Your questions answered

Buying a company can feel like buying a house.

You walk through the front door, you like what you see, the numbers appear sensible, the seller seems credible, and the deal starts to feel commercially right. But, just as with a property purchase, the real issues are often not visible from the outside.

With a house, the hidden problem might be subsidence, damp, a boundary dispute or an old planning breach.

With a company, one of the hidden problems can be tax.

A business may look profitable, well-managed and clean. Yet behind the accounts there may be unpaid PAYE, incorrect VAT treatment, weak transfer pricing, questionable R&D claims, historic employment tax exposure, unreported benefits, overseas permanent establishment risks, or corporation tax positions that HMRC may challenge later.

This is where tax warranties in a Share Purchase Agreement become essential.

They are not just “legal wording”. They are one of the key tools used to protect a buyer from inheriting tax problems that belong economically to the seller’s period of ownership.

What is a Share Purchase Agreement?

A Share Purchase Agreement, often called an SPA, is the main contract used when someone buys shares in a company.

In simple terms, the buyer is not buying individual assets of the business. The buyer is buying the company itself by acquiring its shares.

That distinction is important.

When you buy the shares of a company, you usually acquire the company with its full history. That includes its assets, contracts, employees, customers, liabilities and tax profile. If the company has a tax issue from three years ago, that issue does not disappear just because the shares have changed hands. The company remains the same legal person.

So, if HMRC later opens an enquiry or raises an assessment for a period before completion, the company may still have to pay the tax, interest and penalties. The buyer now owns the company, so the buyer has a very real economic problem.

The SPA is therefore used to allocate risk between buyer and seller.

What are tax warranties?

Tax warranties are statements given by the seller about the tax position of the target company.

For example, the seller may warrant that:

The company has filed all required tax returns on time.

All tax due has been paid.

The company has properly operated PAYE and National Insurance.

The company is correctly registered for VAT.

There are no ongoing HMRC enquiries, disputes or investigations.

The company has not entered into aggressive tax avoidance arrangements.

The accounts make proper provision for tax liabilities.

The company has complied with its obligations in relation to employees, directors, benefits and expenses.

The company has not created any unexpected tax exposure through transactions with connected parties or overseas group companies.

In plain English, the seller is being asked to say: “To the best of our knowledge, the company’s tax affairs are in order.”

If that statement is wrong, and the buyer suffers loss as a result, the buyer may have a contractual claim against the seller.

Why do buyers need tax warranties?

Because tax liabilities often appear after completion.

A buyer may complete the acquisition in March. Six months later, HMRC may ask questions about the company’s VAT returns for the previous two years. Or the buyer may discover that workers treated as self-employed should probably have been treated as employees. Or the company may have claimed R&D tax relief without sufficient technical evidence.

Without proper contractual protection, the buyer may be left paying for a problem created before it owned the business.

Tax warranties help the buyer in three practical ways.

First, they encourage disclosure. If the seller is asked to warrant that there are no tax disputes, and there is in fact an HMRC enquiry, the seller should disclose it before signing.

Secondly, they allocate risk. If a pre-completion tax issue exists and is not properly disclosed, the buyer may have a route to recover loss from the seller.

Thirdly, they focus due diligence. A well-drafted tax warranty schedule often reveals where the key risks may sit: VAT, PAYE, corporation tax, transfer pricing, employment status, R&D, SDLT, overseas operations, management incentives or group reorganisations.

Are tax warranties the same as a tax indemnity?

No. This is a very common misunderstanding.

A tax warranty is a contractual statement. If the statement is untrue, the buyer usually needs to show breach and loss.

A tax indemnity, often called a tax covenant in UK transactions, is more direct. It usually says that the seller will reimburse the buyer for certain tax liabilities relating to the period before completion.

The distinction matters.

A warranty is like saying: “The roof is in good condition.”

An indemnity is more like saying: “If there is a leak relating to the period before you bought the house, I will pay for the repair.”

In many share transactions, the buyer will want both: tax warranties and a tax covenant. The warranties help flush out information and protect against incorrect statements. The tax covenant provides more specific protection for historic tax liabilities.

What types of tax issues do warranties usually cover?

The exact wording depends on the transaction, the target company, the sector and the tax profile of the business. However, typical areas include:

Corporation tax compliance, including tax returns, computations, losses and provisions.

VAT registration, VAT returns, partial exemption, option to tax, reverse charge issues and cross-border supplies.

PAYE and National Insurance, including employees, directors, consultants, benefits, expenses and termination payments.

Employment status risks, particularly where the business uses contractors, freelancers or consultants.

IR35 and off-payroll working issues, where relevant.

R&D tax relief claims, especially where claims are material or documentation is weak.

Transfer pricing and connected-party transactions.

Loan relationships and debt arrangements.

Dividends, distributions and management charges.

Capital allowances and fixed asset claims.

Stamp taxes, including Stamp Duty and SDLT where property or shares are involved.

International tax matters, including permanent establishments, withholding tax, overseas branches and controlled foreign company issues.

Tax avoidance, DOTAS, DAC6 or other disclosure-related matters.

HMRC enquiries, investigations, penalties or settlements.

For a buyer, the purpose is not to create a long legal checklist for its own sake. The purpose is to understand whether the tax position being acquired is clean, defensible and properly priced.

What is the seller’s disclosure letter?

The disclosure letter is one of the most important documents in the transaction.

If the seller cannot truthfully give a warranty without qualification, the seller should disclose the relevant facts in the disclosure letter.

For example, assume the SPA says:

“The company is not involved in any dispute with HMRC.”

If there is an ongoing VAT enquiry, the seller should disclose it.

A proper disclosure may prevent the buyer from later bringing a warranty claim for that specific matter, because the buyer was told about it before completion.

This is why disclosure is not a box-ticking exercise. It is a risk allocation exercise.

From the buyer’s perspective, disclosures need to be reviewed carefully. A disclosure that says “HMRC has asked some routine questions” may not be enough if, in reality, the company is facing a serious challenge on VAT treatment.

From the seller’s perspective, disclosure needs to be accurate, specific and complete. Vague or incomplete disclosure can create future disputes.

Can a buyer rely only on due diligence?

No. Due diligence and warranties perform different functions.

Tax due diligence is the investigation. It allows the buyer and its advisers to review the company’s tax affairs before completion.

Tax warranties are part of the contractual protection. They give the buyer a remedy if certain statements prove to be untrue.

A good buyer should not treat warranties as a substitute for due diligence. Equally, a buyer should not assume that due diligence alone is enough.

Some tax issues are not obvious from the documents provided. Others may depend on facts known only to management. Warranties force the seller to stand behind the tax information provided.

What should sellers be careful about?

Sellers should not treat tax warranties as harmless boilerplate.

A seller who signs broad tax warranties without properly checking the company’s tax position may create personal or corporate exposure after completion.

Before signing, the seller should ask:

Can we honestly give these warranties?

Do we understand what each warranty means?

Are there historic tax issues that should be disclosed?

Have we reviewed payroll, VAT, corporation tax, R&D, benefits and employee status?

Have there been any HMRC enquiries or informal questions?

Have we taken advice on any uncertain tax positions?

Are the time limits, financial caps and claim thresholds commercially acceptable?

A well-advised seller will usually seek to limit its exposure. This may include time limits for claims, financial caps, minimum claim thresholds, exclusions for disclosed matters, and limitations where the buyer had actual knowledge of the issue.

The key is balance. The buyer wants protection. The seller wants finality.

What should buyers be careful about?

Buyers should focus on whether the warranties actually match the risk profile of the company.

A generic set of tax warranties may be inadequate.

For example, a technology company that has made substantial R&D claims needs specific attention to R&D tax relief. A company with many contractors may need specific warranties on employment status and IR35. A property-rich company may require careful SDLT and VAT analysis. A group with overseas operations may need warranties dealing with transfer pricing, withholding tax and permanent establishment exposure.

The buyer should also consider whether a tax covenant is needed. In many share acquisitions, the answer will be yes.

Most importantly, the buyer should connect the legal drafting with the tax due diligence findings. The SPA should not sit in a separate legal universe. It should reflect the actual tax risks identified.

What happens if a tax warranty is breached?

If a tax warranty is breached, the buyer may bring a claim against the seller under the SPA.

The practical outcome will depend on the drafting.

The buyer will usually need to show that the warranty was untrue and that loss has been suffered. The SPA will also contain rules on notification of claims, time limits, financial caps, conduct of tax disputes and mitigation.

For example, the buyer may need to notify the seller within a specified period after becoming aware of the issue. If HMRC raises an enquiry, the SPA may set out who controls correspondence with HMRC and whether the seller has a right to participate in defending the matter.

These mechanics matter. A strong tax warranty can be weakened if the claims procedure is badly drafted or missed.

Are tax warranties only relevant for large deals?

No.

In fact, they can be even more important in owner-managed business transactions.

In a large corporate deal, the parties may have sophisticated finance teams, extensive due diligence, tax advisers and a negotiated tax covenant.

In a smaller private company sale, the tax position may depend heavily on how the owner has historically run the business. There may be informal arrangements with directors, shareholder loans, family members on payroll, benefits not fully reported, mixed business and private expenses, or VAT treatments that have simply been followed for years without being challenged.

That does not mean anything improper has happened. Many owner-managed businesses operate pragmatically. But when the company is sold, historic tax practice becomes part of the buyer’s risk.

This is precisely where clear tax warranties and proper disclosure are commercially valuable.

What is a practical example?

Imagine a buyer acquires a consultancy company.

The accounts look strong. The business has good clients. The seller explains that several consultants are self-employed and invoice the company monthly. The buyer proceeds with the acquisition.

After completion, HMRC reviews the arrangements and argues that some of those consultants were, in substance, employees. The company may then face PAYE, National Insurance, interest and possible penalties for periods before completion.

If the SPA contained properly drafted tax warranties and a tax covenant, the buyer may have a route to recover the historic exposure from the seller.

If the SPA did not deal with the issue properly, the buyer may find that it has bought not only the business, but also the tax problem.

The practical lesson

Tax warranties are not designed to make a transaction more complicated. They are designed to make the transaction more honest.

They force the parties to ask the right questions before completion, not after the damage has been done.

For buyers, they provide protection against hidden historic tax liabilities.

For sellers, they create a structured opportunity to disclose known issues and achieve a cleaner exit.

For both sides, they reduce the risk of post-completion disputes.

A share purchase is not simply a transfer of shares. It is a transfer of history. Tax warranties help determine who carries the cost of that history.

How Vectigalis Tax can help

At Vectigalis Tax, we advise buyers, sellers, founders and investors on the tax aspects of UK and cross-border share transactions.

We can assist with:

Reviewing tax warranties and tax covenants in Share Purchase Agreements.

Identifying tax risks during pre-acquisition due diligence.

Helping sellers prepare tax disclosures before signing.

Advising on VAT, PAYE, corporation tax, employment status, R&D, SDLT and international tax issues.

Working alongside corporate lawyers to ensure the SPA reflects the real tax risks in the transaction.

Providing practical, commercially focused advice before completion, when the risk can still be priced, negotiated or protected.

If you are buying or selling shares in a company, do not leave the tax clauses until the end of the deal. By that stage, negotiating leverage may already have moved.

Speak to Vectigalis Tax before signing the SPA.

We help clients understand the tax risk, negotiate sensible protections and avoid expensive surprises after completion.

Contact Vectigalis Tax today to discuss tax warranties, tax covenants and tax due diligence for your transaction.

Mail: angelo@vectigalistax.co.uk

Vectigalis Tax — practical UK and international tax advice for business owners, investors and professional advisers.