“Any right to repayment of Tax which (or to the extent that it) has been treated as an asset of the Company in preparing the Completion Accounts”
2.13 This relief is referring to amounts recoverable by the Company and shown as assets in the Completion Accounts: examples are a corporation tax recovery due to the carry back of trading losses to a prior period under the provisions of Section 393A, ICTA, or VAT recoverable as the output VAT is less than the input VAT in the period up to Completion. 2.14 It is entirely reasonable in most transactions that the Buyer considers that the consideration payable for the shares includes the purchase of the value of the assets within the Company, including these tax assets, to the extent that they are shown as assets on the balance sheet. Therefore, in the event that any of those tax assets are found not to exist a valid claim under the tax covenant can be made in respect of the loss of a Buyer’s Relief. This is on the basis that such loss will be included in the definition of Tax Liability.
2.15 A simple example can illustrate this point:
The shares in Walsham Sausages Limited have been sold to a third party. After agreement of the Completion Accounts it is discovered that the Company has been incorrectly recovering VAT on entertaining expenditure. The Company is in a permanent VAT recovery position as its outputs are all zero rated for VAT purposes, but it suffers VAT on packaging materials and various overheads. The VAT in question is not paid over to H M Customs, but reduces the amount of the next VAT quarterly receipt. 2.16 The use of the phrase “to the extent that” in the above drafting deals with situations in which the Accounts Relief is understated: if the tax refund that is due is a larger amount than shown in the accounts, and this tax refund is then utilised, the loss to the Buyer is the amount at which the Accounts Relief was included in the accounts. The potential understatement protection for the Sellers is normally dealt with as part of the Overprovisions, Understatements, Sellers’ Reliefs and Corresponding Savings part of the tax covenant. 2.17 Sometimes a tax covenant will use the wording: “....of any Relief which would have been available to the Company to the extent that it has been treated as an asset of the Company in preparing the Completion Accounts.....”. It is our opinion that the critical issue here is that the Completion Accounts include a tax asset which turns to dust in the hands of the Buyer. We do not consider that the words “...which would have been available to the Company....” are required.
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