Private equity investment and tax compliance: What every newly backed business must know

Private equity (PE) investment can be transformative for a business, bringing capital, strategic direction and growth opportunities. But with this new backing comes a more complex tax landscape. PE-owned businesses often find themselves part of larger, more intricate corporate structures, which can significantly affect their tax compliance obligations.

At PKF Francis Clark, we help businesses understand these complexities, ensuring they prepare for growth whilst remaining compliant. Below we have set out some of the key considerations needed to ensure tax obligations are met.

What private equity ownership means for corporation tax

Associated companies includes any company under common control. This includes foreign entities but excludes dormant and passive holding companies.

The number of associated companies affects:

• Corporation tax rates: The small profits rate of 19% applies to profits up to £50,000. Marginal relief applies up to £250,000. These thresholds are reduced based on the number of associated companies in the year. Therefore it is unlikely a PE backed business will be able to access the small profits rate

• Quarterly instalment payments (QIPs): Whether a company pays a corporate tax liability every quarter or nine months after the year end depends on the profits made in the period:
  • Large companies with profits over £1.5m must pay quarterly instalments every three months from six months and 14 days after the accounting period starts
  • Whereas very large companies with profits over £10m must pay quarterly instalments from three months and 14 days after the start of the accounting period

These profit thresholds are divided by the number of associated companies at the end of the previous accounting period. This means PE backed businesses often fall into very large quarterly instalment payments the year following the PE investment. Failure to plan for this and make payments on time can lead to large amounts of late paid interest becoming due. Careful forecasting and awareness of the payment due dates is required.

Our advice: Engage early with your tax advisors to ensure you are appropriately forecasting corporation tax payments.

Annual investment allowance (AIA): Group-wide limits for private equity structures

AIA provides tax relief on qualifying capital expenditure up to £1 million per annum. However, this is a group-wide limit which applies to businesses held under common control. PE-backed businesses may unknowingly exceed the AIA limit if other UK entities have already claimed it. We anticipate this to be a growing area of HMRC challenge.

Top tip: Ask your advisor coordinate with PE fund to track AIA usage across the UK entities and avoid disallowed claims.

Loss utilisation and the deductions allowance

The corporate loss restriction rules limit the use of brought-forward losses to 50% of taxable profits, after applying a £5 million deductions allowance per group. A group for the purpose of the deductions allowance is a parent and its 75% subsidiaries.

Challenges for PE-backed businesses:

• Determining the group allocation of the £5m allowance can be difficult, particularly if the different UK companies don’t communicate with each other
• A nominated company must submit an allocation statement. Without it, any allocation claimed may be invalid

Top tip: Engage early with the PE fund and group finance teams to ensure proper allocation and submission of the correct information to HMRC.

Tax governance obligations for private equity owned businesses

Being part of a larger group may trigger additional tax governance requirements, including:

• Senior accounting officer (SAO) regime
• Uncertain tax treatments reporting
• Publication of a tax strategy

There is a risk that PE-owned businesses may be unaware they’ve crossed the relevant thresholds due to group size. This could lead to large penalties for non-compliance.

Top tip: Confirm with the PE fund whether your company falls under these regimes and ensure governance processes are in place.

Apprenticeship levy and employment allowance

Both the employment allowance and the apprenticeship levy allowance must only be claimed once by connected companies. However, PE-owned businesses are often not aware of the allowance being claimed by other UK entities, so may inadvertently exceed the limit.

Top tip: Communicate with the PE fund regarding which company can claim the relevant allowance.

Conclusion

Private equity investment brings exciting opportunities. However it also brings a new level of complexity in tax compliance. From new reporting obligations to varied allowances and governance, the stakes are higher and the rules more intricate.

At PKF Francis Clark, we specialise in supporting PE-backed businesses through these transitions. Our expert team can help you understand your obligations, optimise your tax position, and stay compliant. So you can focus on growth.