payment was not made until shortly after the Last Accounts Date, and this cost is not deductible in the period to the Last Accounts Date but will be relievable in the following period. The tax losses available at the Last Accounts Date have therefore been reduced by £20,000 and a claim is possible under the tax covenant in respect of the loss of a Deferred Tax Relief. The amount of the claim under the Tax Covenant is £6,000 as this is the level of Deferred Tax Relief which has been lost. However this has resulted in the creation of a new Deferred Tax Relief, namely the taxed pension provision. If the Last Accounts had been amended for this adjustment there would have been no change to either the profit and loss account or the balance sheet. One Deferred Tax Relief has simply been replaced by another. 3.8 In the above example, the Corresponding Saving arises in the stub period between the Last Accounts Date and Completion. It meets the definition of a Corresponding Saving, as the definition above does not require the saving to arise after Completion, when the transaction involves Completion Accounts. If the transaction is based on Last Accounts the above definition is still appropriate: if there is a transaction between the Last Accounts Date and Completion, it is only those transaction which are outside the normal course which may result in a claim against the Covenantors, and it is only Corresponding Savings in respect of such transactions which are relevant. 3.9 It is very common for tax covenants to provide that the auditors to the Company for the time being are to be the final arbiters as to whether or not a Corresponding Saving has arisen. There are at least two problems with this state of affairs: firstly the record keeping can be burdensome, with shadow capital allowance computations being needed if there is an adjustment which affects the capital allowance pools; secondly, can the parties be confident that the auditors to Tuddenham Potteries Limited, presumably the same auditors as used by the rest of the Buyer’s group, but who may not be accustomed to wrestling with the concepts in a tax covenant, will recognise that the use of the Relief in the period prior to Completion will represent a Corresponding Saving? 3.10 There are Corresponding Savings which can arise in groups: it is possible that a transfer pricing adjustment may arise in one company, with the effect that its taxable profits are increased. This will normally result in a reduction in the taxable profits of another group company. 3.11 The wording sometimes substitutes the words “...resulted in a payment being made under clause 2 of this Tax Deed...” for the words: “... resulted in a payment by the Covenantors falling due under this Tax Deed ...” It does not appear to us to be necessary for there to be a requirement that a payment is made. It is quite feasible that there is a claim for PAYE which is identified sometime after the end of the relevant accounting period. If this is the case, then the corporation tax relief, in the form of the deduction for the PAYE liability, may have already been gained.
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