UK business sale tax scrutiny widens over founders’ deferred pay structures

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UK business sale tax scrutiny

Highlights

HMRC has intensified reviews of sale-linked payments such as earnouts for founders, scrutinizing whether they constitute taxable employment income rather than capital gains.
Reclassification of founder proceeds from capital gains (taxed at 18–24 per cent) to employment income (up to 45 per cent plus national insurance) could substantially increase tax liabilities.
Expanded HMRC enforcement, including a new team of 350 criminal investigators and technology investment announced in the 2025 Spring Statement, is raising compliance risks for business sellers and advisers.

HMRC review expands across sale-linked payments

As reported by the Financial Times, HM Revenue & Customs has stepped up reviews over the past year into how business owners are taxed when they sell companies, especially where payments are linked to their ongoing involvement after completion.

Such structures, including earnouts, are widely used in start-ups and other high-growth businesses where buyers and sellers differ on valuation. Founders can receive cash after a sale, shares in the acquiring company or other payments linked to future business performance, and advisers say HMRC is examining whether some of those amounts amount to disguised remuneration rather than sale proceeds.

Dulcie Daly, a partner in the tax practice at law firm Goodwin Procter, said founder sellers commonly receive equity as part of the consideration where they are expected to remain involved in the business. She said the structure can align seller and buyer interests in building future value while reducing the upfront cash needed to fund an acquisition.

A central issue is whether those proceeds are taxed as capital gains from a share sale or as employment income from continued work. Capital gains are typically taxed at 18 per cent to 24 per cent, while income tax can reach 45 per cent, in addition to national insurance contributions, meaning any reclassification can materially raise a founder’s tax bill.

Gideon Sanitt, a partner at Macfarlanes, said HMRC has long focused on arrangements that treat income earnings as capital, but is now increasingly targeting what many regard as commercial arrangements. Clare Halligan of S&W Group said cases with a potential disguised remuneration risk are often escalated to HMRC’s technical team for a more detailed and intrusive review, while Crowe UK partner Hayley Ives said investigators are requesting more documentation, including full sale and settlement agreements.

Enforcement push raises risk for founders and advisers

The tougher reviews come after the UK government committed more resources to reducing the country’s estimated 46.8 billion pound tax gap, the difference between tax owed and tax collected. In the 2025 Spring Statement, Chancellor Rachel Reeves said the government was investing in cutting-edge technology and expanding HMRC capacity to tackle avoidance, while the previous autumn Budget announced a new team of 350 criminal investigators focused on tax evasion by small businesses.

HMRC said it does not hold data on whether investigations into entrepreneurs’ share-sale deals have specifically increased. The authority added that its duty is to ensure everyone pays the right tax under the law, no more and no less.

Advisers say the pattern extends beyond one-off company sales. Ives said there are also more HMRC challenges over whether partnership profits allocated to partners should instead be taxed as salary, suggesting a broader push to test whether transaction labels match the underlying tax treatment.

With deferred and equity-linked consideration likely to remain common in high-growth sectors, tax specialists say founders should seek professional advice early in a sale process. Matthew Brown, technical officer at the Chartered Institute of Taxation, said early planning is important to reduce the risk of later disputes.

Our earlier article on the Diezani Alison-Madueke bribery trial in London covered how a Southwark Crown Court jury acquitted the former Nigerian oil minister and two co-defendants, bringing a long-running UK corruption prosecution to an end. We noted the verdict was a significant setback for the National Crime Agency’s flagship case and highlighted what it could mean for the UK’s wider efforts to pursue alleged overseas corruption through domestic enforcement.

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