2 The Main Covenant
2.1.1 any Tax Liability of the Company resulting from or by reference to any income, profits or gains earned, accrued or received on or before the Completion Date or any Event occurring on or before the Completion Date whether alone or in conjunction with other circumstances and whether or not such Tax Liability is primarily chargeable against or attributable to any other person; and 2.1 This is the main source of protection needed - protection from additional tax liabilities which have to be paid to the tax authorities and which were not foreseen at Completion, together with related interest and penalties. The definition “Tax Liability” also includes any losses in respect of the four types of Buyer’s Relief. 2.2 If we go back to the example of Stowmarket Warehousing Limited, mentioned in the Foreword, the extra payments of £9,300 made by the Company relating to NIC and VAT would result in a claim under this part of the tax covenant. As previously mentioned, they would also trigger a Corresponding Saving in view of the prospect of a corporation tax deduction in respect of these trading costs. 2.3 The main covenant is restricted here to a Tax Liability of the Company, thereby narrowing the definitions of Taxation and Taxation Liability. In other tax covenants this narrowing can take place in the definitions. There is also a limitation in respect of the periods up to Completion. 2.4 It is a useful check to make sure that the tax covenant does not result in the Covenantors being liable for the stamp duty costs of the Buyer. It is a cost which is triggered by Completion of the transaction. Over-enthusiastic drafting of clauses relating to degrouping charges and the definition of Tax Liability can result in the Buyer’s stamp duty being swept up and triggering a liability for the Sellers. (This would be the case if the words “of the Company” were deleted from the above text.) This is clearly not the aim of a tax covenant. If such protection has to be added in the form of a specific exclusion, then it is our view that the main covenant is too broadly drawn. 2.5 The power of this main operative clause can be demonstrated by the fact that it is sometimes necessary to include an exclusion in respect of Tax Liabilities which have been settled, either before Completion or before the Last Accounts Date. It is our view that the definitions are too widely drawn if this exclusion has to be added in order to make sense of the intentions of the parties. It is far preferable that the definition of Tax Liability excludes any tax settled prior to the pivot point. 2.6 As this very broad covenant has to be restricted to Tax Liabilities which were unforeseen at completion, this covenant is normally matched later with the appropriate exclusion for the amounts of Tax that have been provided for in the Last Accounts or Completion Accounts.
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