Grossing-up of Payments

143  It is envisaged that where a termination results from default by the Local Authority, force majeure or corrupt gifts or fraud, the termination payment to the Service Provider is subject to taxation in the hands of the Service Provider.  The Local Authority would gross-up the payment so that the Service Provider is left with the same amount of money after payment of that taxation as it would have had, had the payment not been subject to any taxation.

144  This is to ensure that, as far as possible, the intended purpose of the termination payment is satisfied; that is that the Service Provider and its financiers are fully compensated, that the financial consequences of termination be shared or that senior debt is repaid, depending on which termination event applies and what has been commercially negotiated between the parties.

145  Grossing-up should also apply to any payments by way of indemnity or compensation made by the Service Provider to the Local Authority.

146  The payment should take account of any relief from taxation available to the Service Provider that have been derived from the particular PFI project in the usual way, and subject to the financial model.  Clearly, if the Service Provider has priced the project on the basis that tax relief is available for surrender to group companies, then the Local Authority will already have had the benefit of that relief by way of a lower Service Payment.  It should therefore still gross-up the termination payment accordingly.  Grossing up provisions are included in the Model Contract.