22.2.1 Compensation on early termination should be calculated on the basis that there is grossing-up of payments (for tax deductions), save in the case of Contractor Default where a market value payment makes grossing-up inappropriate as the Contractor is basically receiving the sale value of the outstanding Contract rather than receiving amounts designed to compensate specific elements of its financing.
A grossing-up provision would typically be as follows:
If any amount of compensation payable by the Authority under Clauses 21.1.3 (Compensation on Authority Default), 21.3.2 (Compensation on Termination for Force Majeure), 21.4.4 (Compensation for Termination for Corrupt Gifts and Fraud), 21.5.2 (Compensation on Volutary Termination) [21.5.4 (Compensation on Termination on an Authority Break Point Date)] and 21.6.2 (Compensation on Termination for Breach of the Refinancing Provisions) is subject to Tax payable to a Relevant Authority in the United Kingdom385, then the Authority shall pay to the Contractor such additional amount as will put the Contractor in the same after Tax position as it would have been had the payment not been subject to Tax, taking account of any relief, allowance, deduction, setting off or credit in respect of Tax (whether available by choice or not) which may be available to the Contractor to reduce the Tax to which the payment is subject.
22.2.2 With the approaches taken in Section 21 (Early Termination) to termination compensation, there is no need to deal in the drafting with the extent to which payments to replace the Unitary Charge should reflect tax deductions that would otherwise have occurred.
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385 The Authority should ensure that UK tax only is relevant, so that no liability to foreign tax authorities is caught, as can occur if, for example, the Contractor's Affiliates are registered or located abroad. The Authority should also ensure that it retains the right to pay the amount of gross-up directly to HMRC or other Relevant Authority and to contest the Contractor's tax liability.