Tax administrations in some jurisdictions now have the power to pursue a buyer directly for a seller’s unpaid taxes. That change shifts risk down the commercial chain and can catch buyers off guard — particularly companies that assume they are only responsible for their own tax affairs. Understanding this shift is essential for buyers, sellers and advisors who want to avoid surprise liabilities and costly disputes.
There are several reasons tax authorities may be empowered to enforce a seller’s tax debts against a buyer:
- Improve tax collection: When sellers disappear, are insolvent, or refuse to pay, pursuing a solvent buyer is a practical way to recover revenue.
- Combat fraud and evasion: Targeting the buyer can deter schemes that involve selling to avoid tax obligations.
- Administrative efficiency: Recovering liabilities from a known counterparty can be faster and cheaper than lengthy investigations into the seller.
What this means for buyers
Buyers can face risks they might not expect. These include:
- Unexpected cash outflows: Tax authorities may seek payment directly from the buyer for unpaid tax liabilities tied to previous transactions.
- Disruption to operations: Enforcement actions can lead to frozen payments, withholding of refunds, or liens that affect cash flow and supplier relationships.
- Increased compliance burden: Buyers must be more vigilant about the tax standing of their suppliers and the documentation that supports transactions.
How buyers can protect themselves
Practical steps can reduce exposure to seller tax liabilities. Key measures include:
- Due diligence: Check a seller’s tax registration, compliance history and any public notices. Ask for tax clearance certificates where available.
- Document every transaction: Keep invoices, contracts and proof of tax withheld or paid. Clear paper trails help defend against enforcement claims.
- Contractual protections: Include warranties and indemnities in purchase agreements that require the seller to cover tax liabilities arising from periods before transfer.
- Payment structures: Use escrow, retention or staged payments to hold back funds until tax risks are cleared.
- Seek tax advice and insurance: Engage tax counsel for complex deals and consider tax liability insurance in large transactions.
Steps sellers should take
Sellers have an interest in avoiding complaints that could trigger action against their buyers. Recommended practices:
- Keep tax affairs current: File returns and pay taxes on time to reduce the chance of enforcement against counterparties.
- Provide assurances: Supply buyers with up-to-date tax certificates, clear invoices and disclosure of any disputes or audits.
- Agree clear contractual terms: Address post-closing tax liabilities, cooperation on audits and allocation of responsibility in sale agreements.
Implications for commercial deals and supply chains
The possibility of buyer liability changes the economics and behaviour across markets:
- Negotiations may shift: Buyers will push for stronger protections, which can affect pricing and deal timelines.
- Smaller suppliers may be disadvantaged: Larger buyers may demand more documentation or restrict trade with vendors who lack clear tax records.
- Increased administrative friction: More checks and paperwork can slow down routine procurement and affect working capital.
Dealing with enforcement — practical tips
If a tax authority approaches a buyer about a seller’s liability, companies should:
- Act quickly: Respond to notices promptly and gather the transaction documents that prove payment and tax treatment.
- Engage legal and tax counsel: Early advice helps assess exposure and identify defences or procedural remedies.
- Negotiate with the seller: Pursue contractual indemnities or reimbursement if the seller is still solvent.
- Explore administrative remedies: Many systems allow appeals, requests for suspension of enforcement or negotiation of payment plans.
Regulatory balance and the road ahead
Making buyers answerable for sellers’ taxes can be an effective enforcement tool, but it also raises fairness and commercial efficiency questions. Policymakers face a trade-off: stronger collection powers improve revenue protection but can burden business activity and add compliance costs.
For businesses, the takeaway is clear: assume greater responsibility for the tax integrity of your trading partners. Tightening due diligence, strengthening contract terms and keeping meticulous records are no longer optional — they are essential risk management steps in an environment where tax authorities can reach across commercial relationships to secure unpaid revenue.