Legal Due Diligence and Covid Fraud

HMRC recently confirmed that an estimated £4.5 billion in Covid Support has been lost by fraud or error and that it is expected to recover £1.1 billion by September 2023. The misuse of Covid Support will continue to be an area of focus for the Government and HMRC.

Any corporate business acquisition should, as a matter of course, be subject to detailed legal, financial and commercial due diligence, but these recent announcements throw particular light on a new area of legal and tax due diligence - the misuse of Covid support.

Usually, legal due diligence will aim to establish the key areas affecting the target company relating to its legal obligations and liabilities that the buyer will potentially be acquiring. Legal due diligence will typically focus on the following areas:

• The corporate structure of the target group.
• The capacity of the seller.
• Historic corporate actions and transactions.
• Material agreements.
• Finance arrangements.
• Legal compliance and anti-bribery and corruption matters.
• Data protection.

When acquiring a company, it is important to run an effective due diligence process. This will ensure that the target company’s accounts, tax and business status are understood, and if there are any liabilities which arise, they can be properly accounted for in the share purchase agreement before purchasing the target company.

Also, an effective due diligence process can allow a buyer and the buyer’s solicitor to raise relevant and productive further enquiries to ensure that the buyer has the necessary information before completion.