Your IndustrySep 29 2021

Govt's NI hike to impact valuations in adviser M&A deals

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Govt's NI hike to impact valuations in adviser M&A deals

The government's increase in National Insurance contributions could make selling financial advice firms more complicated and lead to lower valuations of their assets, according to Ross Stupart, tax partner at RSM. 

The reason for his warning is how share incentive plans, usually owned by employees, are treated under the rules. 

Stupart said if not structured as part of National Insurance, the hike could fall outside of earlier NI agreements for share incentive purposes and present a liability for the acquiring firm. 

The government plans to place a 1.25 percentage point increase on National Insurance contributions alongside a 1.25 per cent dividend tax, in order to pay for a £86,000 cap on the cost of social care. 

The plans were dubbed a 'health and social care levy', in light of the Conservative's election pledge to not hike NI. 

Stupart explained: “There are HMRC approved schemes for using [share incentive plans], but many firms use schemes such as Longterm Incentive Plans (LTIPs) which are unapproved schemes.

"Now the thing with those is, there is often an agreement between the employer and the employee, called an election, under which, when the share scheme matures, the employee agrees to bear any of the liability for National Insurance, for both the employer and themselves.

"But this new increase is being presented as a separate levy for health and social care. And such a levy would not be covered under the agreement struck years ago around National Insurance.

"Now it may be the government decide this is part of National Insurance, but if not, then it could be quite a liability for a firm that is doing the acquiring.”  

The Treasury has told FTAdviser the new levy will be based on NI contributions initially but will be separated out formally in two years' time. 

The Levy will be effectively introduced from April 2022, when NICs for working age employees, self-employed and employers will increase by 1.25 percentage points and be added to the existing NHS allocation.

From April 2023, once HMRC’s systems are updated, the 1.25 per cent levy will be formally separated out and will also apply to individuals working above State Pension age, and NICs rates will return to their 2021-22 levels.

Stupart said firms wishing to acquire other advice firms should factor this in in their due diligence. 

He told FTAdviser: “As a buyer you look at the historic earnings of a business plus the Ebitda (earnings before interest, tax depreciation and amortisation) - you look at the historic earnings to see what the future earnings might be.

"But if I was advising a potential acquirer, I think I would say to them, are historic earnings a good proxy for future earnings when the pay bill is rising? If the pay bill is for example, £10m, then the National Insurance increases mean that goes up by £125,000, which obviously makes the future earnings lower.

"Smaller businesses may not be materially impacted but larger ones would be, and it is certainty something to pay attention to in the due diligence.” 

Helen Relf, head of transaction tax at RSM, said another consideration was possible changes to Capital Gains Tax in the upcoming budget, which may impact the net proceeds that a seller receives. 

This year's Autumn Budget, which will be delivered on October 27, could feature changes to CGT after widely expected reforms did not materialise in the March Budget. 

Last year the chancellor commissioned a review into CGT by the government's Office for Tax Simplification, saying he was particularly interested in how the levy interacted with taxes on income.