tax purposes will not have come to an end. The fact that there is a profit up to Completion and losses thereafter will not normally feature in the tax computations and the post-Completion losses will therefore not exist in a strict tax sense. 2.23 In such circumstances, which are very common, it is implicitly assumed that an Accounting Period comes to an end at Completion, for the purposes of computing the Post-Completion Relief only. It is becoming increasingly common for this to be stated in the tax covenant. It is our view that this should be overtly stated and that special rules for the carry-back of losses are deemed to apply for the purpose of computing the Post-Completion Relief. 2.24 If Completion takes place part way through an accounting period, then it has to be assumed that an accounting period comes to an end at Completion in order for the concept of Post-Completion Relief to work. It then also has to be assumed that the period of 12 months allowed for the carry-back of losses under Section 393A (assuming that we are dealing with a trading Company) is extended by the length of the period between the Last Accounts Date and Completion. 2.25 It is generally accepted that the Buyer is normally to be allowed to organise his tax affairs to his own best advantage, provided that the Seller is not prejudiced. The inclusion of this specific covenant therefore allows the Buyer to carry-back the losses to the prior period without jeopardising his position. 2.26 We cannot envisage any circumstance in which Sellers should object to such a clause as it places them at no disadvantage. Any objections may therefore be little more than seeking as many negotiating points as possible. In our experience objections have often been poorly-based, and have arisen due to the Sellers’ advisors not penetrating the meaning of this clause; then, having taken a stand on a matter, they have found it difficult to retire with any grace. (It is fair to say that it is one of the more difficult parts of the classic covenant to analyse, especially for those with little knowledge of corporate tax, and with limited experience of tax covenants.) Stradbroke Pharmacies Limited has an accounting reference date of 31 December. It was sold on 30 June 2008 by Mr and Mrs Olde to Mr and Mrs Newman, for consideration of net assets plus £1 million. The net assets were determined by reference to Completion Accounts. The profits of the Company for the year to 31 December 2008 were £280,000 and they were £160,000 for the 6 months to 30 June 2009. Happily the accounting profits and the tax profits are identical. Provisions for corporation tax of £53,200 and £31,775 respectively were made. The statutory accounts for the year to 31 December 2009 showed losses of £100,000. (It is therefore implicit that the Company lost £260,000 for the 6 months to 31 December 2009.) The tax liabilities up to completion were understated as Mr and Mrs Olde had two other active companies under their control; unfortunately the existence of these other companies had not resulted in a reduction in the small company rate bands applicable to Stradbroke Pharmacies Limited in the self-assessment tax returns. The extra corporation tax liabilities payable were £44,700. However, the losses of £100,000 have 2.27 This can be illustrated by an example:
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