payments that were made. Assuming a corporate tax rate of 28%, there is therefore the prospect of a saving of 28% of £9,300, which is £2,604. The classic tax covenant is not structured on the basis that the claim under the main covenant is reduced by this tax saving: the focus on the underlying cash flows means that the Covenantors are obliged to make a payment of £9,300. When the corporation tax liability of the Company is then reduced by £2,604 in consequence of these costs, repayment is then due to the Covenantors. 4.3 The inclusion of the words “ and that relief is utilised ” in the above text is to recognise that the creation of a Corresponding Saving is not sufficient to trigger a repayment to the Covenantors: if the Company entered a period of persistent losses, there would be no benefit to the Covenantors from the Corresponding Saving.
4.4 There are various types of Corresponding Savings, including the following:
4.4.1 NIC, PAYE and VAT costs which are incurred by the Company and which trigger a consequential reduction in the profits subject to corporation tax, on the basis that they are incurred wholly and exclusively for the purposes of the business; 4.4.2 timing adjustments for deferred tax purposes, such as capital expenditure expensed to repairs and taxed provisions, such as general bad debt provisions and provisions for pension contributions;
4.4.3 transfer pricing adjustments between companies, with the effect that the profits of one company in the group are increased and the profits of another are decreased;
4.5 A very common form of Corresponding Saving is an adjustment to capital allowances: for example various items of capital expenditure may be expensed each year as repairs, rather than being capitalised, with capital allowances then claimed. 4.6 Adjustments such as these, which are a very common type of adjustment to computations arising from aspect enquiries, do not increase the overall amount of the taxable profits which are reported. However they do result in the taxable profits being reported in different accounting periods. 4.7 With such an example, the increase in the taxable profits in periods up to Completion will be followed by reductions in the taxable profits of post-completion periods. Such reductions are Corresponding Savings. 4.8 On the basis of tracking the underlying cash flows in respect of taxation, the tax covenant works in such a way that the Covenantors have to make payment in respect of the increases in the taxable profits, and therefore Tax Liabilities, in the periods up to Completion. They are entitled to some refund of such payments when the Corresponding Savings actually materialise in the form of reduced cash flows in the post-completion periods.
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