Completion Accounts, then the net assets shown have been reduced to the extent of those tax provisions.
4.3 Therefore, if there are to be no Completion Accounts, the Buyer will have taken account of the Tax Liabilities in the Last Accounts in formulating his price for the shares: the price agreed for the shares in Felixstowe Supertruckers Limited is set at £48 million in April, and there are to be no completion accounts. The Last Accounts were prepared to 31 December. Completion takes place on 10 July. The price of £48 million was based on the trading performance of the Supertruckers group in the previous three years, the expectation that such a level of performance would have been maintained since 31 December and the level of the group net assets at the previous 31 December. The level of these group net assets will have been reduced by whatever provisions were made for tax liabilities in the Last Accounts. 4.4 If the transaction does involve Completion Accounts, then the formula to determine the price may include an increase or reduction in the price by reference to the increase or reduction in the level of the net assets. 4.5 As an example, the shares in Wickham Control Valves Limited are sold with Completion of the transaction on 30 September. The transaction is for a consideration of £400,000 plus the value of the net assets shown by Completion Accounts prepared to 30 September. The Last Accounts are prepared to 31 March. After Completion it transpires that the corporation tax computations relating to the Last Accounts did not add back certain disallowable entertaining and legal costs, amounting to a total of £53,000. The tax payable is recomputed at a figure which is £17,225 higher than the provision. A claim can be made for this under-provision of £17,225. Similar claims can also be brought as this is a systemic failing which affects the 6 prior years. This amounts to additional tax of £52,775. A similar error has been made in the proforma tax computations prepared for the period from 1 April 2007 to 30 September 2007 for an amount of £20,490. The additional tax is £6,000 and this triggers a further claim under the tax covenant. The total additional tax is therefore the sum of the three figures above, namely £76,000. 4.6 The underprovision would have existed in both the Last Accounts and also the Completion Accounts. The accounts for the previous six years would each also have underprovided for the tax liabilities, on an accumulating basis. It is not necessary to refer to both the Last Accounts and the Accounts for earlier years and the Completion Accounts: the essential point for the Buyer in this circumstance is that the net assets in the Completion Accounts are understated. (This is ignoring any argument that the tax efficiency of the Company may be less than was originally thought, as its effective tax rate from normal business is somewhat greater than was shown by its accounts.) 4.7 This point can be demonstrated by an example: as part of the due diligence it was noted before Completion that the adjustment for disallowed entertaining and legal costs had not been made. It was agreed that provision should be made in the Completion Accounts for the extra tax in respect of the previous 6 years and also for the stub period. Once such provision was made, the net assets were reduced and the consideration to the Sellers was reduced by the amount of the understated tax. The
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