Craig Rothnie

Scotland’s tech sector is thriving bolstered by a broad range of world-class, innovative companies which, combined together, employ around 88,000 people and contribute an estimated £6.87 billion to our economy each year.

The high quality of the sector has been underlined by a number of M&A deals of Scotland-based businesses over the past year. This includes the acquisition of Edinburgh-based firm Reactec by Nottingham company, Ideagen; the sale of Glasgow firm RedMosquito to Red Squid, a UK IT managed services provider (MSP) also headquartered in Scotland’s biggest city; and the purchase of fellow Glasgow MSP, Cloud Cover IT, by Gateshead-based Aspire Technology Solutions as part of its expansion into new UK regions.

These transactions demonstrate how acquisition by UK parent companies can add further value to our tech sector by helping Scottish-based firms further expand their operations.

While many other tech businesses in Scotland have the potential to follow this course, a number of key tax-related issues, increasingly scrutinised by HMRC, must typically be addressed before they are in a ‘sale ready’ position.

From a tax perspective, getting a tech business ready for acquisition should be focused on mitigating risk, avoiding last-minute surprises, and strengthening its negotiating position.

Based on my involvement in recent deals, employment taxes and cross-border compliance issues are often a key area of concern. The growth in hybrid working has blurred borders with employees aften based across different parts of the UK or overseas. It’s therefore increasingly important for companies to demonstrate to a potential buyer that they are compliant with payroll, social security and corporate tax obligations in all relevant jurisdictions.

This is a long-term process which typically requires at least one year of planning to ensure all appropriate compliance issues have been met and associated documentation to support this are in place. Beginning this process at the earliest possible stage also enables an emerging tech business time to deal HMRC and other parties to address any potential issues before acquisition talks begin.

With many emerging tech businesses exchanging equity for early investment, clear and accurate shareholder records are another key consideration in advance of preparing for acquisition. Details of when, how, and at what value shares were issued or transferred must be clearly documented or it could delay a transaction and weaken confidence in the business.

It’s therefore essential to review current shareholdings and consider potential means of improving tax outcomes. This may include considering share transfers to a spouse or reviewing whether key shareholders qualify for Business Asset Disposal Relief.

Setting up equity incentive schemes can potentially add to the sale value of a technology business but this requires careful review in terms of how it is structured. Companies which are ultimately looking to be acquired must get careful advice on whether such share options deliver value to employees and how this might interact with the sale structure.

With claims under increasing scrutiny from HMRC, R&D Tax Relief is another key pre-sale consideration. It’s vital that all supporting reports, HMRC correspondence and other underlying documentation is in order and on file.

The starting point of ensuring a business is sale ready is to carry out a health check on the above points. It’s important to ensure compliance with corporation tax, VAT, and transfer pricing. This should include HMRC responses to all key tax issues as a potential buyer is likely to review these as part of the due diligence process for an acquisition.

Preparing for acquisition takes time but it is essential for businesses in maximising their value to a potential suitor and can ultimately help further bolster the global reach of innovative, Scottish-bred technology.

Craig Rothnie is lead at the entrepreneurial tax team at accountants CT