CHAPTER SIX
THE RELEVANT ACCOUNTS AND THEIR TAX PROVISIONS
Executive Summary
A The most common error in the first draft of tax covenants is the incorrect treatment of the relevant accounts. Transactions are normally built on Last Accounts or Completion Accounts and the tax covenants need to be adjusted correctly for these two different deal structures. B If there are to be no Completion Accounts, the tax covenant will largely “pivot” on the Last Accounts. If there are Completion Accounts then the tax covenant will pivot on these Completion Accounts. C If the transaction does not involve Completion Accounts, then the covenant will include all taxes to the point of Completion as usual. The usual exemption relating to amounts provided for in the Last Accounts should then be included. However a further exemption is then added to exclude any taxes arising from the normal course of business of the Company in the period from the Last Accounts Date to Completion. There is then, increasingly, a list of matters which are not to be treated as being in respect of the normal course of business. D If a transaction is excluded from the exemption on the basis that it is not in the normal course of business of the Company, there is then an issue as to why the Sellers should be liable for the Tax if the Buyer gains the effective benefit of the profit on the transaction. This is an enigma with no simple solution and needs to be considered by reference to which transactions may be outside the normal course. E Even if it can be shown that the Consideration is not computed by reference to levels of net assets, but is based on some other measure, the Buyer and Sellers achieve certainty by defining “unforeseen tax liabilities” by reference to a statement of net assets. F The frequency of errors made in the modification of the tax covenant to reflect whether or not Completion Accounts are a feature of the transaction suggests to us that firms of solicitors should consider retaining two precedent tax covenants, dealing with Last Accounts and Completion Accounts respectively.
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