Estimated earn-out

Our client made a disposal of his business during the 2009/10 tax year which included an earn-out element of 30% of future profits over the next five years all to be paid in September 2014.

We have treated that in line with the Marren v Ingles case and estimated the value of the earn-out right. We recognise that tax will have to be paid on any excess pay-out over the estimated value.

At current rates that tax will be charged at 28% whereas the value of the earn-out was taxed at only 10% because of the availability of entrepreneurs’ relief.

If HMRC subsequently feel that the earn-out was under-valued then presumably they can challenge this under an enquiry or (possibly) via a discovery assessment.

However what happens if they think that we have over-valued it?...