Open HMRC enquiries when selling a company

Q: How might this look in a real sale?

Illustration only. Seller A agrees to sell a consultancy company for £1,000,000. HMRC has an open enquiry into the company's latest return about whether some contractors were really employees. The adviser estimates exposure of £40,000 including interest. A discloses the enquiry and all correspondence in the disclosure letter. The buyer takes a specific indemnity for any tax, interest and penalties arising from the enquiry, and retains £50,000 of the price for 18 months or until the enquiry is concluded. A has the right to be consulted on and approve any settlement, and the buyer must pass on HMRC letters within 5 working days. HMRC closes the enquiry with £30,000 due. The buyer pays HMRC from the retention, which is applied to the indemnity, and the remaining £20,000 is released to A.

An open HMRC enquiry does not stop when the shares are sold, because the enquiry is into the company’s own return and the company carries on under its new owner. The buyer will expect the enquiry to be disclosed against the warranties and covered by a tax indemnity, and may want a retention or price reduction. Who deals with HMRC after completion, and on whose instructions, is a point to settle in the sale agreement, because the buyer controls the company but the seller usually carries the cost.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

Does an HMRC enquiry end when the company is sold?

No. On a share sale the company is the same legal person before and after completion. HMRC’s Enquiry Manual at EM8004 stresses that a company is a legal entity separate from its shareholders and directors. A change of shareholder does not affect the enquiry into the company tax return, the enquiry window for returns already filed under paragraph 24 of Schedule 18 to Finance Act 1998, or the time limits for discovery assessments.

After completion the company still acts through its officers. Section 108(1) of the Taxes Management Act 1970 says everything a company must do under the Taxes Acts is done through its proper officer or through another person who has authority to act for it. In practice that means the new board, and whichever adviser the new board authorises, will be the ones corresponding with HMRC. Under an asset sale the position is different: the enquiry stays with the selling company, which keeps its tax history. See selling a company: shares or assets.

What does the seller need to tell the buyer?

Everything material about the enquiry. ICAEW’s best practice guideline on financial due diligence describes tax due diligence as focused on identifying the tax risks and liabilities that a buyer of shares will inherit from the target company. It also explains that the disclosure letter sets out information relating to the warranties and indemnities so that the buyer is aware of it before signing.

ICAEW’s guideline on completion mechanisms says all warranties are subject to fair disclosure of factors the buyer has been made aware of during due diligence. A seller who discloses an open enquiry properly is protected against a warranty claim for that matter, but that is precisely why the buyer will then ask for a specific indemnity instead. Typical disclosure includes:

the enquiry notice and the returns and periods it covers;
all correspondence with HMRC, including information requests and any meeting notes;
the adviser’s current view of the likely outcome, including tax, interest and any penalty range;
any linked enquiries into directors’ personal returns or employer compliance reviews.

Our page on warranties and indemnities on a company sale covers the general mechanics.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

How is the risk of an open enquiry dealt with in the price?

The ICAEW completion mechanisms guideline says a buyer will normally seek a generic tax indemnity, giving pound for pound redress where unprovided historical tax exposures arise. Where due diligence identifies higher risk exposures that are not provided for, these are sometimes dealt with by a specific adjustment to the price or by specific indemnities subject to fewer limits or restrictions. An open enquiry is a classic example of an identified exposure.

The guideline also describes two cash mechanisms used to protect a buyer after completion:

Retention. Part of the consideration is held back by the buyer and released later once the relevant amount is confirmed.
Escrow. Part of the completion funds is placed in an escrow account from which agreed amounts can be paid, with any balance returned to the seller.

The guideline discusses these in the context of completion account adjustments, but the parties can use the same tools for a known tax dispute. The sale agreement should say when the retention is released, for example on a closure notice, a contract settlement or the end of any appeal, and whether interest and adviser costs can be deducted from it.

Who controls the conduct of the enquiry after completion?

Legally, the company does, which means the buyer. HMRC deals with the company and its authorised representatives, and is not a party to the sale agreement. Control therefore comes down to contract. The points normally negotiated include:

whether the seller, who is paying under the indemnity, has the right to direct the response to HMRC or only to be consulted;
whether the buyer may agree a settlement, accept a closure notice or decide not to appeal without the seller’s consent;
who chooses and pays the advisers dealing with HMRC, and whether the seller’s existing accountant stays involved;
obligations on the buyer to pass HMRC correspondence to the seller promptly and to meet HMRC deadlines;
whether the buyer can volunteer disclosures about pre sale periods that would trigger an indemnity claim.

A seller who gives a tax indemnity but has no conduct rights may find the new owners settling quickly to clear the issue at the seller’s expense. A buyer who gives the seller full control may find the company tied up in a long dispute. The agreement needs to strike a balance between the two.

Can HMRC pursue the seller personally?

In some situations. A director’s own self assessment return is a separate return, and EM8210 says HMRC issues a separate enquiry notice to each director whose return it needs to examine. That enquiry continues whether or not the director still owns or runs the company.

There are also specific rules allowing HMRC to recover a company’s unpaid corporation tax from former controllers after a change in ownership. Under section 710 of the Corporation Tax Act 2010, where corporation tax assessed for an accounting period beginning before the change remains unpaid more than 6 months after it was assessed, and one of the conditions in section 711 is met, a person linked to the company may be assessed. The section 711 conditions include the company’s trade ceasing or becoming small or negligible within 3 years before the change, or a major change in the nature or conduct of its trade linked to a transfer of assets. Section 710(4) allows such an assessment within 3 years of the final determination of the company’s liability. Section 713 contains a similar rule for periods ending on or after the change.

How are indemnity payments taxed?

HMRC’s Capital Gains Manual at CG13010 explains that a payment under a warranty or indemnity made to the buyer of shares is treated as a capital sum derived from the shares and in practice reduces the buyer’s acquisition cost. Where the payment is made instead to the target company, the treatment depends on its character, and a payment that is not a reimbursement of allowable expenditure is treated as a chargeable gain of the company. For the seller, CG13010 says the disposal consideration is adjusted under section 49 of the Taxation of Chargeable Gains Act 1992. Drafting the indemnity to pay the buyer rather than the company is therefore worth considering.

How might this look in a real sale?

Illustration only. Seller A agrees to sell a consultancy company for £1,000,000. HMRC has an open enquiry into the company’s latest return about whether some contractors were really employees. The adviser estimates exposure of £40,000 including interest.

A discloses the enquiry and all correspondence in the disclosure letter.
The buyer takes a specific indemnity for any tax, interest and penalties arising from the enquiry, and retains £50,000 of the price for 18 months or until the enquiry is concluded.
A has the right to be consulted on and approve any settlement, and the buyer must pass on HMRC letters within 5 working days.
HMRC closes the enquiry with £30,000 due. The buyer pays HMRC from the retention, which is applied to the indemnity, and the remaining £20,000 is released to A.

What are the common mistakes?

Not disclosing an enquiry, or disclosing it vaguely, so that the seller faces a warranty claim as well as the tax.
Agreeing an open ended indemnity with no cap, time limit or conduct rights.
Forgetting that linked enquiries into the directors’ personal returns are not covered by a company indemnity and stay with the individuals.
Leaving no one clearly responsible for HMRC deadlines during the handover, which can lead to penalties for failing to comply with an information notice.
Assuming any fee protection cover held by the company will follow the seller; see who pays accountants’ fees in an HMRC enquiry.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.