Tax-related (Commercial) Disputes

The relevant contract will usually contain provisions dealing with notifying claims and applicable time limits.  If there are no mention of limitation periods, general statutory time limits for breach of contract should apply (generally six years where the warranty or indemnity is given by contract or 12 years where given by deed).  

To minimise the chance of a potential tax-related claim becoming time-barred, any would-be claimant should seek advice as soon as the underlying tax dispute arises.  Our specialists can help clients take a pragmatic approach to protect their position while any underlying tax dispute is being resolved.

A claimant under a tax warranty will usually be under a general duty to mitigate their losses, meaning they will not be able recover damages for any tax liabilities or penalties if these could have been reasonably avoided (and any specific requirements of mitigation will normally be set out in the relevant contractual provisions). 

Where there is a duty to mitigate and potential defendants do not have specific conduct rights, they will usually seek to challenge the way in which the underlying dispute with a tax authority has been handled to show that the claimant has not done enough to mitigate their losses (the most obvious example being where a tax dispute has been settled with the tax authority).  For that reason, any would-be claimants should always seek advice regarding any potential tax-related claims as soon as the underlying tax dispute arises.

Payments of damages made in connection with tax-related (commercial) claims can be taxable in the hands of the claimant.  If taxable, it will need to be determined whether the damages should be treated as income or capital for tax purposes in order to calculate the amount of tax payable – this is a complex issue that should be discussed with professional advisers as soon as possible and factored into any amount claimed.