Is your management buy-out losing out on tax reliefs? It is often the case that it will do and it is the responsibility of any adviser to ensure that the client is aware of the tax efficiencies that are available.

In this article, IRIS Professional Tax Practice’s MBO and share scheme expert David Craddock explores the opportunities that exist to:

• reinforce the commerciality of the management buy-out with tax structures that are tried and tested and deliver the value that the client seeks; and
• provide for future tax efficiencies as well as immediate benefits.

At the time of the management buy-out (MBO) the need to secure cost-efficiencies is paramount. In many cases the financial institutions will require incoming shareholders to mortgage their private residences and will always seek to maximize their return from interest payments. So it is all the more surprising that minimal attention is given to the tax efficiencies that can be obtained for the management team and other employees through a constructive use of employee share scheme arrangements as part of an MBO.

On one view, a MBO initiative is a major employee share scheme initiative. The incoming shareholder directors are employees and it is employee involvement at any level within the business, whether at director level or at general employee level, that the government-sponsored tax-approved schemes are designed by statute to assist.

Tax-approved employee share schemes should not be underestimated for their flexibility and versatility – just because the Revenue sponsors them does not mean that the potential rewards are small. They will usually have a role to play in the management buy-out arrangement that seeks to utilize the tax advantages of employee share schemes. Often, Enterprise Management Incentives (“EMI”) will have a contribution to make for the new shareholder managers as will the Company Share Option Plan (“the CSOP”). For the wider employee workforce, the use of the all-employee Savings-Related Share Option Scheme (“ShareSave”) and the Share Incentive Plan (“the SIP”) can bring the key motivation for growth with a financial contribution from them, usually comparatively minor but sometimes substantial, to the overall buy-out funding requirement.

However, it is through introducing tax-unapproved arrangements that employee share structures come into their own in supporting the MBO. Central to these arrangements is the employee share trust which has the capacity to deliver significant tax efficient capital gains tax benefits to the outgoing shareholders and a whole range of tax efficient share benefits and cost-savings measures for the new incoming shareholders. The employee share trust will typically be resident offshore with a recognised trust administrator in the Channel Islands, which combines the commercial advantages of the structure with a full infrastructure of regulation which gives the MBO team the security and peace of mind that are so essential.

Tax-unapproved schemes can deliver tax advantages that are as beneficial as the tax-approved schemes and sometimes even more beneficial, because they can involve higher percentages of shares. Courtesy of the Income Tax (Earnings and Pensions) Act 2003 we now have the full armoury of tax elections, notional loan arrangements and restricted securities, all of which can be combined with share reclassifications and new classes of shares as necessary to construct a tax-efficient infrastructure on a bespoke basis to service the MBO’s needs. Furthermore, the new Companies Act 2006 abolishes the prohibition on loans to directors, replacing it with a shareholder approval regime that opens up significant opportunities for share loan schemes that have the potential in certain circumstances to make a MBO possible where otherwise the possibility could easily fade away into the realm of the pipe dream.

So, in summary, the constructive use of a combination of the Taxes Acts, the Companies Acts and Trust Law can deliver the MBO in a commercially sensible and seriously tax-efficient form using employee share scheme arrangements.

The opportunity is there for meaningful tax planning right from the start of the buy-out initiative. It’s never too soon to ask.

For further details on management buy-outs and share schemes please contact IRIS Professional Tax Practice and ask to speak to our MBO and share schemes specialist David Craddock, quoting this article on the SWATUK website.

Tel: 01865 847474

Fax: 01865 847974

Email: advice@ptptaxconsultancy.co.uk