1 Introduction
1.1 The meat of this section is in the definitions, and it is therefore appropriate that they are repeated:
Overprovision ” means the amount by which any provision in the Completion Accounts relating to Tax (other than a provision for deferred Tax) is greater than the Tax Liability, and also means the extent to which any amounts paid under the Corporation Tax (Instalment Payments) Regulations 1998 are in excess of the related Tax Liability except in each case to the extent that such Overprovision is due to the utilisation of a Buyer’s Relief, or arises from a change in rates of taxation or any change in tax law or practice, in each case with retrospective effect; 1.2 As previously noted, it is a central theme of tax covenants that the Buyer takes on the risks associated with retrospective increases in taxation arising from changes in rate or other changes in tax law or practice. It is therefore only reasonable that the Buyer should also have the benefit of retrospective decreases. 1.3 Overprovisions are a relatively common feature of accounts: provisions will be made for tax liabilities on a prudent basis in respect of some contentious matter, assuming that a possible interpretation of HMRC will prevail. The tax computations are then submitted on the basis which is in favour of the Company, and these tax computations are often not challenged. 1.4 The main operative clause concerns itself with underprovisions: claims are made against the Covenantors if a Tax Liability arises in respect of the pre-completion period; the exclusion relating to provisions in the completion accounts then swings into action to reduce the size of any potential claim. If the Tax Liability is £130,000 and the provision in the Last Accounts or Completion Accounts is only £110,000 then a valid claim can be made against the Covenantors for £20,000. 1.5 It is therefore perhaps understandable that the Covenantors then seek recompense if the opposite situation prevails and the provision in the Last Accounts or Completion Accounts exceeds the Tax Liability. 1.6 Allowance for Overprovisions will be understandably resisted by the Buyer if the consideration payable for the shares is not directly determined by the level of the net assets: if there is no such relationship then the Sellers can include a significant Overprovision in the Last Accounts or Completion Accounts and thereby obtain a large degree of protection from claims under the tax covenant. 1.7 This is a matter in which there are two viewpoints when dealing with a transaction based on Last Accounts: even if the consideration is not directly determined by the level of the net assets, it is very likely that the level of the net assets may have played some part in the negotiation of the price. If the price has been determined as a multiplier of the earnings before interest, a multiplier of say, 7 may have been reduced to 6.5 if the balance sheet in the Last Accounts was skimpy. The alternative view is
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