confirmed that they consider that payments under tax covenants will be considered in the same way as warranties and representations.)
7.5 If the ceiling on claims is greater than the consideration received, then it is the view of HMRC that the Seller does not crystallise a capital loss if claims paid exceed the consideration. It is their view that adjustments under Section 49 can only take the consideration down to £nil and that consideration cannot be a negative figure. 7.6 This can be a potential issue in those cases where the Consideration is nominal, due to ongoing trading losses being incurred or due to the balance sheet of the Company having net liabilities. In such situations the Buyer may seek protection under the warranties and indemnities of a figure which is considerably in excess of the Consideration paid. 7.7 It is very common for Sellers to receive part of the Consideration for the shares in the form of loan notes. Such loan notes can be either qualifying corporate bonds (“QCBs”) or nonqualifying corporate bonds. Either structure is very common. This is especially the case where part of the Consideration is deferred at the instigation of the Buyer.
7.8 There are three possible tax treatments for deferred consideration, depending on the structures that are adopted:
7.8.1 if the consideration is due under the contract, and is deferred consideration, then it is taxable at the point of exchange of unconditional contracts for sale: the fact that part of the Consideration is to be paid some time after Completion has no impact on the point when the tax crystallises. Under the provisions of Section 48, TCGA the future proceeds are brought into account without any discount and without regard to any risk of any part being irrecoverable;
7.8.2 if the Seller receives the deferred consideration in the form of QCBs then the total gain is computed by reference to the total proceeds including the amount of the QCBs. The gain which has been computed is held over but then accrues and tax is payable on the subsequent realisations of the loan notes. It is the view of HMRC that a QCB must have a term of at least 6 months. Therefore if the consideration is to be paid in 36 monthly instalments, commencing on completion, the first 6 instalments cannot be in the form of QCBs; 7.8.3 If the Seller receives the deferred consideration in the form of non-QCBs, this is treated in the same way as a share for share exchange. The nonqualifying Corporate Bonds are treated as a new security which have the same base cost as the original holding. Under the provisions of Section 117, TCGA a loan note which is expressed in a currency other than Sterling, or which is convertible into currency other than Sterling is a nonqualifying corporate bond. This is the normal mechanism used to achieve the status of a nonqualifying corporate bond when required. 7.9 The differences between the three structures are significant: some aspects can be explored by considering the tax effects if the Buyer is unable to pay the consideration that is due under the three alternatives:
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