A share purchase agreement is the key document drafted when a company is sold and will contain tax warranties and a tax covenant. We often provide advice on both tax warranties and covenants. We work alongside lawyers and accountants throughout the transaction.
Tax warranties
A warranty is a statement of fact about the tax affairs of the company, made by the vendor. It provides the buyer with assurance that the company has complied with applicable tax regulations and paid all tax which is due. An example of a tax warranty is as follows:
“All notices, returns (including any land transaction returns), reports, accounts, computations, statements, assessments and registrations and any other necessary information that have, or should have, been submitted by the Company or any Subsidiary to any Tax Authority for the purposes of Tax have been made on a proper basis, were submitted within applicable time limits, were accurate and complete when submitted and remain accurate and complete in all material respects. None of the above is, or is likely to be, the subject of any material dispute with any Tax Authority.
A disclosure letter is usually drafted, which limits the seller’s liability under the warranties. It will give further detail about instances where the warranties are not fully correct. For example, a disclosure against the warranty above might state:
“The corporation tax return for the year ended 30 June 2021 was filed on 17 July 2022. The HMRC late filing penalty of £100 was paid”.
Significant time may be required for consideration and discussion of the disclosure letter and so this will need to be built into the project timetable.
If a tax warranty is breached then the remedy is damages payable to the buyer. The buyer must be able to prove that he or she has suffered a loss. The damages will seek to put the buyer in the position they would have been in had the liability been known.
Tax covenants
A tax covenant is a promise by the seller to make a payment to the buyer if certain circumstances arise in the future. It aims to apportion liabilities fairly between the buyer and the seller. An example of a clause in a tax covenant is as follows:
“The seller covenants with the buyer that, subject to the provisions of this tax covenant, the Seller shall pay to the Buyer an amount equal to any liability for taxation arising from or by reference to an event occurring on or before completion.”
There is no disclosure letter relating to tax covenants and there is no requirement to prove that a loss has been incurred. It is sufficient to show that the circumstances mentioned in the covenant have arisen.
Items already provided for in the accounts will usually be carved out of the covenant.
Specialist tax advice should always be taken in relation to tax warranties and covenants. If you would like to discuss how we might be able to assist please do get in touch on hello@allegro-tax.com.
