1.6 We believe that the classic tax covenant imposes a disproportionate burden of post- completion record keeping and professional costs when there are claims under the tax covenant in respect of timing differences. This approach also introduces a measure of uncertainty as the auditors of the Company are normally given the role of final arbiter. We have included in this chapter a specimen tax covenant prepared on the basis that timing differences are ignored, and on the basis of Completion Accounts. We have also given a number of examples showing how this tax covenant works in practice.
1.7 This new approach may not be suited for companies with the following qualities:
1.7.1 high levels of tangible fixed assets, notably long-life assets;
1.7.2 high levels of purchased goodwill or purchased intangible assets (as distinct from such assets which arise on consolidation only);
1.7.3 large tax losses carried forward which are recognised as a deferred tax asset in the Accounts;
1.7.4 defined benefit pension schemes accounted for in accordance with FRS 17, due to the related deferred tax balances.
2
The “Net Asset Reduction” Tax Covenant, assuming Completion Accounts
THIS DEED OF TAX COVENANT is made this day of 20xx
BETWEEN:
JOHN SMITH AND ANNE SMITH of 60 Mill Street, Maintown, Loamshire, LO5 2PQ (the “ Covenantors ”) and
BUYER LIMITED a company incorporated under the laws of England and Wales with registered number 0123456789 and having its registered office at 100 Middle Street, London, EC8B 4SF (the “Buyer”). This Deed of Covenant is entered into pursuant to the Share Sale and Purchase Agreement dated xx (the “Agreement”) made between the Covenantors and the Buyer.
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