The use of deferred consideration structures in share sales is becoming increasingly relevant in the current market environment.   As well as commercial and legal considerations, these structures require some thinking on the tax side.  In a recent post I commented on some of the capital gains tax points which sellers need to think about (Deferred Consideration and Capital Gains Tax) but what about buyers?   

From a tax perspective, one thing buyers will need to consider is the stamp duty treatment of their deferred consideration structure.

Stamp duty 

Stamp duty is generally payable at the rate of 0.5% of the consideration payable for the transfer of shares in the UK.   In the context of deferred consideration, the stamp duty position will depend on whether the amount of deferred consideration payable (or potentially payable) is known, unknown but ascertainable, or unascertainable at the time of completion of the sale of the shares.

Known amounts

Where the amount of the deferred consideration is known at the time of completion then stamp duty will be payable on that amount within 30 days of completion, in the same way as for any upfront consideration.  For example, this would catch a simple deferral situation where an additional amount of consideration is payable 6 months following completion.   In this scenario, there is no opportunity to obtain a refund of overpaid stamp duty if the consideration is not ultimately paid.

Ascertainable consideration

Where the amount of any deferred consideration is unknown but could be ascertained at the time of completion stamp duty is generally payable under the ‘wait and see’ principle.  This most commonly applies to transactions where the amount of the consideration is based on target figures in a set of completion accounts which reflect the financial position of the business being acquired at the time of completion.  Often in this scenario an estimated consideration is paid up front and then adjusted when the completion accounts have been finalised.

Under the ‘wait and see’ principle buyers are able to pay stamp duty, and have their stock transfer forms provisionally stamped, within 30 days of completion even though the final amount of the consideration is unlikely to be known at that time.  This is generally done based on an estimate of the final consideration which will be payable.  Any stamp duty application relying on the ‘wait and see’ principle must also be accompanied by an undertaking to resubmit the stock transfer forms, and pay any additional stamp duty due, once the consideration has been finalised.    Once the consideration is finalised, if it is a higher than the original estimate, additional duty on the excess amount (plus interest from the date falling 30 days after completion) must be paid or, if the consideration is lower than the original estimate, any excess duty which was paid should be refunded (with interest, albeit at a lower rate).

Using the ‘wait and see’ method of stamping has two benefits for buyers.  Firstly, assuming the stock transfer forms are submitted within 30 days of completion, no penalty will apply when the final consideration is determined and the stock transfer forms are submitted for final stamping and any additional duty paid. Secondly, provisional stamping allows the company books to be written up and title to be completed.   

Unascertainable consideration

Where the amount of the deferred consideration is not known and cannot be determined at the time of completion the stamp duty treatment is determined by the ‘contingency principle’.  This could be the case where the amount of deferred consideration payable depends on the future performance of the business, often referred to as an earn-out.  An example of this type of consideration would a further payment due one year following completion of an amount equal to 5% of the profits of the business in excess of £100,000 for that year.

Generally, under the ‘contingency principle’ stamp duty will be payable based on the maximum amount that could be payable in respect of the deferred consideration.   If there is a set figure included in the sale agreement in respect of the deferred consideration, e.g. a maximum cap, a minimum amount or a fixed figure that may vary, stamp duty will be payable based on that set figure (or the highest of them if a minimum and maximum is included).    However, if no such set figure included and the amount of the deferred consideration is based on a formula which cannot be calculated at completion (as in the example above) no stamp duty will be payable on the deferred element.

Buyers should therefore be aware that any cap placed on deferred consideration (no matter how aspirational) will be used as the consideration for the purposes of calculating stamp duty.   Unlike the ‘wait and see’ principle there is no true up once the consideration is determined so there will be no refund of duty if the full amount of deferred consideration is not paid.  Although uncapped deferred consideration could provide a benefit from a pure stamp duty perspective (as no duty would be payable on the deferred consideration element) this will often be unpalatable commercially so the focus from a buyer should be on ensuring that the stamp duty liability is factored into their costings for the transaction. 

Future gazing

The government launched a consultation in April 2023 on modernising stamp duty and SDRT.  Among other things that consultation proposed reforming the stamp duty (and SDRT) treatment of deferred contingent, uncertain or unascertained consideration to align with the current SDLT treatment.    Broadly, this would involve stamp duty being payable on a reasonable estimate of the consideration to be paid (assuming any future contingency takes place) at the time of the original return.  A subsequent return would then be required once the final consideration was determined and any additional duty paid or a refund made by HMRC.  There would also be a possibility to defer payment of duty on contingent or uncertain elements of consideration payable at least 6 months after completion.

The consultation closed in June 2023 and there have been no further updates from the government since then.  It therefore remains to be seen if these proposals will be adopted.

Conclusion

As is clear from the above, the use of deferred consideration structures in share sales introduces complexities from a stamp duty perspective. The stamp duty treatment deferred consideration structures should be considered, and advice taken, early to avoid any unexpected (and unfunded) tax liabilities for the buyer when it comes to completion.