CHAPTER FOUR
SOME TAX IMPLICATIONS OF CORPORATE TRANSACTIONS
Executive Summary
A If a company makes a trading loss after Completion, those losses may be carried back to reduce taxable profits made before Completion. If the tax liabilities were understated before Completion and there is a potential claim under the tax covenant, it is generally accepted that such a claim should still stand, even if the taxation that would be payable is reduced by the carry-back of the losses. This is the basis for the third of the four Buyer’s Reliefs, namely the Post-Completion Relief. B There are various degrouping charges that can arise at the point of exchange of unconditional contracts for the sale of shares in the Company out of a group. They are a matter of major concern to the Buyer: they are charged on the target Company, they arise from transactions in the periods prior to Completion, and there will be no liability included for such tax liabilities in the accounts of the Company. The Buyer therefore seeks comfort that the protection of the tax covenant extends to such degrouping charges. If there are such degrouping charges the Sellers may want the option of transferring the charge to another company in the Seller group, if there is a company in the group with capital tax losses. C There are provisions in the Taxes Act whereby tax losses can be denied if there is a major change in a trade within three years of a sale of the shares of the Company in question. The Buyer needs protection from the Seller if there are tax losses which are potentially subject to disallowance. This is one of the reasons for the first component of Buyer’s Reliefs, namely Deferred Tax Relief. The Sellers in turn need to be sure that the Buyer is not able to make a claim under the tax covenant if the change in the trade takes place after Completion. D Inheritance Tax can be levied on a company in a number of different circumstances. It is also possible for HMRC to take a charge over shares in a company or over its assets. The Buyer seeks protection from such liabilities.
E A tax covenant in respect of stamp duty may be void and this protection may be only available through a warranty.
F The tax position of the Sellers is complex if there is deferred consideration or deferred contingent consideration. The use of loan notes can be a way of avoiding some tax problems. However, some of the decision points have changed with the introduction of Entrepreneur’s Relief.
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