payment on the same date, or at some point in the future when the tax losses would have been used, depending on the wording of the tax covenant and the views of the auditors. Under the revised tax covenant the tax is payable within five days of notification.
3.5
Deferred Tax Underprovided
3.5.1 We shall assume that deferred Tax has been underprovided by £50,000 due to a computational error: an asset balance of £50,000 in respect of tax losses was carried forward in the deferred tax account, despite the fact that the losses had been utilised many years earlier.
3.5.2 Under the classic tax covenant this would represent the loss of a Deferred Tax Relief, the first form of Buyer’s Relief. This therefore represents a Tax Liability.
3.5.3 Under the revised tax covenant, this is an Underprovision or Overstatement of Deferred Tax and therefore represents a Tax Cost.
3.5.4 This is neither a timing difference nor are there any Corresponding Savings - this is nothing more and nothing less than an error in the accounts.
3.5.5 A claim can therefore be made for this Tax Cost under the provisions of clause 2.1 of the tax covenant. It represents a Tax Cost in that the accounts will need to include a charge of £50,000 more than might otherwise be expected due to this error. The net assets were overstated by £50,000 due to this error. 3.5.6 Under the classic tax covenant, the timing of the payment by the Covenantors will depend on the wording of the tax covenant: either it will be assumed that sufficient taxable profits are immediately available to allow the Deferred Tax Relief to be used, or the timing of the payments will depend on the actual shape of the taxable profits in the post-Completion period. Under the new format, payment is due within five days of notification. 3.5.7 If the deferred tax was underprovided as a deferred tax liability was omitted, then there would be no claim under the classic tax covenant. Under the revised tax covenant a claim can be made as it is a Tax Cost. 3.6.1 The Value of the Losses in the Deferred Tax Account are understated by £50,000. £28,000 of this relates to an error in the capital allowance computation of £100,000, in that allowances had been claimed at a rate of 20%, instead of the rate allowed of 40% in the relevant period. Therefore the value of the capital allowances pool carried forward has been reduced by £100,000, the Accounts Value of this being £28,000. The rest of the adjustment, £22,000, reflects the lack of certainty that the tax losses of some £78,600 would be utilised; no losses were therefore represented in the deferred tax account. The accounts are prepared in accordance with UK GAAP. (The analysis 3.6 Tax Losses Understated in the Deferred Tax Account
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