extends the protection of the tax covenant to include parts of the intercompany balances on the basis that these balances represent quasi-taxation assets.
8.9 This is a matter which may be relevant only when dealing with the acquisition of companies from within a group. Such an approach is fraught with problems in that the definition only extends to group relief assets and does not cover group relief liabilities: if the group relief is reordered within a group, there may be a reduction in group relief assets but a commensurate reduction in group relief liabilities, with no overall impact on the net assets of the Company. 8.10 Such an approach also raises all sorts of difficult issues in determining whether or not any intragroup account balance includes group relief assets: this will be determined by the way in which other entries, such as cash receipts on that account, are matched. 8.11 It is our view that the nature of the components within intragroup accounts up to the point of Completion should be ignored: the important issue for the Buyer is to ensure that any such intragroup balances are settled or determined at Completion, regardless of whether they may or may not include the vestiges of group relief transactions at that point. We therefore consider that the Buyer should ensure that any group relief agreements between the companies in the Seller group are understood and that any obligations are terminated at Completion. He then needs to ensure that all balances with other companies in the Seller group are settled as at Completion. If this is done, complex analysis of the amounts that were paid or received for group relief received or surrendered is not required. (Under Section 402(6), ICTA a payment for group relief can be anywhere between 0p and 100p in the pound without being taken into account in computing profits or losses.) 9.1 The Buyer is concerned to make sure that the protection of the tax covenant extends to cover the underprovision of actual tax liabilities and the overstatement of actual tax and deferred tax assets. 9.2 The inclusion of this clause is the precursor to one of the exclusions that often features in a tax covenant: to the extent that the Tax Liability in question is covered by a Relief which is not within the definition of a Buyer’s Relief, there should be no liability under the tax covenant. This is therefore a Seller protection definition. 9.3 If we return to the example of Tuddenham Potteries Limited, there were tax losses carried forward of £250,000 which had been included as part of the deferred tax balances. However, it was then identified that there had been a simple computational error in an earlier year, whereby a profit on disposal of a fixed asset had been added to the profits rather than deducted in arriving at the taxable result for the year. This amounted to £15,000 and the tax losses were therefore recomputed as £280,000, rather than £250,000. 9 “Sellers’ Relief” 1.2.8 “ Sellers’ Relief” means any Relief arising in the Company before Completion which is not a Buyer’s Relief;
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