instalments: therefore the exclusion of this clause is to put it beyond doubt that any IHT within this clause is payable in accordance with the terms of the tax covenant.
6 “Overprovision”
1.2.5 “ Overprovision ” means the amount by which any provision in the Completion Accounts relating to Tax (other than a provision for deferred Tax) is greater than the Tax Liability, and also means the extent to which any amounts paid under the Corporation Tax (Instalment Payments) Regulations 1998 are in excess of the related Tax Liability except in each case to the extent that such Overprovision is due to the utilisation of a Buyer’s Relief, or arises from a change in rates of taxation or any change in tax law or practice, in each case with retrospective effect; 6.1 This definition is used in the seller-protection clauses of the tax covenant. If the corporation tax computations are prepared for a Company it is very likely that the provision in the Last Accounts will be slightly greater than the computed liability, the additional sum may relate to either rounding or a generally cautious approach. If a claim is made by the Buyer under the tax covenant in respect of an unprovided Tax Liability, also known as Underprovisions, it is not surprising that the Covenantors will look for credit to be given for Overprovisions. 6.2 It should be noted that the standard drafting is careful to exclude deferred tax Overprovisions from the definition. Such Overprovisions are capable of recovery as Corresponding Savings and this is the nature of the remedy under the classic tax covenant. 6.3 There is sometimes an argument put forward that the Sellers have control of the tax and accounting affairs of the Company up to Completion and it is therefore within their power to manage matters so that Overprovisions do not arise: to the extent that they fail in this mission, there should be no recompense under the tax covenant. 6.4 We do not consider that this argument is worthy of serious consideration: there are many circumstances in which a tax liability can be increased in one accounting period, leading to a reduction in another. If both of these accounting periods are before Completion, then an Underprovision and an Overprovision would both arise, with the net loss being interest in respect of accelerated corporation tax. We are therefore of the opinion that a fairer interpretation is to recognise that Overprovisions are very often the other side of the coin of Underprovisions: if there is a Tax Claim for an Underprovision, then credit should be given for an Overprovision. 6.5 Allowance for Overprovisions will be understandably resisted by the Buyer if the consideration payable for the shares is not directly determined by the level of the net assets: if there is no such relationship then the Sellers can include a significant overprovision in the Last Accounts or Completion Accounts and thereby obtain a large degree of protection from claims under the tax covenant.
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