prior to Completion and becoming a member of the Buyer’s Group for the purposes of Taxation;
16.3 This exclusion is of particular relevance when dealing with Completion Accounts: unless the accounting reference date is changed to Completion, the tax rate in the stub period will be affected by the number of companies in the Buyer’s Group: under the provisions of Section 13(3(b), ICTA it is the number of associated companies in the accounting period which is relevant. Therefore taxes provided at 21% in the stub period accounts, as the Company is small may, in reality, be taxable at a rate of 29.75% or 28%, depending on the number of companies in the Buyer’s group. 16.4 The above narrowing of the exclusion does not then provide the protection required in circumstances as set out in Chapter 17, dealing with the counter-covenant. Therefore, if the exclusion is narrowed, as suggested above, it is important that the counter- covenant then provides the appropriate protection: otherwise, under the wording of the tax covenant the Sellers could be liable for taxation which originated in the Buyer’s group before Completion but is then payable by the Company, due to failures by the Buyer’s group to settle the tax. 3.1.17 s uch Tax Liability arises either from the cessation of any trade of the Company or a major change in the nature or conduct of any trade carried on by the Company, or by any trade becoming small or negligible , in each case occurring after Completion; 17.1 Under the provisions of Section 768, ICTA 1988, no relief will be given for losses under Section 393 (dealing with the ability to carry forward trading losses) if there is both a change in ownership of a company and a major change in the nature or conduct of a trade carried on by that company. The period in question is any period of three years in which both events take place. 17 Cessation or Diminution or Change of Trade
17.2 Therefore, if the trade is changed in some material way, including becoming small or negligible, any tax losses will be at risk, by virtue of Section 768.
17.3 If the Buyer decides that the trade carried on by the Company will cease after Completion or will become small or negligible, then there would be the prospect of the Buyer making a claim under the Tax Covenant, on the basis that any tax losses are no longer available. 17.4 There is a robust argument that can be put forward to state that such an occurrence would be caught by the exclusion dealing with voluntary acts of the Buyer after Completion. However, the use of this specific exclusion puts matters beyond doubt.
18 Failure to Make Payment to HMRC or to Retain Records
3.1.18 s uch Tax Liability is a fine, penalty, surcharge or interest arising by reason of any failure or delay on the part of the Company or the Buyer after Completion
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