Tax due diligence is a fundamental requirement of any successful acquisition or investment process. While it is often perceived as a review of historic compliance, its real value lies in identifying issues that could crystallise into liabilities after completion, influence transaction terms or negatively affect the long‑term value of the investment.

In the current UK tax environment, with increasingly complex legislation and heightened HMRC scrutiny, tax risks can be wide‑ranging and, in many cases, are not immediately visible from statutory filings alone. Performing tax due diligence provides clarity over these risks, enabling informed decision‑making and effective protection within the transaction documentation.

Tax due diligence is more than a compliance exercise

The primary purpose of tax due diligence is to assess whether the target business has complied with its tax obligations and whether any historic or ongoing issues could result in a tax liability crystallising for the buyer post‑completion. However, its value goes beyond reviewing tax returns and filings. The tax due diligence process can:

• Identify historic liabilities that may justify price adjustments, escrows or specific indemnities

• Highlight weaknesses in the target’s processes that can be addressed after the transaction has taken place

• Evaluate the availability of tax attributes (such as losses) post completion

While the tax covenant included in the share purchase agreement (SPA) may provide the buyer with the mechanism for recovering tax liabilities from the sellers, this process can often be time consuming and costly, particularly if there is disagreement over the validity or quantum of the claim.

Identifying potential tax risks before the transaction ensures they can be dealt with appropriately prior to completion. This may mean negotiating a reduction in the purchase price, obtaining specific indemnities for identified risks, or requiring the sellers to remedy the issue before the deal completes. Addressing risks upfront gives the buyer greater certainty and avoids the delay and expense of pursuing a claim later.

What are the key tax risk areas commonly identified in transactions?

While risks vary by sector and business size, there are certain issues that we consistently see during tax due diligence exercises and can result in material exposure if not fully understood prior to completion.

How we can help

Tax due diligence plays a critical role in ensuring that buyers understand what they are acquiring. Our findings feed directly into SPA negotiations, informing warranties, indemnities and pricing mechanisms, and reducing the risk of post‑completion disputes.

We work closely with deal teams to ensure that tax findings are reflected appropriately in the transaction documentation, whether through pricing adjustments, specific indemnities, warranty protection or pre-completion remediation actions.

Whether you are acquiring a business or making an investment, tax due diligence provides greater certainty and safeguards the long-term value of the transaction. If you would like to discuss how our transaction tax team can assist with your next deal, please fill in the form below and one of our team will be in touch.