24 Timing Differences - Loss of Buyer’s Deferred Tax Relief
3.1.24 such Taxation Liability comprises the loss or reduction of a Buyer’s Deferred Tax Relief where such loss or reduction is caused by an originating Timing Difference as defined in Financial Reporting Standard Number 19 such that a similar Relief becomes available to the Buyer or the Company;
24.1 This exclusion is most readily explained by an example, as it involves more of the dark arts of deferred tax accounting:
24.1.1 Washbrook Windows Limited has trading losses in its Last Accounts of £5,000 and these have been used to reduce the deferred tax liability that would otherwise exist. The trading losses therefore represent a Buyer’s Deferred Tax Relief; 24.1.2 it transpires that a cheque for £1,000 relating to the employer pension contributions for the final month of the year had not cleared the company’s bank account by the Last Accounts Date. An ever-vigilant Inspector of Taxes therefore disallows this payment for corporation tax purposes. The payment is instead allowed as a deductible expense of the following accounting reference period. This adjustment therefore reduces the tax losses carried forward at the Last Accounts Date from £5,000 to £4,000; 24.1.3 this reduction of the losses is the loss of a Buyer’s Deferred Tax Relief; the Buyer is therefore able to make a claim under the tax covenant. However, a new Buyer’s Deferred Tax Relief has been created by this adjustment, as there will be an additional deduction available in the period following the Last Accounts Date of £1,000. If the Last Accounts were recomputed to take account of this change to the tax computation, both the Tax Liabilities and the deferred tax provision would be unaltered. 24.2 The above exclusion deals with the situation described above. The circumstances described are very common as very many adjustments required to tax computations are in respect of timing differences rather than absolute differences, as noted above. 24.3 Again, it is possible to argue that the exclusion above is not needed: the compensating savings clause should serve to give recompense to the Sellers in the future. However many would say that the creaking, clunking and expensive mechanism of the compensating savings clause, probably involving the Company’s Auditors, is a heavy- handed way of dealing with a situation where there is no real loss to the Buyer, either in cash flow or accounting terms. 24.4 If payment is to be made for the loss of the Buyer’s Deferred Tax Relief only when it would otherwise have been utilised, i.e. depending on the actual profits that are made after Completion, then there is an argument that the above exclusion is not expressly required. This is on the basis that the use of the newly created Deferred Tax Relief (the tax deduction that is available when the pension payment is made) occurs in the same accounting period as that in which some or all of the tax losses would have been used.
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