AVOID the tax traps and follow these steps…
1) If there is a maximum Earnout payment normally calculated on post completion profits —in the Sale Agreement – by all means state the basis of the calculation but DO NOT make reference to a maximum or minimum figure – as the HMRC will assess the maximum to be taxed .
2) Where the earn out payments are to be made more than 18 months from Agreement date then any related tax can be paid by instalments.
3) Ensure that the Earnout is not related to any service – time – work done by you the Vendor during the Earnout period. Why? This is because the HMRC will seek to assess the Earnout as income which would be taxed at up to 45% together with National Insurance being also payable—- Capital Gains Tax (CGT ) is payable at 20% on an Earnout.
4) Make sure that Sale Agreement doesn’t refer to any future role of the Vendor in the business going forward but that the earnout payments relate only to the VALUE of the BUSINESS.
This article deals with the subject of Earnouts in general terms – for specific advice on your deal – please contact Peter French at [email protected]