13.3 A very common example of such a claim is a claim under Section 393A, ICTA. This allows a trading loss to be set against profits of whatever description of that accounting period (Section 393A(1)(a) ICTA. The losses can then also be carried back to prior accounting periods (Section 393A(1)(b). 13.4 If the Sellers have prepared the Last Accounts on the basis that a claim will be made under Section 393A, then this will have reduced the tax that would otherwise be payable. If the Company then does not make the claims that were envisaged in preparing the Last Accounts, the corporation tax liabilities are increased as a result. By way of example, a claim under Section 393A may have been used to cover interest income of the Company in the Last Accounts. If the Buyer does not procure that the Company makes the claim, there will be corporation tax payable on this interest income. The interest income arose prior to the pivot point and therefore the tax on this income can, prima facie, be claimed under the tax covenant. The Buyer will then have rather greater tax losses available in the future. (If the Corresponding Savings clause is properly drafted this should then lead to a recovery by the Sellers in respect of payments made under the tax covenant.) 13.5 The Buyer will understandably be concerned that he should be notified of any such claims. He will not wish to agree to an open-ended commitment to make claims relating to the period prior to Completion if he does not know which claims have been assumed in preparing the Relevant Accounts. 13.6 There are practical issues when dealing with a transaction involving Completion Accounts: the stub period from the Last Accounts Date to Completion is unlikely to be an accounting period for corporation tax purposes, unless the accounting reference date has been changed to Completion. Therefore it is very possible that certain tax treatments have been assumed in the Completion Accounts, such as the carry back of trading losses to the Last Accounts Date.
13.7 It may be considered appropriate to address this concern directly in this exclusion. If so, an alternative wording is:
3.1.13 such Taxation Liability arises in the period between the Last Accounts Date and Completion and only arises as a result of valid claims and elections which were assumed in preparing the Completion Accounts being ignored in computing the Taxation Liability in question. For this purpose, claims and elections are deemed to be valid if they would have been valid on the basis that Completion represented the end of an accounting period for tax purposes;
14.Failure by the Buyer to Comply
3.1.14 such Tax Liability is increased as a result of a failure of the Buyer to comply, or to comply promptly, with its obligations under this tax covenant except where such failure is carried out at the request or with the approval of the Covenantors;
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