1 Introduction
1.1 There are various circumstances in which Sellers will seek an indemnity from the Buyer in respect of tax liabilities. Requests for such indemnities are now virtually standard, and are not usually resisted. There is protection to the Buyer in the standard tax covenant in that the Buyer is protected from unforeseen taxation which is the primary or secondary liability of the Company. There is however, some scope for tax to “splash back” to the Seller, and an indemnity from the Buyer may therefore be appropriate.
1.2 There are several specific circumstances to consider when considering indemnities from the Buyer:
1.2.1 the risk of the Sellers having to meet certain liabilities to taxation, if there is default by the Buyer or the Company;
1.2.2 the risk of the Buyer being able to make a claim under the tax covenant, even though the tax originates in the Buyer’s group but is, as a question of fact, paid by the Company and relates to an event before Completion but within the Buyer group;
1.2.3 the risk associated with liabilities which may settle on the Company following a further sale of the Company by the Buyer after Completion.
1.3 Some of these risks may be seen as remote. However, it is understandable, in view of the power of a tax covenant, that professional advisers acting for the Sellers normally want to obtain the comfort of an indemnity from the Buyers in these circumstances. 1.4 The above counter-covenant wording covers the risks in 1.2.1 and 1.2.3 only. Protection against the risk in 1.2.2 has to be obtained from an extension of the above wording, or from one of the exclusion paragraphs.
1.5 In order to identify the need for the counter-covenant we are therefore exploring below some of those provisions within the taxing statutes which may be relevant.
2Section 767A, ICTA
2.1 A counter-covenant in respect of Section 767A is now very close to being a standard term: the irony is that it is only likely to apply if some very peculiar circumstances of the Company or any subsidiaries apply prior to Completion. The tenacious insistence that protection against Section 767A should be included belies this simple point. 2.2 Section 767A, Income and Corporation Taxes Act 1988 deals with corporation tax liabilities on a change in company ownership. This section provides that where there has been a change in the ownership of a company and any corporation tax in respect of a period before the change of ownership remains unpaid, then the tax in question may be charged to the Seller (Section 767A(1), ICTA).
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