on perceptions of profitability and value. If this is the case a claim under the tax warranties may be appropriate.
3.9 Clearly if this was a transaction based on Completion Accounts, then the Seller would have had the effective benefit of the increase in the net assets up to Completion. The Seller would then have been liable for all such tax costs, including the Employers’ NIC, for all periods up to Completion.
4 No Loss from Transaction Outside the Normal Course of Business
3.1.3 s uch Tax Liability is in respect of a transaction which has created an increase in the net assets of the Company, after allowing for such Tax Liability;
4.1 Again this clause should not be included in the specimen tax covenant in Appendix A on the basis that it is only relevant in transactions where there are no Completion Accounts. The logic here is that some relatively unexceptional transaction may be found to be outside the normal course of business: the sale of a fully depreciated piece of printing equipment by a printing business with 8 different printing presses may not be a very regular feature of its activities, and be held to be outside the normal course of its business, as the company is engaged in printing for customers and not in buying and selling printers. 4.2 If the tax relating to this transaction was payable by the Covenantors under the tax covenant they may feel understandably aggrieved if the value realised for this piece of equipment exceeded expectations and has increased the net assets, despite the tax charge. 4.3 The counter argument is that many such transactions may give no real commercial benefit to the Buyer, despite the increase in the net assets: if a freehold property in use in the trade is sold, then it will need to be replaced, and it is likely that such replacement will require the whole of the proceeds. This is an argument with weaknesses as replacement would be likely to defer the tax that had otherwise crystallised. 4.4 In these types of situations the professional should discuss the types of transactions which have actually taken place in the period since the Last Accounts and make sure that there are no transactions where the Buyer may get the benefit of the profit, but the Covenantors are liable to an amount equivalent to the tax on that profit. 4.5 The real risk to the Buyer is that the Sellers have entered into some transaction since the Last Accounts Date which has an adverse impact on their perception of the value of the Company. If this is the case, then there is no reason why the related Tax Liability should be considered to be the measure of the loss.
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