Jurisdiction(s):
United Kingdom

Key definition

Tax covenant definition

What does Tax covenant mean? In UK and Irish share sales, a tax covenant is the seller’s contractual undertaking to reimburse the buyer for specified tax liabilities of the target company or group that relate to periods before completion or pre-completion events (for example, corporation tax, VAT or PAYE). It does not require the seller to pay the tax authority; instead it obliges the seller to pay the buyer an amount equal to the liability (often including interest, penalties and costs), thereby shifting historic tax risk to the seller. The expression is a transactional term rather than a statutory definition; it is...

Private M&A: Explaining the Tax Covenant and Tax Warranties—Allocation, Exclusions, Disputes, Outstanding Returns, Overprovisions/Savings, Buyer’s Covenant, and Client Instructions

Published by a LexisNexis Tax expert

Precedents

[ Law firm’s letterhead ]

[ Addressed to client ]

Acquisition by [ name of buyer ] (the Buyer) of [ name of target company ] (the Company) from [ name of seller ] (the Seller)—tax [ deed of ] covenant and tax warranties

I enclose, for your consideration, an initial draft of the Tax covenant and the tax warranties. In a purchase of a private Limited company, it is customary for the buyer to receive protection under both a tax covenant and tax warranties. A short outline is set out below of:

the purpose of the tax covenant and the tax warranties
particular procedural matters addressed by the tax covenant, and
a list of specific queries on which I would appreciate your instructions

1 The tax covenant

The tax covenant determines how responsibility is shared between the Seller and the Buyer for tax Liabilities that arise within the Company or any members of its group (together, the Target Group)...

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Web page updated on 22/05/2026

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