have had at least 10% of the shares throughout. We have agreed subject to Due Diligence to sell the business for the price below, which includes up to USD7m to be paid on an earn out.
At the moment I think it is likely that the Revenues will be between USD36 and 41m.
My questions are:
- Do I qualify for entreneurs relief?
- How should I structure/declare the earnout? I am assuming that the best course of action is to pay tax at 10% on the lot then claim back any excess – is this correct? Do I need to ensure that the earnout structure meets any particular criteria to be able to do this? Will the overpayment to the Revenue carry interest receivable by me?
1 PRICE
1.1 The purchase price for the Sale Shares (Price) shall comprise the following elements:
1.1.1 At Completion:
(a) US$28.5m will be paid in cash to the Sellers.
(b) US$1.5m will be paid in cash into an escrow account to be held for 12 months from Completion (Escrow Amount).
1.1.2 Post Completion there will be an earn out payment (which is payable within 45 days from the date of the audited financial statement) upon the achievement of the targeted Revenues in accordance with paragraphs 3.2 to 3.6 below.
1.2 If the Revenues are less than US$41m but equal to or in excess of US$36m then the earn out payment shall be US$2m, which shall be satisfied by the payment of US$1m in cash and US$1m in ordinary shares in the capital of the Bidder.
1.3 If the Revenues are equal to or more than US$41m then the earn out payment shall be the sum of:
1.3.1 US$5m, which shall be satisfied by the payment of US$2.5m in cash and US$2.5m in ordinary shares in the capital of the Bidder; and
1.3.2 an additional US$0.5m (split 50:50 between cash and shares) for each US$1m amount of Revenues in excess of US$41m up to a ceiling of US$45m.
By way of example, if the Revenues are US$45m then the earn-out payment shall be US$7m (which shall be satisfied by US$3.5m in cash and US$3.5m in shares).
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
From the tenor of your question it would appear that you are entitled to Entrepreneurs' Relief (ER). This relief limits taxation of the gain to 10% instead of the usual 18%, 28% or a combination of the two rates.
The methods of payment and how they are made are irrelevant. The gain for CGT kicks in at full value on the date of sale. You should declare the gain as a Capital Gain on the Income Tax Self Assessment Tax Return for the relevant year, not forgetting to claim ER. HMRC will then advise you of the taxes and National Insurance payable by 31 January ie for the 14/15 tax year by January 2016.
I do hope I have shed some light on your question. Of course, you may be liable to tax in the States on the gain also, but under the Double Taxation Treaty in force between the UK and the USA any tax paid in the UK is allowable as a tax credit against any US tax liability on the same stream.
Customer: replied 2 years ago.

Sorry but I think you haven't answered the questions about the earnout element, in particular can I claim back the overpayment, does it carry interest, and do I need to structure it a certain way to go this route. All of this is dealt with in HMRC practice notes but I wanted to see if there was anyone who could shed any particular light. I have no idea why you mentioned the USA. Let me know if you want to try and tackle this or are happy that I decline to approve the answer.

Expert:  bigduckontax replied 2 years ago.
I mentioned the USA because your question was entirely quoted in US$. UK taxation guidance is given by HMRC in ERSM110940. An extract therefrom indicates that the earn out is part of the consideration for the sale of the holding viz:
'The sale agreement demonstrates that the earn-out is part of the valuable consideration given for the securities in the old company
The value received from the earn-out reflects the value of the securities given up.
Where the vendor continues to be employed in the business, the earn-out is not compensation for the vendor not being fully remunerated for continuing employment with the company.
Non-employees or former employees receive the earn-out on the same terms as employees remaining.'
You are not continuing in employment. but as you are receiving compensation on the same terms as other shareholders I would suggest that these are all payments of a capital nature not remuneration.
Customer: replied 2 years ago.

You still haven't answered the whole thing. You appear to suggest that given the structure stated I have no choice but to declare and pay the lot notwithstanding that I don't expect to get it all. Can I reclaim the overpayment once the value is known? Will the overpayment to the Revenue carry interest receivable by me?

Customer: replied 2 years ago.
Relist: Incomplete answer.
Expert:  bigduckontax replied 2 years ago.
The reason your penultimate follow up question was not answered was because I was in transit between Thailand and the UK and travelling for nearly 28 hours including the time shift.
In Capital gains tax the gain crystalises on the date the sale is made irrespective of the flow of payments.
In the circumstances I consider your rating a tad unfair. It is akin to shooting the messenger and should be revised accordingly.
Customer: replied 2 years ago.

I am sorry you think it unfair, however you could have made it clear that your answer was incomplete and you would be following up. In any case you still haven't indicated if I will be able to reclaim the excess and if the repayment amount is subject to interest.

Expert:  bigduckontax replied 2 years ago.
Of course you can, you either make an amendment if you have already made the return on take it into account if you have not.
Deep apologies for the omission.
bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.
Thank you for your support.