How to Compare Pound-for-Pound Tax-Covenant Recovery with Disclosure-Limited Tax Warranties
Compare a pound-for-pound tax covenant with a disclosure-limited tax warranty and route one England and Wales bill to the column that pays.
Key takeaway in 30 seconds
On an England and Wales share purchase, a tax covenant promises to pay an in-scope unprovided pre-completion liability pound for pound, without proof of a fall in share value. A tax warranty is a damages claim that needs proof of loss and mitigation, and fair disclosure removes it. Disclosure against the warranty does not cancel the covenant unless the covenant says so. Put the bill on a row, strike the carve-outs, and claim on the column that still pays.
One tax bill on an England and Wales share purchase is read against two recovery columns before you sign, and again before you claim. The tax covenant pays the in-scope amount pound for pound, without proof of a fall in share value. The tax warranty is a damages claim: it needs proof of loss and mitigation, and fair disclosure removes it.
Mark one bill on the share purchase agreement (the sale contract for the shares) and the tax schedule. Unprovided corporation tax before completion is the example row.
Disclaimer: Checkory provides AI support, not legal advice. Consult a qualified lawyer for binding decisions.
Why does the tax covenant pay without proof of a fall in share value?
A tax covenant, sometimes called a tax deed, pays an in-scope unprovided liability pound for pound. You need not prove a fall in share value, and a duty to mitigate applies only if this clause says so.
Gannons, updated 19 October 2026, say this deed’s terms decide. Accountancy Ireland, 5 September 2026, reprints an Irish firm note of 2 April 2025 and says there is usually no duty to mitigate. Without a promise to pay, there is no covenant column.
Weil’s September 2014 note called a gross-up relatively standard. Withholding is covered in the gross-up review.
What does a tax warranty actually pay?
A tax warranty is a statement of fact, and the claim is for damages. You must prove a loss, usually a fall in share value, and you must mitigate. Fair disclosure in the disclosure letter (the letter that qualifies the warranties) removes the warranty.
In Oversea-Chinese Banking Corporation Ltd v ING Bank NV [2019] EWHC 676 (Comm), consideration was US$1.466 billion and the settlement was US$14.5 million. The buyer did not allege a fall in value and sought a hypothetical indemnity. The claim failed because the measure is the fall in share value. The judgment did not find the accounts warranty broken, and it is not a covenant precedent.
Tax Adviser, 1 August 2019, applied that measure to tax warranties. Pinsent Masons, 12 October 2018, adds a duty to mitigate.
Tax covenant: a promise to pay
Pros
- ✓Pays the in-scope amount pound for pound, without proof the shares fell.
Cons
- ✗Does not pay outside its scope, and adds no duty to mitigate unless this clause includes one.
Tax warranty: a damages claim
Pros
- ✓Pays damages for breach of a statement of fact, measured by the loss you prove.
Cons
- ✗Does not pay the tax bill pound for pound. Needs proof of loss and mitigation, and fair disclosure removes it.
The disclosure letter is not the covenant
A disclosure against a tax warranty does not cancel the covenant unless the covenant says so in words. No paragraph in the disclosure letter is itself a negotiated exclusion for a matter that was disclosed and reflected in the price.
Does a disclosure against a tax warranty cancel the covenant?
No, unless the covenant says so in words. The letter can remove the warranty and leave the promise to pay in place.
The usual mistake is to treat an open enquiry as the end of both columns. Transaction Tax Partners, reviewed 4 October 2026, put the known issue in the covenant. Wilson Browne, 12 August 2026, requires that disclosure be reflected in the price, for example by a price chip, a specific indemnity, or an express carve-out.
How long should the covenant notice period stay open?
Give the covenant its own notice period, and keep commercial warranty survival separate. Gannons, updated 19 October 2026, say not to assume one period for every tax claim. Do not copy a period of years into this draft.
A corporation tax enquiry on an on-time return is 12 months from delivery for a singleton or small group, and 12 months from the filing date if the group is not small. A late return runs to the next 31 January, 30 April, 31 July, or 31 October after the first anniversary of delivery. An amendment restarts the window. See Schedule 18 paragraph 24 and HMRC COM71005. That window is not the clause’s notice period.
The discovery period from the end of the accounting period is 4 years if not careless or deliberate, 6 years if careless, and 20 years if deliberate (HMRC CH56200). These are not a tax rate or the notice period. This is an England and Wales draft. If the deed lifts the limit for fraud, that is a deed term, not a statute.
Which carve-outs do you strike before you choose a column?
A pound-for-pound promise does not pay a bill the draft already excludes.
Strike tax already in the accounts, a voluntary act after completion by the buyer or the company, and a later change in law, HMRC practice, or rates. Ordinary-course tax up to completion is excluded where the price took that profit. Do not run the covenant through a tipping basket unless the draft says so. The basket comparison is a different limit.
Mark one tax bill on two columns
Write one tax bill as a row
Note the tax, the period, pre- or post-completion, and any accounts provision. If there is no live bill, use a teaching row: unprovided corporation tax before completion, not a deal figure.
Read the covenant, not the warranties
Look for a promise to pay the tax, with no proof the shares fell and no duty to mitigate. Do not invent it from the warranties.
Mark the warranty as damages
Note damages, proof of loss, and mitigation. Fair disclosure removes the warranty. The tax bill is not the measure.
Read the covenant’s words on disclosure
If the covenant is silent, do not treat it as closed. Use the price, a specific indemnity, or an express carve-out.
Write two clocks and keep them apart
Keep warranty survival off the covenant period. Use the enquiry window and the longer assessment window, not a copied period of years.
Strike the carve-outs before you choose
Strike tax already in the accounts, a post-completion voluntary act, a later change in law, practice, or rates, and ordinary course already in the price.
Choose the column
The covenant is for unprovided pre-completion tax in scope and outside the carve-outs. The warranty is only for a missed risk, including base-cost loss from a pre-completion relief, if it is still alive and the loss is provable.
Where does the claim go once the carve-outs are struck?
Use the covenant for unprovided pre-completion tax inside scope and outside the carve-outs. Use the warranty only if the covenant misses the risk, disclosure has not removed it, and loss is provable.
A later base-cost loss from a pre-completion relief misses the covenant and sits on the warranty if, for example, share value fell. Do not leave known tax on a warranty policy. See the warranty-insurance guide.
Routing row for one tax bill
| Tax fact | Covenant pays | Warranty still alive | Clock | Carve-out | Claim goes here |
|---|---|---|---|---|---|
| Teaching row: unprovided corporation tax, year before completion. Not a deal figure. | Yes, if the promise needs no proof the shares fell and the letter does not limit it. | No for this row. It needs proof of loss, and fair disclosure removes it. | Covenant notice period, not commercial warranty survival. | None assumed. | Covenant. |
On the row, record covenant, warranty, or neither. If neither pays, close the issue in the price, a specific indemnity, or an express carve-out. The disclosure letter does not close the issue.
The indemnity-clause checklist does not choose these columns. Locked-box leakage is a price mechanic, so the locked-box comparison does not cover this row.
Then a first pass of the agreement and tax schedule can run in document analysis (the machine pass that extracts clauses before a human reads every page). It does not choose the column.
Frequently asked questions
Does fair disclosure against a tax warranty also cancel the covenant?▼
Does a duty to mitigate apply to a covenant claim?▼
How long does the covenant stay open?▼
Does a tax warranty pay the tax bill pound for pound?▼
Where does a base-cost loss from a pre-completion relief go?▼
Does tax already in the accounts still give rise to a covenant claim?▼
Does a known tax issue sit on a warranty-insurance policy?▼
First pass on the SPA and the tax schedule
Upload the agreement and the tax schedule. The pass sets out the columns. It does not choose the claim.
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