Tax Due Diligence for a Private Equity Investment in a UK Technology Business

Tax Due Diligence for a Private Equity Investment in a UK Technology Business

A private equity investment house asked our team to review the tax position of a UK technology business it planned to invest in. The window was tight and the information arrived in stages. This is how we handled it.

At a glance

• Client: a private equity investment house
• Target: a UK technology business serving the hospitality sector
• Scope: a detailed tax due diligence report with risks and recommendations
• Difficulty: a tight turnaround, with information released in stages through the data room
• Areas covered: overseas tax, R&D claims, VAT, PAYE and National Insurance, and contractor status

The client

The client was a private equity investment house. It was considering an investment in a leading UK technology business serving the hospitality sector.

The challenge

The review needed a detailed look at the target's tax position within a tight turnaround. It was made harder because information was released bit by bit through the data room. The report had to be updated, amended and reviewed again each time new material came in.

What we did

We completed a comprehensive tax due diligence review, identifying areas of risk and giving recommendations.

• Reviewed the data room and wrote the report. The result was a detailed tax due diligence report.
• Looked at overseas exposures. We considered the tax risks of engaging overseas contractors. We also considered whether overseas group companies working in the UK could accidentally create UK permanent establishments.
• Tested the Research and Development (R&D) claims. We assessed whether the claims were compliant and where future claims could be strengthened. We also pointed out that Patent Box relief might be available.
• Checked VAT on international supplies. This covered the reverse charge and the VAT treatment of software licences under the "use and enjoyment" rules.
• Found PAYE and National Insurance risks. Cash allowances had been paid to employees for Christmas celebrations outside payroll. We calculated the potential exposure.
• Reviewed contractors. We looked at self-employed contractors and personal service companies (PSCs), and tested the contracts and working practices for employment status and off-payroll working risks.

The outcome

We delivered the full tax due diligence report on time, despite the information arriving in stages, and kept it updated right up to the end. The investor went into the deal with a clear view of every tax risk in the business: the overseas permanent establishment exposure, the R&D claims, VAT on international supplies, the PAYE and National Insurance exposure on the cash allowances, and the contractor arrangements.

Each risk came with a recommendation, and we calculated the potential exposure where one existed. The investment completed, and the investor also came away with practical points for the future, including how to strengthen the R&D claims and the opportunity to claim Patent Box relief.

Why it matters

Tax risk in a technology business often sits in the details of how people are paid, where they work and how services are supplied across borders. A buyer who sees those risks early can price them, ask for protection in the contract or plan to fix them. A report that is kept current as the data room fills is worth more than one fixed at the first sight of the documents.

If you are weighing up an acquisition or an investment, see our selling a business page, or book a call with our team.