the set off or use against income, profits or gains earned, accrued or received or against any Tax chargeable in respect of an Event occurring on or before Completion of any Relief which is not available before Completion but arises after Completion in circumstances where, but for such set off or use, the Company would have had a liability to make a payment of or in respect of Tax for which the Buyer would have been able to make a claim against the Covenantors under this Tax Covenant (“Post-Completion Relief”). 2.9 We recognise that this drafting has a certain density to it; for those who are new to tax covenants two or three readings may be needed in order to tease out the meaning. The most common example of a Post-Completion Relief is the carry-back of losses under the provisions of Section 393A, ICTA. 2.10 As an example: Dedham Foods Limited prepares its tax computations in respect of the accounts for the year to 30 June. This is also the Completion Date. The accounts and taxable profits are shown as £200,000 and tax of £42,000 is provided. However the company failed to add-back tax penalties and interest of £20,000 and professional costs of £24,000. Its taxable profits were therefore, in reality, £244,000 and the accounts should have shown a corporation tax liability of £51,240, rather then £42,000. The liability was therefore understated by £9,240. The profits after tax were reported as £158,000 when the actual figure was £148,760. The net assets were stated as £500,000 when they were actually £490,760. 2.11 After Completion the Company incurs trading losses of £400,000. The Buyer sets the losses off against a small amount of rental income of £5,000 in the post-completion period. He also elects to carry the losses back to the pre-completion period. 2.12 In this circumstance the losses carried back result in no tax being payable relating to the year to 30 June. The Company is entitled to recover the tax that was paid of £42,000. It also results in the additional tax of £9,240 no longer being payable. 2.13 In order to cover the above situation, and to allow the Buyer to recover against the Covenantors the tax of £9,240, the workings of the classic tax covenant will provide that there is still a Tax Liability under the tax covenant in the circumstances where the tax in question is no longer payable due to the use of post-completion losses. This is the meaning of the text in italics above. 2.14 As we have stated earlier, the classic tax covenant sticks closely to the tax cash flows. In this situation we are looking at notional tax cash flows in order for the tax covenant to define the point at which the Covenantors have an obligation to make payment. This is not a task that requires any great leaps of faith: the tax is normally stated to be payable by the Covenantors three days or five days before the date when the corporation tax would have been payable, if the losses had not been carried back. 2.15 It is not expected that the circumstances set out above should provide any particular problems for either party: the Buyer gains the benefit of a more rapid conversion of tax losses into cash than might otherwise be the case. However this benefit is not at any additional cost to the Covenantors. Their situation remains unaltered.
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