Executive Summary
A The definitions in the standard tax covenant are complex: they justify some considerable time being spent in their analysis. It is the complexity within the definitions which can then result in rather shorter operative clauses. B There can be concerns relating to group relief receivable and payable in the Company and the extent to which group relief claims have been made and the amounts that have been paid for any losses surrendered to the Company. We do not think that it is appropriate to consider parts of intercompany balances as representing quasi-tax assets or liabilities. The concerns should be certainty as to the settlement of intragroup accounts at Completion, knowledge of what group relief has been surrendered, and the ending of any group relief commitments. C The advisers acting for the Buyer will be concerned to make sure that the various “degrouping charges”, which can crystallise at the point of sale of the Company, are covered by the covenant. This is normally achieved by ensuring that the definition of “Event” includes exchange and Completion; it is also necessary to make sure that the main covenant is drafted to refer to Tax Liabilities arising on or before Completion. There is a growing tendency for an additional paragraph to be included expressly referring to degrouping charges. We question the need for such an additional clause. D The definitions within the tax covenant can be very widely drawn and may include all elements of taxation, and whether payable by the Company or not. It is therefore important to narrow down the extent of the covenant in its main operative clause: a covenant which could lead to the Covenantors being liable either for tax that was settled before the relevant pivot point (Completion or Last Accounts), or for the stamp duty costs of the Buyer, is not well drawn and has ramifications unintended by either side.
E It is our view that a new definition, “Accounts Value” should be included as a means of quantifying certain terms, including “Relief”.
F We do not consider that the balances for group relief should be included in the definitions of tax assets and Reliefs. The important point is that all intragroup balances are cleared at Completion, regardless of their components and that no additional group relief obligations remain.
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