6.6 It is therefore important for the tax covenant to be negotiated with a good understanding of the structure and dynamic of the transaction so as to gauge what is reasonable in the circumstances of the transaction.
6.7 There is a further exclusion in the definition in respect of the utilisation of a Buyer’s Relief: again, this can perhaps be explained by a simple example: in the period after Completion the Company makes taxable losses and these are to be carried back to the pre-Completion period: this would then mean that the corporation tax provision was greater than required, but this overprovision would be due entirely to the use of a Buyer’s Post-Completion Relief. It would therefore clearly be inequitable for this to result in a credit to the Sellers. 6.8 One of the underlying themes of tax covenants is that it is the Buyer who bears the risks involved with retrospective changes in taxation rates, law and practice. It is therefore reasonable that the definition of Overprovision should specify that any Overprovision as a direct result of such changes with retrospective effect should also be for the benefit of the Buyer and not the Covenantors. 6.9 Under the Corporation Tax (Instalment Payments) Regulations 1998, those companies which are chargeable to corporation tax at the full rate are required to make instalment payments of corporation tax. The payments are based on management accounts and estimates of the taxable profits arising. If it is found that any of these payments is excessive, then such excess has been included in the definition of Overprovision. 1.2.6 “ Recovery ” means any amount which the Buyer or the Company recovers from some other person (other than the Buyer, but including any Tax Authority) in respect of a Tax Liability in respect of which payment has fallen due from the Covenantors under this Tax Deed provided that the Recovery is not an Accounts Relief; 7.1 The tax covenant covers Tax Liabilities of the Company, regardless of whether or not they are potentially recoverable from some other party. If recovery is then made, it is reasonable that the Covenantors are then recompensed at that point. 7.2 Once again, we are pressing an example into service in order to provide some illustrations: Rushmere Consultants Limited carries out engineering consultancy work. There are several retired engineers who work for the company but who are treated as self-employed “associates” at their request. The Company has been advised that the relationship between the Company and the associates may represent a contract of service and that it is very likely that these people are, in fact, employees. The associates have therefore all signed undertakings to recompense the Company in the event that the self-employed status is successfully challenged by HM Revenue & Customs. The Company has tax investigation protection insurance in place. This matter is identified by HMRC as a breach of the legislation after the sale of the 7 “Recovery”
106
Made with FlippingBook Learn more on our blog