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BKL Tax offers a helpful tax tip for vendors following a business sale.

Introduction

In the good old days personal tax claims could generally be made within six years of the end of a tax year. Self Assessment brought that down to five years and ten months, to tie in with the personal tax filing date of 31 January. And from 1 April 2010 the normal time limit has come down to four years.

Warranties on Sale Agreements - Tax Implications

One of the areas in which this may cause difficulty is in relation to warranties on sales. TCGA 1992 s 49 provides that, in most cases, the possibility that the vendor may be required to make a payment to the purchaser under a warranty is simply ignored in the first instance: the CGT computation on the sale is made without regard to the warranty. If it turns out that a payment is made under the warranty the original tax computation is revisited and the tax re-computed having regard to the revised position.

However, the amendment is not automatic: it requires that a claim be made. And, since the claim must be made within four years of the end of the tax year in which the disposal was made, that presents something of a problem in respect of a warranty claim which comes to light after the time limit for adjusting the tax computation has expired.

Take Care the Warranty's Not Out of Time for Tax Purposes!

In drafting Sale Purchase Agreements, vendors and their advisers should now routinely be seeking to limit the time limit for warranty claims to such period as will allow time for the related tax claim to be made. If that is not commercially achievable there may be alternative solutions: but these would be very much second best.

However, that advice for the future does not help vendors who sold at a time when the s 49 time limit was five years and 10 months and who negotiated warranties on that basis: they may be left high and dry if a warranty claim is made outside the tax adjustment window. Best advice in such cases is likely to be to ensure that the warranty position is very carefully examined before the s 49 adjustment window closes (assuming it hasn't already closed) with a view to making a claim if there is the slightest hint of a suspicion that a warranty claim will be made. If all else fails, there may be scope for arguing that in these special circumstances an out-of-time claim should be accepted: HMRC guidance does accept the possibility that in very limited circumstances they may be able to exercise discretion to extend the time limit by up to a year.