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. 3.3 This is a reasonable way of dealing with this problem: the Buyer is effectively gaining the benefit of the profits made and retained by the business in the period from the Last Accounts Date to Completion. It is therefore reasonable that he should bear the cost of the Taxation which relates to those profits. It is equally reasonable that he should not bear other Tax costs, defined as the tax which does not relate to the normal course of business. 3.4 A simple example illustrates the technical point: Horham Trading Limited is sold in a deal which does not involve completion accounts. The Last Accounts were prepared to 31 December. Completion takes place on 9 June. On 19 June the Company pays the PAYE and NIC liabilities relating to the May payroll, that is 10 days after Completion. Provision for this liability would not have been made in the Last Accounts. The Sellers would not expect to be liable for such a cost. The clause which protects the Sellers from liability is the exclusion which states that tax arising from the normal course of business since the Last Accounts Date is excluded from claims under the tax covenant. 3.5 This leads to the very important question of how transactions outside the normal course of business which take place between the date of the Last Accounts and Completion should be dealt with in the tax covenant. The simple solution referred to in paragraph 3.1 above brings with it some complex problems. These are dealt with below. 4.1 The tax covenant will work in such a way that the vast majority of the tax provisions included in the relevant accounts will be recognised as covering tax liabilities that might otherwise be claimed under the tax covenant. The relevant accounts will include a liability for VAT if the Company is a net payer of VAT: the liability will be based on the net of the relevant output and input VAT in the VAT period up to the relevant accounts date. Such a liability will then form part of the VAT liability for the relevant three month period, assuming that the Company accounts for VAT on a quarterly basis. The relevant accounts will similarly include provisions for PAYE and NIC, normally payable on the 19th day of month following the payroll run, and also for corporation tax on profits and gains, normally payable 9 months and one day after the end of the relevant Accounting Reference Period, assuming that the Company is not obliged to make payments by instalments. 4.2 For such liabilities as those described in 4.1 above, there will normally be no claim under the tax covenant to the extent that the Company has properly accounted for the liabilities: if they have been included as liabilities in the Last Accounts or the 4The Status of Tax Provisions in the Relevant Accounts
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