Asset acquisitions in the insurance intermediary sector are becoming increasingly common and are often presented as the simpler alternative to buying shares.
The usual pitch is that a purchaser can avoid the complexity of a full corporate acquisition, select only the assets it wants and reduce the scope of due diligence. That is true up to a point. But it is a myth that buying a book of business – even where the transaction is documented as a straightforward sale of client relationships, renewal rights and associated records – has no meaningful tax consequences compared with a more complex share acquisition process.
The better analysis is more nuanced. An asset purchase may reduce exposure to historic Corporation Tax, VAT, PAYE and NIC liabilities of the vendor, because the buyer is not acquiring the vendor company. However, the transaction itself can create new tax costs, cash-flow risks and employee relations issues. In some cases, those issues can be material enough to change the commercial pricing of the deal.
Corporation Tax: the goodwill mismatch
The first issue is Corporation Tax asymmetry. The vendor will usually be taxed on any profit realised on the disposal of goodwill or other intangible assets. Where the vendor is within the UK corporate intangible fixed assets regime, credits on the disposal of relevant intangible assets are generally brought into account for Corporation Tax purposes. If the vendor is not within that regime for a particular asset, capital gains principles may instead be relevant. Either way, the sale is unlikely to be tax neutral for the vendor.
The buyer’s position is also often unattractive. Where the principal asset acquired is goodwill or a customer-related intangible such as renewal rights, client lists or customer relationships, Corporation Tax relief is restricted. For acquisitions of goodwill and relevant assets on or after 1 April 2019, relief may be available only where the goodwill is acquired as part of the acquisition of a business that includes qualifying intellectual property. The relief is given at a fixed annual rate of 6.5%, but only on the lower of the cost of the relevant assets and six times the cost of the qualifying IP acquired.
That condition is important in the insurance intermediary context. A book of business will commonly comprise client relationships, policy information, introducer arrangements, renewal income rights, records and perhaps the benefit of employee know-how. It will not necessarily include qualifying IP such as patents, registered designs, copyright, design rights or similar protected rights of any meaningful value. Software, trade names, websites, databases and marketing materials should be examined carefully, but the presence of operational data or a brand label does not automatically produce valuable qualifying IP for these purposes.
The commercial consequence is a mismatch: the vendor may price the deal on the basis that it is selling taxable goodwill, seeking a higher price to give rise to the planned net-of-tax proceeds, while the buyer may not receive a corresponding tax deduction for amortisation. If there is qualifying IP that could give rise to relief, then this should feed directly into valuation, completion accounts and the allocation of consideration. If part of the price is allocated to software, licences, restrictive covenants or other identifiable intangibles, that allocation must be supportable and reflected consistently in the legal documents, accounts and tax computations. Artificial allocations are unlikely to survive scrutiny.
VAT: the TOGC assumption may be wrong
The second issue is VAT. Parties often assume that a book purchase will be a transfer of a going concern, so no VAT is chargeable. That assumption may be correct, but it should not be made casually. UK VAT TOGC treatment requires more than the sale of assets. The assets transferred must be capable of forming a separate business in their own right and must be used by the buyer to carry on the same kind of business as the seller. The business must be live or operating, and the buyer must be put in a position to continue it.
Insurance intermediation creates particular pressure points. The first fail state is that the buyer acquires only income streams or renewal opportunities, rather than an operating business or identifiable part-business. A static client list, without the systems, permissions, data, people, contracts or practical ability to service the clients, may look more like an asset sale than a going concern.
The second fail state is interruption or non-continuity. If the seller stops servicing the book before completion, client consent processes are incomplete, agency or insurer terms are not novated, or the buyer cannot immediately write, renew or administer the relevant policies, HMRC may question whether a live business has been transferred.
The third fail state is that the buyer does not carry on the same kind of business. This is usually less problematic where one authorised insurance intermediary acquires a book from another and continues broking or distribution activity. It may be more difficult where the book is absorbed into a materially different model, transferred to an appointed representative structure, used merely as a lead-generation asset or run down rather than actively serviced.
The fourth fail state is VAT registration and VAT recovery. If the seller is VAT registered, the buyer will normally need to be VAT registered, or required to be registered, at the relevant time. Insurance intermediary supplies are often exempt, which can also mean that any VAT charged in error may not be fully recoverable by the buyer. That can turn a technical dispute into a real cost. The sale agreement should therefore state whether the price is VAT-exclusive, allocate risk if HMRC challenges the treatment, and require evidence supporting TOGC status.
TUPE, PAYE and employee tax expectations
Where staff transfer with the book, the tax risk is not limited to historic liabilities. TUPE can transfer employees automatically, together with their contractual rights and employment history. For PAYE purposes, a succession may arise where ownership changes and the new owner takes responsibility for the old employer’s pay records. In other cases, the old employer may issue P45s and the buyer may operate a new PAYE scheme. The payroll mechanics should be agreed in advance, not discovered after completion.
The practical problem is that the buyer may inherit people whose expectations have been shaped by poor or informal employment tax practices. Examples include mileage payments made incorrectly, or without evidence of business mileage, homeworking allowances paid without checking eligibility, client entertainment or travel costs reimbursed without considering taxable benefit treatment, commission or bonus payments processed inconsistently, salary sacrifice arrangements undocumented or misunderstood, and benefits such as cars, medical cover, phones or professional subscriptions not reported correctly.
When the buyer applies the correct PAYE, NIC, benefits reporting and expenses processes, take-home pay may fall or long-standing practices may be withdrawn. Employees may regard this as the buyer changing the employment deal, even where the buyer is simply applying the law correctly. That creates a staff retention and integration issue as much as a tax issue. It should be addressed through pre-completion due diligence, clear employee communications and, where appropriate, price adjustment or indemnity protection.
Simpler does not mean easy
A book acquisition is definitely simpler than a full share purchase from a due diligence perspective. The buyer does not usually need to review every historic tax exposure of the vendor company in the same depth, and the scope of warranties and indemnities can be more focused. But it is not a tax-free shortcut.
The buyer should validate the vendor’s tax position and the transaction tax treatment before signing. At a minimum, that means identifying exactly what assets are being acquired; modelling the Corporation Tax treatment of goodwill and customer-related intangibles; testing whether qualifying IP exists and whether any goodwill relief is realistically available; documenting the VAT TOGC analysis; checking VAT registration and exemption consequences; reviewing payroll, expenses, benefits and pension processes for transferring employees; and ensuring the sale agreement contains appropriate VAT clauses, tax warranties, indemnities, information rights and price adjustment mechanisms.
The objective is not to turn an asset deal into a share deal by another name. It is to recognise that the tax risk profile is different, not absent. A well-managed buyer will preserve the speed and simplicity of the book purchase while still asking the questions that determine whether the agreed price reflects the real after-tax economics of the transaction.
To discuss anything raised in the article in more detail, please contact: Chris Riley, Tax Partner.
