the accounts. This should be resisted by the Buyer. It is our view that this exclusion is designed for the simple purposes described above. A reference to a potential tax liability in the note to the accounts does not reduce the level of the net assets and should not therefore normally act as an exclusion. It is far better if any such matter, such as a note relating to a contingent liability in respect of Taxation is addressed overtly by the parties. 2.11 There can be specific matters which are addressed by a very specific exclusion. By way of example, if a property is revalued in the accounts, then under UK GAAP provision is not made for the tax on that revaluation. However, the notes to the accounts will normally refer to the amount of tax that would be payable if the property were to be sold for its revalued amount. If the property was then sold between the Last Accounts Date and Completion, the parties would doubtless agree specifically how the tax liability on the actual disposal was to be treated. 3.1.2 it arises as a result of transactions in the ordinary course of business of the Company between the Last Accounts Date and Completion, [provided that none of the following shall be treated as having occurred in the ordinary course of business of the Company]; 3.1 This exclusion will only be appropriate if the deal is based on Last Accounts and no Completion Accounts are to be produced. For this reason this exclusion should not be included in the specimen tax covenant which is given in Chapter 5 as this is based on a transaction involving Completion Accounts. Again, Chapter 6 explores these issues and the appropriate pivot point for the tax covenant. 3.2 If the deal is structured so that the Buyer agrees a price based on the Last Accounts and with no Completion Accounts being required, then it is anticipated that the Buyer has the benefit of the profits made between the date of the Last Accounts and Completion. It is therefore only reasonable that the Buyer should accept the expected tax charges in respect of those profits. It is not reasonable that the Buyer should be responsible for unexpected tax costs that might arise in that period as the business is still being operated by the Seller. 3.3 There is clearly potential for dispute as to whether or not a tax charge is expected. This is normally addressed by stating that the tax charge must relate to the ordinary course of business of the Company. However, this then merely moves the area for dispute on to what is meant by the ordinary course of business. 3.4 If the directors of the Company incur lavish entertaining expenditure in the period between the Last Accounts Date and Completion and this expenditure is not deductible for tax purposes, then this will increase the tax liabilities of the Company above the expected headline corporation tax rate. In these circumstances, the Buyer may believe that he should not be liable for the increased corporation tax liabilities. (He may also be very aggrieved that the profits have been reduced as a result of this expenditure.) 3 Transactions Between the Last Accounts Date and Completion
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