3.3.4 Under the classic tax covenant, the Tax Liability of £50,000 is payable 5 days prior to the liability of £50,000 falling due to HMRC. The crystallisation of the Corresponding Saving is then determined by the accounting decisions by the Company after Completion, and its trading results. Under the new format £28,000 is payable within 5 days of notification. 3.3.5 Under the new approach, if the whole of the Underprovision for Corporation Tax had related to a general bad debt provision or other similar timing difference, then there would have been no Tax Cost and there would be no payment due under the tax covenant on the basis that the net assets would not have reduced. Under the classic tax covenant there would be a payment required of £50,000 followed by the possibility of a repayment of all or part of that amount at a later date. 3.4.1 We shall assume that the taxable profits in a pre-Completion Period have been increased by £200,000, due to a disallowance of professional costs, and this has resulted in tax losses of £120,000 being fully used, with £80,000 of profits being chargeable to corporation tax. The losses were recognised in the deferred tax account at an Accounts Value of £33,600. There was no provision in the accounts for the corporation tax of £22,400 payable on the profits of £80,000. 3.4.2 With the classic tax covenant this would have represented a Tax Liability, with two components: there would have been a Corporation tax Liability of £22,400, with no exclusion available in respect of a provision in the accounts. There would also have been a loss of a Deferred Tax Relief of £33,600, the first form of Buyer’s Relief. 3.4.3 Under the revised tax covenant, the utilisation of the tax losses would mean either that the net Deferred Tax Assets were Overstated, or that the net Deferred Tax liabilities were Underprovided. Either circumstance would mean that this loss of a Buyer’s Relief would also be an Overstatement or Underprovision and would therefore represent a Tax Cost. 3.4 Increase in Taxable Profits Including the Use of Tax Losses Brought Forward
3.4.4 There was no provision for the corporation tax payable of £22,400 and this would therefore represent an Underprovision, and this would also be a Tax Cost.
3.4.5 The professional costs disallowed of £200,000 were an absolute rather than a timing difference and therefore there is no Corresponding Saving nor any other Sellers’ Relief produced.
3.4.6 The amount payable under the tax covenant is therefore £22,400 + £33,600 which is £56,000. This is also equivalent to the reduction in the net assets at Completion.
3.4.7 Under the classic tax covenant, the Corporation Tax Liability would have been payable by the Covenantors five days before the date when the Corporation tax was due to be paid to HMRC. The loss of the Buyer’s Relief would either have resulted in a further
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