However, if it is clear that this has always been a part of the operations of the Company, and that large entertaining disallowable expenditure has been a standard feature of the corporation tax computations, then there is a strong argument to say that this is in the ordinary course of business of the Company, as this is a matter that will have been established by the due diligence work or the disclosures made against the warranties. 3.5 It is therefore clear that there are some situations which may be within or outside the ordinary course of business of the Company, depending on the circumstances of the case. 3.6 However, it is normally recognised that there are specific matters which should be overtly stated as being outside the normal course of business of the Company for the purposes of this part of the tax covenant. These points have been included in chapter 8 dealing with definitions: a series of matters are detailed which are expressly stated not to be in the ordinary course of business. The text in square brackets will be likely to be required by the advisers to the Buyer, if the phrase “in the ordinary course of business” has not been defined elsewhere. 3.7 By way of example, Finningham Traders Limited is charged PAYE and NIC in respect of people who have been incorrectly treated as self-employed for tax purposes. The NIC costs relate to both employers’ and employees’ NIC. This charge comes to light following a PAYE inspection after Finningham Traders Limited is sold to Bacton Holdings Limited. The share sale transaction is based on Last Accounts, not Completion Accounts. The Buyer will be able to recover from the Sellers under the main covenant in respect of the periods up to the date of the Last Accounts. This is on the basis that the tax relates to an event before Completion, and provision for the tax was not made in the Last Accounts. The Buyer may also be able to recover in respect of the period between the Last Accounts and Completion. It may be unwise to base that recovery on the general statement that the tax does not arise as a result of transactions in the ordinary course of business of the Company. The Buyer is in a far clearer position if the tax covenant expressly states that any Tax Liability which represents “ any failure to deduct tax, or any failure to deduct, charge, recover or account for tax” is outside the normal course. However, the Buyer will only be able to recover the PAYE and employees’ NIC costs which are not recovered if this exemption to the exclusion is used. The Buyer will probably not be able to recover the employers’ NIC arising in the period between the Last Accounts and Completion, unless he can argue successfully that this was either a failure to account for tax or, alternatively, did not arise in the normal course of the business of Finningham Traders Limited. Provided that the tax covenant is properly drafted, the Buyer should be protected from interest and penalties relating to this matter, as such costs will be considered to be outside the normal course of the business of the Company. 3.8 There is some logic in the example of Finningham Traders Limited given above: it is arguable that the employers’ NIC is a normal cost of operating Finningham Traders Limited. On this basis, it is reasonable that the Buyer group should effectively bear this cost as it relates to a period when it has the effective benefit of the profits of the Company. From a practical perspective we would anticipate that this risk, and the costs involved, would have been identified as part of due diligence. The counter argument is obviously that the true costs of operating Finningham Traders Limited are now rather greater than disclosed in the accounts of earlier years. This may have a marked impact
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