Produced by Tolley
  • 19 Oct 2021 22:56

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Tax treatment of earn-outs and deferred consideration
  • Date of disposal for CGT ― reminder of basic rules
  • Ascertainable deferred consideration
  • Earn-outs ― unascertainable consideration ― Marren v Ingles principle
  • Loss on disposal of right to receive future consideration
  • Share for share exchanges
  • Earn-outs satisfied by loan notes
  • CGT instalments
  • Employment related securities

Tax treatment of earn-outs and deferred consideration

The consideration received by an individual on disposal of their shares in a company will often be simply in the form of cash, payable at the time of the transaction. However, there may also be some form of deferred consideration, which is often used as an incentive to tie key individuals into continuing to work for the business after the disposal for a certain period of time. In such cases the deferred element of the consideration may be quantified at a later date, typically using a formula based on two / three years post-acquisition profits. An arrangement such as this is known as an ‘earn-out’.

The way in which the consideration for the sale of shares is structured determines when the capital gains tax liability of the individual falls due. There are special rules allowing the payment of tax in instalments in certain circumstances, which are covered at the end of this guidance note.

Most of the commentary in this note relates to the tax position of the individuals involved in a share sale, rather than the companies. It is important that the directors and their advisers understand the tax position of the individuals involved in a transaction as this may impact the way in which the transaction is structured. However, it is recommended that each party involved obtains their own tax advice tailored to their specific circumstances.

Date of disposal for CGT ― reminder of basic rules

The basic rule is that the date of disposal for capital gains tax is the date when there is an unconditional contract for sale. If a contract is conditional on a condition precedent, the date of disposal for CGT purposes is the date that all of the relevant conditions have been fulfilled. A condition precedent is an external condition which must be fulfilled in order for the transaction to proceed, eg a contract for sale of land may be conditional on planning permission being

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