Tax covenant / Tax deed meaning

In practice, a tax covenant (often called a tax deed when executed as a standalone deed) is a seller’s promise to reimburse the buyer, pound-for-pound, for specified tax liabilities of the target company or group that relate to pre-completion periods. It is not a promise to pay HMRC or the Revenue Commissioners; it is a tax indemnity obligation to pay the buyer the amount of the relevant liability, shifting economic risk as agreed. A tax covenant commonly sits in a schedule to the share purchase agreement (SPA) or in a separate deed (tax deed of covenant/tax deed). It typically covers corporation tax, PAYE, VAT and other taxes for pre‑completion periods, and may exclude liabilities provided for in the accounts, arising from the buyer’s post‑completion acts, changes in law or rates, or changes in accounting policy. It usually includes procedures for tax claims, control of disputes, gross‑up, interest and penalties, and time limits aligned to assessment periods, and sits alongside tax warranties. The term is not defined by statute or case law; it is a widely used transactional concept. Usage is consistent across England & Wales, Scotland, Northern Ireland and Ireland, though execution formalities for deeds differ by jurisdiction.