£50,000 in the period before Completion. This is a Tax Cost and therefore a claim can be made under the tax covenant. However, the Underprovision does not result in an additional Tax liability as the losses can be carried back to extinguish this Tax liability. 3.7.2 Under the classic tax covenant, this is the third of the four forms of Buyer’s Relief. The definition of Tax Liability includes the use of a Buyer’s Relief. The amount of the Tax Liability is then stated to be the amount of Tax that would have been payable, if the Relief had not been available. The Tax Liability is payable when the Tax would have been paid if the Relief had not been available. 3.7.3 The structure is very similar under the revised tax covenant: the losses which arise after Completion are a Post-Completion Relief, the third type of Buyer’s Relief: under paragraph (iii) of the definition of Tax Cost the setting off of a Post-Completion Relief is a Tax Cost. The amount of the Tax Cost is the amount of such Taxation which would be payable but for such setting off. 3.8.1 There is an HMRC enquiry into the affairs of the Company. It is identified that there are some costs which should have been disallowed in the accounts for periods prior to Completion. The amount of the corporation tax is £50,000 and there is also interest payable of £6,000 in respect of periods up to Completion, and £8,000 after Completion. There are penalties of £5,000. Professional fees of £4,000 are incurred by the Company in dealing with this enquiry. There was tax investigation insurance protection in place but the Buyer and the Company did not communicate to the insurer in advance of the professional fees being incurred and the cover is therefore invalidated. There is a claim brought against the former accountants in respect of incorrect advice in respect of the transaction, and this is settled some two years later at £10,000. 3.8 Tax Liability with Recovery 3.8.3 The definition of Taxation also includes the phrase: “... together with all related interest, fines and penalties... ” Therefore the £6,000 of interest incurred up to Completion is clearly included. The penalties are also a liability of the Company at Completion and are therefore included within subparagraph (i) of the definition of Tax Cost. The interest in respect of the periods after Completion are not a liability at Completion. The main covenant at paragraph 2.5 therefore includes interest and fines arising in the period after Completion in respect of any Tax Cost, so that the interest of £8,000 is also covered (and to put the position of the penalties of £5,000 beyond doubt). 3.8.4 The professional fees of £4,000 are not a liability of the Company at Completion and they are also not included in the definition of Taxation or Tax Cost. They are included in the main covenant in clause 2.6 as reasonable third party costs in connection with a Tax Cost. It is arguable as to whether or not they are properly incurred, as they were incurred without first notifying the insurers of the enquiry and seeking their approval for the proposed costs. As a result the insurers have withdrawn cover. The exclusion in 3.8.2 The corporation tax liability is within the definition of Taxation. It is also an Underprovision and is therefore within subparagraph (i) of the definition of Tax Cost.
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