1 Introduction
1.1 In order to explain this part of the tax covenant, it is helpful if the definition of Recovery is repeated:
“ Recovery ” means any amount which the Buyer or the Company recovers from some other person (other than the Buyer, but including any Tax Authority) in respect of a Tax Liability in respect of which payment has fallen due from the Covenantors under this Tax Deed provided that the Recovery is not an Accounts Relief. 1.2 Recoveries may come from third parties: using the prior example of Rushmere Consultants Limited, it is possible that HMRC succeed in their arguments that the associates of that company were in fact employees. In this situation the company would be obliged to account to HMRC for PAYE and for employers’ and employees’ NICs. HMRC will then reimburse the associates for the taxation that they have already paid under their self-employed status. The associates have all signed undertakings to the company to make reimbursement in this situation. The Buyer wants immediate recompense from the Covenantors in respect of this tax cost. He does not wish to wait until amounts are received from each of the associates. However, as the money is received from the associates the Buyer should then make repayment to the Covenantors. The same thought process applies to the tax investigation insurance proceeds relating to the professional costs. If there is no reimbursement to the Covenantors the Buyer will have effectively received payment twice for the same Tax Liability. 1.3 Another example often given is of claims made against the tax agents to the company for negligent advice or execution. Claims for negligence can grind on at a slow pace and the Buyer does not wish to wait to be reimbursed. 1.4 Tax investigation fee insurance is now increasingly common, especially with smaller companies, where it is sold with some alacrity by the accountants and tax agents. Such insurance provides cover for the professional costs associated with HMRC enquiries. The same broad principle applies: the Buyer is recompensed by the Covenantors without delay and then any proceeds from this source can then be used to reimburse the Covenantors as they are received.
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