Five tax issues slowing UK private equity exits

The UK private equity market is showing signs of renewed activity, but deals are still taking longer to get over the line. Buyers remain selective, due diligence is increasingly forensic and warranty and indemnity (W&I) insurers are scrutinising transactions more closely than ever.

Against that backdrop, tax is an increasingly important component of deal execution. Most transactions are not failing because of tax issues alone, but tax findings are regularly contributing to delays, valuation discussions and limitations on insurance cover.

Here are five themes we are seeing repeatedly in transaction readiness and tax due diligence exercises across UK private equity-backed groups.

A few years ago, diligence was largely focused on identifying technical tax exposures. Today, buyers increasingly want to understand how tax risk is managed across the business.

Questions around governance, ownership of tax matters, board oversight and risk management processes are becoming commonplace.

For groups that have grown through acquisition, inconsistent processes between portfolio companies can quickly become apparent. Even where no significant liabilities are identified, a weak governance framework can raise concerns about control environments and management oversight and lead to deeper scrutiny across the board.

Employment taxes continue to generate a disproportionate number of diligence points, particularly where management incentive arrangements have been implemented during PE ownership.

Common issues include late ERS filings, incomplete documentation, historic share awards and uncertainty around the treatment of leavers.

Many of these issues are capable of remediation, but they can be costly and often attract significant attention because they involve senior management. They can also create concerns around governance and compliance standards.

VAT remains one of the most common sources of tax diligence adjustments.

Growth, acquisition activity and changing business models can all create VAT risks that are not immediately visible in day-to-day operations. We regularly see questions around partial exemption, cross-border trading, property transactions, VAT recovery and overseas compliance obligations.

Buyers are increasingly using data analytics to identify anomalies, making it harder for historic issues to remain hidden.

One of the biggest changes in recent years is the way diligence providers analyse data.

Rather than relying solely on sampling and interviews, advisers now routinely interrogate large datasets to identify potential risks and inconsistencies.

The result is that poor data quality is becoming a finding in itself. Incomplete audit trails, inconsistent ERP systems, weak VAT coding and difficulties reconciling returns can all create questions during a transaction.

In many cases, buyers become more concerned about the reliability of information than the underlying tax exposure.

Where unresolved matters are identified, W&I insurers may seek additional information, impose exclusions or require specific indemnities. That can create further negotiation points and potentially reduce the protection available to buyers.

As insurers continue to scrutinise tax diligence in detail, sellers are finding that issues that historically may have been negotiated commercially can now have wider implications for transaction structure and risk allocation.

The wider backdrop is important. Buyer sentiment remains cautious, processes are taking longer and investors have more opportunities to deploy capital than they did during the peak years of the market.

In that environment, buyers are less willing to overlook weaknesses they uncover during diligence.

For PE-backed groups preparing for an exit, the lesson is clear: Tax readiness should begin well before a sale process starts. Reviewing governance arrangements, employment tax compliance, VAT risks and data quality ahead of a transaction can help reduce delays, improve insurability and support value.

Increasingly, the most successful exits are not necessarily those with no tax issues. They are the ones where management has identified the risks early, taken action and can demonstrate control.

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