notified. Again, these can be reversed at the option of the Company, or may be covered by actual expenditure in the next accounting period;
2.6.5 if there is a liability in respect of a pension fund shortfall under the provisions of FRS 17, dealing with defined benefit pension schemes, then this liability will not have been deductible for tax purposes and there will therefore be a related deferred tax asset. This last deferred tax asset is somewhat unusual in that it is netted off the FRS 17 provision balance, and is not shown with the other deferred tax components. 2.7 The above are all referred to as deferred tax assets, which they are: however, they will only be recognised in the accounts as assets in one of two circumstances: firstly, they reduce deferred tax liabilities but are not greater than those liabilities; secondly, there is a net deferred tax asset and it is more likely than not that they will be recovered in the future. A deferred tax asset of large tax losses would not be recognised if the company was loss-making and there was no realistic prospect in the foreseeable future of it generating profits. 2.8 Any reduction or loss of any deferred tax assets within the deferred tax account should result in a claim under the tax covenant, as such a loss will be included within the definition of Tax Liability. Therefore, taking the example in 2.6.1 above, if it was identified that the tax losses carried forward had been overstated due to computational errors prior to Completion, and these losses were recognised as part of the deferred tax balance, the Buyer would be able to make a claim under the tax covenant as this would represent a loss of a Buyer’s Relief. As previously mentioned, the protection for the Buyer in the tax covenant is in respect of unexpected tax liabilities and also in respect of tax assets in the accounts which prove to be ephemeral. 2.9 As these deferred tax balances do not link directly into cash flows, there are various timing alternatives as to when claims can be made under the tax covenant. These matters are addressed later in this chapter.
2.10 This Buyer protection clause is sometimes not included as a component of Buyer’s Reliefs but merely as a part of the definition of Tax Liability.
2.11 The use of the phrase “any Relief to the extent that it has been taken into account ” is preferable to the phrase “any Relief which has been taken into account” on the grounds of precision and is a wording that should be requested by the Covenantors.
Accounts Relief
(b) any Relief, other than Deferred Tax Relief, to the extent that it was treated as an asset of the Company in the Completion Accounts (“Accounts Relief”)
2.12 This Relief is very often included together with the deferred tax Relief. We have shown it separately for the sake of simplicity. It is easier to dissect the tax covenant if we separate out these two components, as they require separate clauses when addressing the measure of the claim and the timing of payments. This clause is sometimes worded as:
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