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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Contingent liabilities: warranties and representations

Warranties and representations often form an important part of the agreement for the sale of an asset of any value, especially shares in a private company. The warranty is an assurance given by the vendor as to the state or nature of the asset being sold. Usually the form of the warranty will be suggested by the purchaser and will consist of a series of factual statements about the asset being sold. The vendor can either accept, object or make a disclosure against the warranty. Commercially this performs the important function of allowing the purchaser to seek information about the asset being purchased. The warranty also allows the purchaser to seek restitution if they suffer damage as a result of breach of the warranty.

Although the primary motive for a warranty is unlikely to be tax driven they are included in TCGA92/S49 to avoid the need to make valuations and to align the disposal proceeds brought into the tax computation with the net amount actually received by the vendor.

Where an election has been made under TCGA92/S171A, so that a disposal actually made by Company A is treated as having been made by Company B, the computation can be adjusted under TCGA92/S49 for any warranty payments made by Company A.

Not all warranties or representations entitle the purchaser to make a claim for damages. For example, a company’s shares may be sold with the warranty that the company’s net asset value is 1 million. The sale proceeds are expressed as (say) 2 million plus 1 for every 1 by which the net asset value exceeds 1 million, or less 1 for every 1 by which it is less. In such a case there can be no claim for damages under the warranty, as the terms of the contract contemplate, and resolve, the possibility that the warranted net asset value is incorrect, in arriving at the consideration payable for the shares. TCGA92/S49 (1)(c) will not apply in such circumstances.