The sobering effect of the ‘small beer budget’ on M&A deals

THE BUDGET lived up to its billing as a “stay the course” announcement, with little that is new or game-changing.

Essentially, fiscally neutral tinkering leaves room for a new Bank of England governor to act with an expanded remit in the summer. It is therefore unsurprising that initial reaction focused on “‘small beer’ measures like the changing price of a pint. But, as ever, on further inspection, there are some important implications for M&A deals buried in the small print.

When undertaking tax due diligence on a deal, one of the most important work streams is to identify tax assets which will, in the future, offer tax benefit. For example, losses carried forward and unclaimed capital allowances on fixed assets are the types of benefits that need special attention if they are to be preserved long-term when structuring a deal. The anti-avoidance measures announced yesterday will have a big impact on the ability to preserve these benefits.

For instance, looking at the use of carried-forward trading losses – when a company is acquired, the losses will survive the change of ownership and can offset the future profits from the same trade. Clearly, this is an important benefit. Anti-avoidance rules, however, extinguish the losses if the new owner changes the nature or conduct of the trade. The subjective nature of the test means this often causes problems.

In these circumstances, purchasers sometimes would transfer the trade into a new company immediately after acquisition, arguing that this new company has not undergone a change of ownership and therefore would not come under anti-avoidance legislation. The chancellor closed this perceived loophole.

A second tax benefit which is set to change relates to acquiring a company which has a pool of unclaimed capital allowances, usually a loss-making company. Under current legislation, these capital allowances could be claimed in future and therefore be available to offset the profits of other companies in the purchaser’s group. This could be a significant benefit of the M&A deal and form part of the combined synergy savings.

The legislation will prevent these losses from being available where the excess capital allowances are more than £50m, or where they are less then £50m, but are not “insignificant”. Crucially, the term ‘insignificant’ is not yet defined, nor is it clear how to compare the benefit of the allowances. A comparison with deal size would be problematic since, if the company being acquired is loss-making, the size of the deal may not be particularly large. This may well have implications for corporate rescues, but we await more clarity. Although the legislation will apply from Budget date, the technical consultation period will not begin until 28 March. Future deal-makers must ensure they are aware of these changes and their implications on the deal value.

As with any Budget statement, the true implications will be felt way beyond the chancellor’s speech and for those involved in M&A deals, “stay the course” may ultimately feel like an understatement. More clarity is needed, but what is clear is that these new and complex rules are factored in as soon as possible to ensure you see the benefits you were expecting from a deal.

Ian Fleming is a managing director with Alvarez & Marsal Taxand