1Introduction
1.1 In this chapter we explore some of the tax implications of a corporate transaction. We are viewing these implications from the viewpoint of the Buyer: this then helps to explain some of the focus of the tax covenants and warranties.
1.2 This chapter is therefore building on some of the points made briefly in Chapter 2, which gave a very brief outline of corporation tax.
2The Carry-Back of Tax Losses
2.1 As mentioned in Chapter 2, under the provisions of Section 393A ICTA it is possible to carry back trading tax losses to an earlier accounting period. The losses can be carried back to the period of 12 months immediately preceding the accounting period in which the loss is incurred. 2.2 The losses are firstly offset against the other income sources in the Company in the current period, such as rental income, interest income or chargeable gains. If there are still losses available, then these can then be carried back to the earlier period.
2.3 The period is extended to 3 years in cases where a company ceases to carry on a trade.
2.4 There is a period of two years following the end of the accounting period in which the loss is incurred in which the claim to carry-back the losses can be made.
2.5 It is this facility to carry back trading losses that is the most common circumstance in which the third of the Buyer’s Reliefs in the standard tax covenant is likely to arise: if the Company makes profits before Completion and losses thereafter it is likely that the Buyer will want the losses to be carried back to the earlier period. This may provide the Buyer with the best mechanism for turning the losses into cash as quickly as possible. 2.6 If there is a potential claim under the tax covenant, as the Sellers have not provided in full for the corporation tax liabilities in the period up to Completion, the Buyer would understandably not wish to see that claim reduced or extinguished if there is no actual tax liability as a result of the Buyer procuring that the Company carries back losses to an earlier accounting period. The Buyer will be concerned to ensure that the claim against the Covenantors still stands in these circumstances. 2.7 The way that this is dealt with is that the tax covenant will define four types of Buyer’s Reliefs, in order to provide protection in various circumstances. The third of these Reliefs will be Post-Completion Relief. This refers to tax losses which are incurred after Completion and which are carried back to the pre-completion period.
2.8
The definition of Post-Completion Relief is:
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