and the work in progress and finished goods both exclude some of the production labour costs and also the production overheads. The price payable for the shares has been agreed as £500,000 plus the amount of the net assets as shown by Completion Accounts. In this case, unbeknown to the Sellers, the Completion Accounts understate the value of the stocks when measured in accordance with SSAP 9 by £50,000. 8.12 After Completion the Buyer changes the accounting onto a basis which is consistent with SSAP 9 and increases the carrying values of the stocks of work in progress and finished goods. The change was not from one acceptable basis to another, and the accounting policy did not comply with accounting principles and practice as existing at Completion. The Buyer is therefore able to claim under the tax covenant for the additional tax now payable in respect of those accounting periods up to Completion which have been reopened. He is also able to claim for the interest and any penalties and also for the professional costs associated with the restatements. He is also able to claim in respect of the stub period. The Sellers will feel understandably aggrieved that they are being expected to pay tax charges in respect of profits aggregating to £50,000: if the Completion Accounts had been prepared on an acceptable basis then the consideration that they received for their shares might have been increased by £50,000 less the related taxation. The opposing argument is that the working capital needed has been increased by some £15,000 above that shown by the accounts of the business, as the tax was being artificially delayed by an unacceptable accounting basis. 8.13 In the case of Gislingham Woodcrafts Limited it is clearly the duty of the accountants or auditors to that company to warn of the consequences if an unacceptable accounting basis is being used. 9.1 Under the provisions of Section 392, Companies Act 2006, a company may by notice specify a new accounting reference date, which will either shorten or lengthen the accounting period from the normal period of 12 months. This new date can have effect in relation to the prior period or the current period. 9.2 A change in the accounting reference date can therefore take place with retrospective effect. It is, in fact, very likely that a change will happen: Section 390(5), Companies Act 2006 provides that the directors of a parent company must secure that the financial year of each of its subsidiary undertakings coincides with the company’s own financial year. (There is an exception in respect of cases where the directors are of the opinion that there are good reasons against it.) 9.3 The decision taken by the Buyer with regard to the year end of the Company can have some impact on the anticipated tax liabilities in the period to Completion. This can affect the stub period, that is between the Last Accounts and Completion. It can also result in the date of the Last Accounts being altered if the accounts have not already been filed with the Registrar. 9 Change in Accounting Reference Period 3.1.8 s uch Tax Liability arises or is increased as a result of a change in the accounting reference period of the Company [or the Buyer] after Completion;
135
Made with FlippingBook Learn more on our blog