1 Introduction
1.1 The clause relating to deductions from payments is now standard in tax covenants. Having gained its place by dint of long service, it is not now likely to be unseated. However it is difficult to see why it is required in respect of payments under the tax covenant as these are not required, under UK tax legislation, to be paid under deduction of tax. There is an argument that some component of it may comprise interest, but we do not consider that a payment under a tax covenant should be deconstructed in this way. 1.2 If there was a requirement for tax to be deducted, for some reason, then the Buyer receives a net amount equivalent to the gross loss. Recovery of the tax withheld by the Covenantors would then be dependant on the Recoveries clause, covered later in this publication. 1.3 The second part of the wording above has the effect of protecting the Covenantors in the event that they are obligated to make payment to some person other than the Buyer. Again, it is difficult to see in what circumstances this part of the clause would ever be invoked. 5.3 If any Tax Authority brings any sums paid by the Covenantors under this Deed into charge to Tax (or would charge to Tax in the absence of any Reliefs available to the Buyer) then the Covenantors shall pay such additional amount as will ensure that the total amount paid, less the Tax chargeable on such amount, is equal to the amount that would otherwise be payable under this Deed ; i f either party to this Deed shall have assigned the benefit in whole or in part of this Deed then the liability of the other party under this clause 5.3 shall be limited to that which it would have been had no such assignment taken place; 2.1 If payments are made between Buyer and Sellers under the tax covenant, then they should not be subjected to tax, provided that they do not exceed the amount paid by the Buyer for the shares in the transaction. As noted earlier, if there is the prospect of the payments exceeding the consideration (for example if the price payable to acquire the shares in the Company is purely nominal, due to net liabilities or continuing losses), then such excess amounts will be taxable on the Buyer. As an example, if a company is sold for £1, as it has net assets of £1 million, large contingent liabilities for redundancies, and continuing losses of £500,000 a year, then it is arguable that the Buyer requires full recompense if it is discovered after Completion that there are additional tax liabilities of £100,000. He will reasonably consider that an effective receipt after tax of £70,000 is not adequate to cover an unexpected liability of £100,000. 2 If Payments are Subject to Taxation
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