When are tax warranties and indemnities used?

A prospective buyer of a company or group will want to seek protection from the seller against potential liabilities arising from pre-acquisition transactions. They will want to ensure that they are buying what appears to be on offer and at what is perceived to be a reasonable price.

The due diligence process is an important form of investigation carried out by the buyer 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 or omission. During the course of the due diligence process, the specialists carrying out the work will alert the buyer 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.

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

It may be appropriate to obtain a warranty or