Selling a Business: Tax Implications and Employee Rights

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Selling your company would be no big deal in a perfect world where there were no taxes and employees were all well taken care of. This world is certainly not perfect. Therefore, people preparing to sell their companies need to be proactive every step of the way. Selling a business involves tax implications and employee rights that need to be properly addressed in order to avoid complicated problems.

If your business plans include selling the company in the near future, I would be more than happy to work with you to ensure things are done correctly.

Selling a Business: Tax Implications

The tax implications of selling a company are one of the first things that need to be considered before any plans are laid out. Beginning with the decision to sell, you and your management team have to determine whether to sell the shares of the company or just its assets. Your decision has multiple tax implications.

Selling the shares of the company means selling the entire business. It means you are selling both assets and liabilities simultaneously. Any potential buyer will want certain protections in place, as would be expected, but you and your management team might need some extra lead time to protect your own interests too.

As just one example, the disposal of your company's assets may eventually lead to capital gains subject to tax. There are ways to work around this including something known as 'rollover relief' for qualifying assets. How assets are structured makes a difference.

Another tax implication to think about is VAT. Company sales undertaken as transfers of a going concern (TOGC) are not subject to VAT. Qualifying under this exemption requires the current business owner to transfer the entire company as an ongoing concern with the assets sold to be used by the buyer to carry on the business immediately following the conclusion of transfer. If there is any significant interruption of business operations post transfer, the sale could be subject to VAT.

Selling a Business: Employee Rights

Owners selling a company need to be cognisant of employee rights prior to the sale. Under the Transfer of Undertakings Regulations of 1981, all current rights of employees are protected when a business is sold as an ongoing concern. Furthermore, the responsibility to employee rights is automatically transferred to the buyer along with business assets, guaranteeing that no interruption of said rights is experienced.

Protecting employee rights is not as straightforward as it sounds. Consider a buyer looking to purchase a company but with no interest in retaining all the employees. The current business owner may have to reduce staff numbers in order to facilitate the sale. However, such dismissals may be deemed unfair under certain circumstances.

It should be obvious that protecting employee rights is a much more difficult proposition than limiting tax liabilities. Employee rights are just one reason for employing the services of an experienced business broker prior to selling a company.

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Author: Tim Luscombe

Hello, I'm Tim and I'm a specialist in corporate finance for the owner managed business. If you've been approached to sell your business, or you are thinking of buying a business or you just want to know what your business ...