tax is no longer underprovided and there is no claim to be made in this respect under the tax covenant.
4.8 If the shares in Wickham Control Valves Limited had been sold on the basis of the Last Accounts and this error had not been identified, what protection would be available to the Buyer? Firstly the provision in the Last Accounts would not have been sufficient, due to the cumulative impact of the error over the previous 6 years. This would therefore lead to a valid claim under the tax covenant. The protection for the Buyer in respect of the extra stub period tax of £6,000 is more challenging: such entertaining expenditure would almost certainly be considered to be in the normal course of business of Wickham Control Valves Limited if such expenditure had, as a question of fact, been incurred in each of the previous 6 years. In this circumstance the Buyer would rely on a clause to the effect that a level of disallowable expenditure in excess of that shown in previous tax computations was to be considered as outside the normal course of the business of the Company. (It would not be sufficient to state that disallowable expenditure in excess of that incurred in previous years is deemed to be outside the normal course: this is clearly not the case with Wickham Control Values. The issue is that this level of disallowable costs has not been identified in the tax computations of earlier years.) The tax on the entertaining expenditure would therefore arise in the stub period between the Last Accounts and Completion, but would not relate to transactions in the normal course. Therefore a claim could be made against the Sellers. 4.9 There can be circumstances in which there are Completion Accounts, but the level of the net assets shown by those Completion Accounts is not a direct determinant of the Consideration that is payable. Again, an example can help to address the issues involved: Debenham Broadband Limited is an internet company with a year end of 31 December; its shares are to be sold, with Completion set for 30 June. The consideration is to be £1,500,000, plus or minus £25 for each net increase or decrease in the subscriber list since 31 December, provided that the net assets at Completion are at least £500,000. The Consideration reduces by £1 for each £1 that the net assets are less than £500,000. The Sellers are confident that the net assets will be some £580,000 at 30 June. In this example, the Sellers would be advised to make sure that the tax provisions were prepared on a prudent basis: if the provisions include some buffers to the extent of say £20,000, then there should be no reduction in the purchase price, but there is some protection in the event that the tax liabilities of the Company prove to be larger than anticipated. This is, of course, subject to the Buyer agreeing that treatment in the Completion Accounts. It is less likely that the Buyer’s advisers would agree that overprovisions could be used to cover unforeseen tax liabilities. This may not be entirely reasonable, for the reasons given below. 4.10 In such a situation it is important to analyse the structure of the deal and what it says about the intentions of the parties: the Buyer of Debenham Broadband Limited appears to have a primary focus on the number of subscribers. The base consideration of £1,500,000 assumes that the intangible assets have a value of at least £1,000,000. The value of that intangible asset is then recognised to increase or decrease by £25 for each extra subscriber gained or lost. The Buyer then expects there to be net assets of at least £500,000 at Completion. The assumption is therefore that the price payable
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