Tax due diligence is a crucial step that is often undertaken during various business transactions, including disposals, mergers, or refinancing. Failing to address any tax-related issues before the due diligence process can lead to significant delays and even result in renegotiation of the price. Therefore, conducting a thorough review of the tax situation before engaging in a planned transaction is of utmost importance.
In the tech and media industries, there are several common tax issues that businesses need to be aware of. These include share schemes, off-payroll workers, export VAT evidence, director’s loans, and overseas operations. It is imperative for companies to assess and document the status of their off-payroll workers, establish robust procedures for export VAT evidence, and understand the reasons behind any intra-group balances. Additionally, businesses with overseas operations may require specialized US tax advice, considering the complexity of US sales tax regulations.
One of the key tax issues that tech and media businesses face is related to share schemes. Share schemes are a popular way for companies to incentivize and reward their employees. However, they can also have significant tax implications. It is crucial for businesses to ensure that their share schemes comply with all relevant tax regulations and that they have a clear understanding of the tax implications for both the company and the employees.
Another important tax issue in these industries is the classification of workers as off-payroll. Off-payroll workers, also known as contractors or freelancers, can provide flexibility for businesses, but their tax status needs to be carefully assessed. In recent years, there has been increased scrutiny from tax authorities regarding the classification of workers, particularly in the gig economy. It is essential for businesses to correctly determine the employment status of these workers and comply with all relevant tax obligations.
Export VAT evidence is another area where tech and media businesses need to exercise caution. When selling goods or services to customers outside of the European Union (EU), businesses may be eligible for zero-rated VAT. However, to benefit from this zero-rating, businesses must have robust procedures in place to obtain and retain the necessary evidence to prove that the goods or services have left the EU. Failing to do so can result in the imposition of VAT on these transactions, leading to unexpected costs for the business.
Director’s loans are yet another tax issue that businesses in these industries need to be mindful of. Director’s loans occur when a company lends money to one of its directors or shareholders. While these loans are not inherently problematic, they can have tax implications if not properly managed. It is crucial for businesses to ensure that any director’s loans are properly documented, and any interest charged is at an arm’s length rate. Failure to do so can result in tax consequences for both the company and the director or shareholder.
Finally, businesses with overseas operations may face additional tax complexities, particularly when it comes to US sales tax. The US has a complex sales tax system, with different rules and rates varying by state. If a business has operations or sales in the US, it may be necessary to seek specialized US tax advice to ensure compliance with all relevant regulations and to optimize tax planning.
In conclusion, tax due diligence is a critical step in various business transactions, and it is particularly important for tech and media businesses to be aware of the common tax issues they may encounter. By conducting a thorough review and addressing any tax-related concerns before engaging in a transaction, businesses can avoid potential delays, price renegotiations, and unexpected tax consequences. Seeking professional advice from tax experts, such as those at BDO, can help ensure compliance with tax regulations and optimize tax planning strategies.
