1Introduction
1.1 Until some twenty years ago, the Company was commonly a party to the tax covenant, which therefore took the form of a deed of indemnity. This had some surface logic: for claims under the Tax Covenant it was the Company that was liable to pay the additional tax liability and it was therefore the Company which should benefit from the indemnity provided by the Sellers. It was considered that it was not technically possible for the Sellers to provide an indemnity to the Buyer as the Buyer had not suffered a direct loss. Documents of twenty or more years ago were correctly described as Deeds of Tax Indemnity as the Company was being indemnified against additional tax payments that it had to make. Such a thought process reflects the origins of tax deeds, which were seeking protection for Tax Liabilities arising outside the Company. 1.2 This structure changed following the case of Zim Properties Limited v Proctor (58 TC 371) and following the issue by H M Revenue of Extra-Statutory Concession D33 (“ESC D33”) on 19 December 1988. 1.3 The case of Zim Properties established that the right to take court action for compensation or damages is an asset for capital gains tax purposes. In the vast majority of circumstances this will be an asset with no capital gains base cost. Therefore, a successful action for compensation or damages will generate a capital receipt: the asset realised may be the right to bring the action concerned. As an example, under the Zim Properties doctrine, a payment made by Accountants to their clients to make recompense for additional tax liabilities caused by negligence is a taxable capital gains receipt in the hands of the client. Such payment would therefore need to be grossed up to have regard to this additional tax liability, if the client was to be properly recompensed. 1.4 This case changed the way that the Capital Gains Tax Act was interpreted: prior to this case, compensation or damages payments were, broadly speaking, related to the underlying events giving rise to them. Section 22(1) TCGA provides that there is a disposal of assets where any capital sum is derived from the assets, notwithstanding that no asset is acquired by the person paying the capital sum. This section expressly includes capital sums received by way of compensation for any kind of damage or injury to assets. The Zim case applied this meaning in Section 22 but indicated that the right to take legal action was a separate asset in its own right. 1.5 It is the view of HM Revenue and Customs that there are two types of right, in addition to statutory rights: there is a contractual right and there is a non-contractual right, which they describe as a Zim style right. (In the Zim case, the company sued its solicitors for
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