G In the classic tax covenant there is an adjustment in favour of the Covenantors in respect of Corresponding Savings, at the time that the cash flow benefit takes place, assuming that it does take place. Under this alternative approach a Corresponding Saving is adjusted immediately against the Tax Liability. If the Tax Liability relates to VAT, PAYE, or NICs, the claim will normally amount to 72% of the Tax Liability (assuming a corporation tax rate of 28%) as the Corresponding Saving will be recognised immediately. H There is a similar approach with regard to Understatements and Overprovisions: if such Seller protections exist, either as a result of the Tax liability or otherwise, then they are recognised immediately. The same approach is not adopted with regard to Recoveries, due to the high level of uncertainty that may exist. These are therefore only recognised when the receipt is effectively certain. I This approach introduces greater protection for the Buyer. It also introduces considerable simplification of the record keeping that might otherwise be required after Completion, to the benefit of the Sellers. The Sellers are also spared the uncertainty that comes with reliance on the opinion of auditors as to whether or not a Saving or Offset has taken place.
J In order to differentiate this style of tax covenant the term “Tax Cost” is used in place of “Tax Liability”.
Made with FlippingBook Learn more on our blog