CHAPTER NINETEEN
A NEW APPROACH TO TAX COVENANTS: THE REDUCTION IN NET ASSETS
AS THE MEASURE OF LOSS: TRANSACTION BASED ON COMPLETION ACCOUNTS
Executive Summary
A This chapter includes a tax covenant based on the concept of the loss to the Buyer being directly linked to the reduction of the net assets of the Company in respect of the unforeseen tax liabilities.
B The tax covenant below is based on the assumption of Completion Accounts.
C This new approach may not be suited for companies with high levels of tangible fixed assets or purchased goodwill or other intangibles, or large losses which are recognised in the deferred tax account.
D There are alternative wordings depending upon whether the Accounts of the Company are prepared on the basis of UK GAAP or International Financial Reporting Standards.
E This alternative form of tax covenant provides extra protection to the Buyer in that it now covers any underprovision of deferred tax liabilities, as well as the existing protection regarding overstatement of deferred tax assets. F The new approach moves away somewhat from the cash flow approach. There are two alternatives provided: one is that claims are payable immediately; the second sticks rather closer to the underlying cash flows. The timing of any payments for underprovisions of deferred tax liabilities is stated as 21 months from the Last Accounts Date. This therefore treats the deferred tax provision as a quasi corporation tax provision of the period straddling Completion. This is clearly nothing other than a proposal: there is no reason why another date cannot be chosen for payment, if it is found that the net assets are overstated, due to a mis-statement connected with tax.
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