3.1 This is a definition which is used in the Seller-protection clauses. This is another definition whose meaning is made clear by examples. There are several types of Corresponding Saving and some of these are detailed below. The inclusion of the phrase: “ and that Relief is utilised ” is to recognise that a Corresponding Saving is considered by the classic tax covenant as no saving at all unless it has an impact on the cash flows of the Company. 3.2 Firstly, if we turn back to the example of Stowmarket Warehousing Limited in the Foreword, the Company had unexpected NIC costs of £2,800 and VAT costs of £6,500. Both of these costs would be deductible for corporation tax purposes. Therefore the net loss to the Buyer is some 72% of those two amounts. 3.3 As a second example, if repair costs include some capital expenditure which has not been adjusted, the computations for earlier years will need to be amended so that the capital expenditure is not allowed as a trading expense; however, capital allowances are then available. In such cases the aggregate amount of the capital allowances will equal the add-back in respect of the capital expenditure which was included in repairs. Therefore this type of adjustment does not affect the aggregate taxable profits of a company, but it does affect the timing of those profits. These types of adjustments therefore will increase the taxable profits of earlier years and reduce the taxable profits of later years. At any point in time the aggregate net effect of the adjustments equates to the increase in the capital allowances pool in respect of those items of capital expenditure at that point. The reason for this is simple, the capital allowance pool balance will reflect the allowances which are yet to be claimed. 3.4 As the system of capital allowances in the UK is based on a reducing balance, there is an ever-decreasing allowance given, reaching forward to infinity. For an item of plant costing £10,000, with a rate of capital allowances of 20% of the reducing balance, the allowances for the first five years will be £2,000, £1,600, £1,280, £1,024 and £820 respectively. At the end of that five year period there will still be a balance left to claim of £3,276. 3.5 Most of the items of capital expenditure are put into a pool and they therefore lose their identity in computational terms. This therefore means that it can involve rather onerous additional record keeping in order to keep track of Corresponding Savings of this type. 3.6 There are various other transactions which are included in the accounts of one period and relieved in the tax computations of another. Examples are general bad debt provisions, accruals for pension contributions and other non-deductible provisions. These are some of the transactions which comprise deferred tax asset balances, as described above. 3.7 It is quite possible for a Deferred Tax Relief to be diminished as a result of an adjustment which gives rise to a Corresponding Saving. Again, an example can help to illustrate the point: Tuddenham Potteries Limited is sold in a transaction involving Last Accounts. The Last Accounts included, as a component of the deferred tax balances, an amount of £75,000 in respect of £250,000 of tax losses carried forward at that point, at a rate of 30%. After Completion it is established that a £20,000 pension
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