under IFRS is identical except that the phrase used is Temporary Difference rather than Timing Difference.)
3.6.2 Under the classic tax covenant the shortfall in the capital allowances pool would represent a loss of a Deferred Tax Relief of £28,000 and this would therefore be a Tax Liability. There is the prospect of a Corresponding Saving, also of £28,000, as the Tax Liability has triggered an increase in the tax losses, provided that the auditors interpret the tax covenant in this way. In the classic tax covenant the definition of Understatement expressly excludes deferred taxation so this would not give any compensation to the Covenantors. The tax losses valued at £50,000 would represent a Sellers’ Relief and this should offer the prospect of recovery, but only if the auditors interpret things in this way. 3.6.3 Under the revised tax covenant the Overstatement of the capital allowances pool, with an Accounts Value of £28,000 represents a Tax Cost, as that part of the deferred tax account is overstated. However, the deferred tax account is understated in respect of losses. Overall the deferred tax asset is understated, not overstated. It is therefore appropriate that there is no claim under the revised format of tax covenant. This makes sense as it is most odd that the movement between the capital allowances pool and the tax losses carried forward (with no material worsening of the tax position of the Company) should lead to the prospect of a claim under the tax covenant. We use the phrase “material worsening” above as there is an argument that an enhanced capital allowances pool is more flexible as a source of loss relief in the future, as tax losses carried forward can only be used against profits of the same trade. However, the losses can be used rather more quickly than the balance in the capital allowances pool. 3.6.4 In view of the fact that there is no claim in respect of the reduced capital allowances pool, it is also important that there is also no Corresponding Saving for the Sellers as a result of the increase in the tax losses. There is now no need for Corresponding Savings in the revised tax covenant so this issue does not arise. 3.6.5 The increased losses are within the definitions of Overprovisions or Understatements but the Accounts Value is only £28,000 due to uncertainty. The remaining £22,000 of losses are a Sellers’ Relief. 3.6.6 The unrecognised tax loss is therefore dealt with under part 8 of the tax covenant: it can be used to reduce or extinguish any amount that is then due from the Covenantors under clause 8.2; alternatively it can be carried back and set against payments already made by the Covenantors under clause 8.3, triggering a refund; alternatively it can be carried forward under clause 8.4 and be used to reduce or extinguish any future payments.
3.7
Losses in the Period after Completion Carried Back
3.7.1 This circumstance assumes that the Company incurs trading losses in the period after the transaction has taken place: there is also an Underprovision of corporation tax of
Made with FlippingBook Learn more on our blog