5.11 If the tax computations are reviewed and amended after Completion, with £50,000 of the general bad debt provision being allocated to specific doubtful balances, then the effect will be that there will be a reduction of one Deferred Tax Relief (as the general bad debt provision will now be £300,000, rather than £350,000) but there will be an increase in another, namely the tax losses carried forward, which will have increased by £50,000, from £580,000 to £630,000. 5.12 There has been a reduction of a Deferred Tax Relief, so the Buyer is able to recover under the tax covenant. If the timing of recovery is on the assumption that profits are sufficient to enable full utilisation of the Deferred Tax Relief, then there is an immediate claim possible for £50,000 at 28%. 5.13 In this circumstance a Corresponding Saving would then also arise, as the increase in the tax losses is a direct result of the decrease in the general bad debt provision. The same would prevail if the loss only resulted in a payment at the time when the additional tax was payable. There will always be some uncertainty as to when general bad debt provisions should be considered to be used, as this is largely at the behest of the Buyer.
6 The Deferred Tax Liabilities
6.1 It is an accident of evolution that tax covenants concern themselves with deferred tax assets, but give no regard to deferred tax liabilities.
6.2
Liability balances in the deferred tax account include:
6.2.1 the book amount of those fixed assets which are eligible for capital allowances (or the net of this figure and the capital allowance pool for those who consider that the separation of these two components is artificial, on the basis that it is the difference between them that is the figure in the deferred tax account);
6.2.2 profits which have been included in the accounts but which have not yet been taxed, such as profits recognised in consolidated financial statements in respect of overseas operations, and which have therefore not been subject to UK tax; 6.2.3 costs which have been allowed for tax but which have not yet been recognised in the profit and loss account, such as interest costs which have been capitalised or carried in a work in progress balance;
6.2.4 under IFRS the deferred tax provision in respect of the revaluation of a property;
6.3 From the viewpoint of the Seller it seems inconsistent that the Seller is punished if a deferred tax asset is overstated, but there is no mechanism for a recovery if the deferred tax asset is understated, or a deferred tax liability overprovided.
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