Warranties and indemnities

By Tolley
Corporation_tax_img6

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Warranties and indemnities
  • Overview
  • Warranties
  • Indemnities
  • Retention
  • Role of the tax adviser
  • Further reading

Overview

A prospective purchaser of a company or group will want to seek protection from the vendor against potential liabilities arising from pre-acquisition transactions.

The due diligence process is an important form of investigation carried out by the purchaser prior to completion of an acquisition. It aims to uncover potential liabilities which could fall due in the future, or liabilities that should have been declared and settled but have not, perhaps due to error. During the course of the due diligence process, the specialists carrying out the work will alert the purchaser of the key potential issues so that action can be taken prior to the sale and purchase agreement (SPA) being agreed and the completion of the transaction. It may be appropriate to obtain a warranty or an indemnity in order to mitigate the potential exposure to the purchaser upon identification of the potential liability. This is discussed further below. Alternatively, and if the potential issue is material to the transaction rather than a small error, the purchaser may try to renegotiate the sale price to account for the known liabilities which will be passed onto them.

For more information on the due diligence process, see the Due diligence guidance note.

Warranties

A warranty is a statement made by the seller in the SPA and is usually documented in a schedule (or appendix) to the main SPA. General warranties can be used as a tool by the purchaser to encourage the seller to disclose relevant information. Tax warranties will be addressed separately in the SPA and all relevant taxes will be covered (corporation tax, PAYE, VAT, NIC, stamp taxes, foreign taxes, etc). As a basic example, the vendor may warrant that all corporation tax liabilities due before the date of completion of the transaction be paid over to HMRC. If the statement subsequently proves to be

More on Buying a company or trade: