HM Revenue & Customs is reported to be widening its examination of payments made to founders when companies are sold, particularly where earn-outs, deferred consideration or equity awards are linked to the seller remaining with the business after completion. The reported change raises a significant classification issue: whether a payment represents capital consideration for shares or employment income connected to continuing services.
Tax specialists at Goodwin Procter, Macfarlanes, S&W Group and Crowe UK have described more detailed HMRC reviews of these arrangements, including requests for sale agreements, settlement documents and evidence explaining the commercial basis for individual payments. HMRC has not published data confirming an increase in investigations specifically involving founders’ share sales, so the development remains based on professional observations reported by tax advisers rather than an announced enforcement programme.
The distinction can materially alter the tax cost of a transaction. Capital gains are generally taxed at 18% or 24%, while the additional rate of income tax can reach 45%, with National Insurance contributions potentially applying as well. An amount originally modelled as sale proceeds may therefore create a much larger liability if HMRC concludes that it was earned through employment, retention or personal performance after the deal.
Earn-outs are a standard feature of acquisitions where buyer and seller cannot agree the company’s value at completion. HMRC’s own guidance recognises that deferred cash, loan notes or securities may form part of the purchase price. It identifies factors supporting capital treatment, including whether the payment reflects the value of the shares surrendered, whether it is independent of future employment and whether personal performance targets have been excluded. Where an arrangement combines sale consideration with a reward for services, HMRC says the value may need to be apportioned.
That places greater responsibility on CFOs and finance directors on both sides of a transaction. Purchase agreements, board papers, valuation work, remuneration records and post-deal employment terms must tell a consistent commercial story. A retention condition, reduced salary, personal target or payment available only to working shareholders may weaken the argument that the full amount belongs to the acquisition price. Finance teams should also model the potential PAYE and National Insurance exposure before signing, rather than treating tax classification as an issue for the founder alone.
The reported reviews fit a broader expansion of HMRC’s compliance capacity. The government’s 2025 Spring Statement provided funding for 500 additional compliance staff on top of 5,000 previously announced, while the Spending Review allocated £1.7 billion over four years for 5,500 compliance staff and 2,400 debt-management staff. HMRC estimated the UK tax gap at £46.8 billion for 2023–24.
Dulcie Daly of Goodwin Procter, Gideon Sanitt of Macfarlanes, Clare Halligan of S&W Group, Hayley Ives of Crowe UK and Matthew Brown of the Chartered Institute of Taxation have all been connected with the latest reporting on the issue. Their observations point to a practical requirement for earlier coordination between finance, tax, legal and payroll teams. Companies planning founder-led sales should assume that transaction documents may later be examined together, with the commercial purpose of each payment tested against the founder’s continuing role.
