1 Introduction
1.1 There is a requirement on the Buyer to notify the Sellers of any tax claims that might arise: the rationale for this is that there may be steps that can be taken to challenge the tax claim, and to reduce or cancel any potential liability. 1.2 In respect of corporation tax it is very likely that the first stage in identifying that there is a potential liability under the tax covenant is a letter from the Inspector of Taxes opening an aspect enquiry. As an example, the directors of Rushmere Consultants Limited may receive a letter asking for an analysis of all amounts paid to associates as included in the accounts of a certain accounting period. At this early stage there should be sufficient knowledge for the Buyer to realise that this is a matter which is very likely to give rise to a claim under the tax covenant: it will have been explored as part of tax due diligence and the disclosure letter will almost certainly have brought the exposure in respect of this issue to the attention of the Buyer. The associates are treated as self-employed whereas there are arguments that can be put forward that the associates are employees in all but name. 1.3 The text above uses the phrase “...reasonable particulars of the potential liability .....” which we consider to be a well balanced request: this is clearly preferable to requirements to provide full particulars. 1.4 Sometimes the drafting will include specific time limits, rather than the general wording above. We consider that the phrase “... as soon as reasonably practicable ....” is preferable to such specific wording. 1.5 The tax covenant is an undertaking to pay; it is therefore arguable that the final clause “ .....provided that any failure in the giving of such notice shall not affect the liability of the Covenantors under this tax covenant” is not required. However, it is understandable if the Buyer wishes to put this matter beyond doubt. 6.2 If the Covenantors shall indemnify and secure the Buyer and the Company to the Buyer’s reasonable satisfaction against any liabilities, costs, damages, Taxes, losses or expenses which may thereby be incurred, the Buyer shall take such action and shall procure that the Company shall take such action as the Covenantors may reasonably and promptly by written notice to the Buyer request to dispute, resist or compromise the same; 6.3 The Buyer shall not be obliged to take any action nor to procure that the Company take any action if, having given the Covenantors written notice of a Tax Claim in accordance with clause 6.1 above, the Buyer has not within fifteen Business Days of the giving of such notice received instructions in writing from the Covenantors to take such action; 2 Action to be Taken
2.1 This is a very standard clause and is understandable: the Covenantors wish to be able to take issue with potential Tax Claims which may result in a payment by them under
159
Made with FlippingBook Learn more on our blog