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The prospective purchaser in a takeover, merger etc will wish to consider whether warranties or indemnities are required from the vendors, in respect of transactions occurring before the purchase. Warranties cover commercial issues, such as the company's profitability and the state and nature of the assets and liabilities, as well as taxation issues. Tax warranties are essential and should cover all taxation aspects. The main purpose of drafting comprehensive warranties is to ensure that all relevant information about Target has been identified.

In contrast to a warranty, a tax indemnity is a specific agreement by the vendor to make a payment to the purchaser if a specified liability arises in the future. In order to bring an indemnity claim, the purchaser only has to show that circumstances set out by the indemnity have occurred. For a warranty, the purchaser has to show that he has suffered some sort of loss or damage.

The indemnity should ensure that the vendor will settle any unexpected tax liabilities arising in Target (usually being liabilities that are not reflected