14.1 There should be no objection to this exclusion in principle. However it is quite likely that the solicitors to the Buyer will wish to narrow this down to deal with specific aspects of the tax covenant.
15 Use of a Relief which is not a Buyer’s Relief
3.1.15 s uch Tax Liability is covered by a Relief arising before Completion which is not a Buyer’s Relief;
15.1 This is a means of the Covenantors gaining some broad protection: as the Buyer’s Reliefs are defined everything outside the definition up to Completion is available to protect the Covenantors. Reliefs arising after Completion as a direct result of matters giving rise to claims under the tax covenant are dealt with as Corresponding Savings. 15.2 A classic example of such a Relief is trading tax losses carried forward under Section 393 which have not been recognised on the balance sheet as either a deferred tax asset or a component part of the reduction in the deferred tax liability. Such a situation would arise if there was insufficient confidence that the losses could be utilised. 15.3 If there are capital losses carried forward, then it is very likely that they will not be considered to be a Buyer’s Relief as they will almost certainly not be represented by an asset in the Last Accounts or Completion Accounts. 15.4 There may be transactions in which it is agreed that the tax losses are all for the benefit of the Buyer, despite the fact that they are not included on the balance sheet. In such circumstances the definition of Buyer’s Relief will be cast on a broader basis.
15.5 The above wording could alternatively refer to a Sellers’ Relief.
16 Impact of Joining Buyer’s Group
3.1.16 s uch Tax Liability arises or is increased solely as a result of the Company becoming a member of the Buyer’s group for the purposes of any Tax;
16.1 This is a very common exclusion, especially when dealing with the acquisition of smaller companies: the small companies rate of corporation tax is 21% for profits up to £300,000. There are residual advantages from being a smaller company for profits up to £1.5 million. However, these small companies rate bands are reduced by the number of active companies under common control. In a group with a large number of active companies the rate bands can diminish to very small sums available to each company. 16.2 There will often be a concern from the Buyer’s viewpoint to narrow this exclusion to deal solely with the issue of the small companies rate of corporation tax. An alternative wording is therefore:
s uch Tax Liability arises or is increased as a result of the Company being eligible for small companies’ relief from Corporation Tax, in accordance with Section 13, ICTA,
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