Mertrux Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 July 2012 |
| Neutral Citation | [2012] UKUT 274 (TCC) |
| Date | 30 July 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 274 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Newey J, Judge Greg Sinfield.
Akash Nawbatt and Christopher Stone (instructed by the Solicitor to HM Revenue and Customs) for the Crown.
Richard Bramwell QC (instructed by Bates Weston) for the taxpayer.
The following cases were referred to in the judgment:
Balloon Promotions Ltd v Wilson (HMIT)SCD (2006) Sp C 524
Council of Civil Service Unions v Minister for the Civil ServiceELR [1985] AC 374
Edwards v BairstowELRTAX [1956] AC 14; (1955) 36 TC 207
IR Commrs v Muller & Co's Margarine LtdELR [1901] AC 217
O'Brien (HMIT) v Benson's Hosiery (Holdings) LtdELRTAX [1980] AC 562; (1979) 53 TC 241
Sabine (HMIT) v Lookers LtdTAX (1958) 38 TC 120
Smith v R & C CommrsTAX [2011] UKUT 270 (TCC); [2011] BTC 1,742
Capital gains tax - Roll-over relief - Consideration - Goodwill - Taxpayer claiming roll-over relief on basis that gain arising on sale of car dealership wholly in respect of goodwill - HMRC disallowing half of claim on ground that half of consideration received as compensation for termination of dealership - FTT allowing appeal - Whether FTT erred in law and reached conclusion not available on facts - HMRC's appeal allowed - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 152 section 155ss. 152, 155.
This was an appeal by HM Revenue and Customs against a decision of the First-tier Tribunal ([2011] UKFTT 398 (TC); [2011] TC 01253) that a payment received by the taxpayer for the sale of its motor dealership consisted wholly of consideration for the disposal of goodwill in respect of which roll-over relief was available.
The taxpayer company sold Mercedes cars under a dealer agreement with DCUK. The dealer agreement could be terminated by either party giving the other 24 months' notice. DCUK purported to terminate its dealer agreements in order to reorganise its business. A number of dealers challenged that action by proceedings. The proceedings were settled by a deed of variation and termination (DoVT). Under the DoVT, the earlier notices of termination were cancelled and it was agreed that the taxpayer's dealership would end on 30 June 2003 (i.e. on just less than 24 months' notice) unless it opted for an earlier termination date. The DoVT provided that the dealership would be taken over either by a dealer nominated by DCUK or by DCUK itself if no other dealer had been found to take over the business by the termination date. The DoVT provided that the taxpayer was entitled to a "territory release payment" (TRP). The TRP would be adjusted depending on the period for which it was payable. The TRP could be a 12 month, an 18 month or a 24-month TRP. A 12 month TRP was an amount equal to the dealer's profit for a prior year, less certain deductions, and was payable if the dealer chose to continue for the full two years to 30 June 2003. An 18 month TRP was payable if the dealer elected to terminate on 31 December 2002. A 24 month TRP (i.e. twice the 12 month TRP) was payable if the dealer elected to terminate on either 30 June 2002 or 1 January 2002. The taxpayer elected for a cessation date of 30 June 2002 and thus became entitled to the 24 month TRP.
The taxpayer transferred its business to a new dealer. The transfer agreement set out the purchase consideration for the sale of the business and assets, as defined. That consideration was the aggregate of the values attributed to the assets. The TRP was expressed separately from the purchase consideration for the business and assets. The new dealer paid the taxpayer £1,752,698. In its corporation tax return for the year ended 31 December 2003, the taxpayer treated £1,705,502 of the payment as having been paid entirely on account of goodwill and claimed roll-over relief under TCGA 1992, s. 152. HMRC considered that the amount paid to the taxpayer comprised two elements, a "basic" TRP equating to goodwill and an "enhanced" TRP reflecting compensation paid for the early termination of its dealership. An apportionment of the TRP to 50 per cent goodwill and 50 per cent compensation was considered by HMRC to be correct. Accordingly, HMRC amended the taxpayer's corporation tax return to show gross capital gains of £852,751 on which corporation tax was chargeable.
The FTT allowed the taxpayer's appeal against that decision, concluding that the amount paid over the value of the tangible assets was goodwill and that the purchaser had no reason to pay compensation for the loss of the dealership, so that the whole of the amount was in respect of goodwill and qualified for roll-over relief ([2011] UKFTT 398 (TC); [2011] TC 01253). HMRC appealed. They accepted that half of the TRP was obtained by the taxpayer for a disposal of goodwill. The issue was whether the balance of the TRP was consideration for goodwill or something else. HMRC's main criticism of the FTT's reasoning and conclusions was that the FTT failed to recognise that the taxpayer had a right to continue as a Mercedes car dealer for 24 months under the DoVT and that that was an asset separate from the taxpayer's goodwill, applying O'Brien (HMIT) v Benson's Hosiery (Holdings) Ltd [1980] AC 562; 53 TC 241.
Held, allowing the appeal:
1.The minimum TRP was calculated by reference to a 12-month period and was payable even if the dealer elected to continue the dealership for the full 24 months under the DoVT. In addition, however, the DoVT provided that, if the dealer agreed to the dealer agreement being terminated before the expiry of the 24 months' notice period, the incoming dealer or, if there were no incoming dealer, DCUK would pay an additional amount. Under the DoVT, the maximum TRP was for a 24-month period and was payable if the dealer, as the taxpayer did, opted to terminate within 12 months. There was also an intermediate 18-month TRP. There was a clear link between when the taxpayer agreed to terminate the dealership and the payment of the additional TRP. The natural inference was that the additional TRP represented consideration for the taxpayer's agreement to terminate the dealership earlier than the 24 months provided in the DoVT: it was being paid to forgo the opportunity to continue to earn profits as a dealer, as it was entitled to under the dealer agreement, as varied by the DoVT.
2.TCGA 1992, s. 152 referred to consideration that a person obtained for a disposal and s. 22 referred to sums received. Those provisions showed that the standpoint of the taxpayer was important in determining what the TRP was consideration for. The taxpayer's standpoint could be inferred from the contractual documents and surrounding circumstances. The natural inference was that the taxpayer received the additional TRP in return for agreeing to early termination of the dealer agreement, as varied by the DoVT. While the TRP was paid under the transfer agreement, its amount was calculated in accordance with the provisions of the DoVT, to which the new dealer was not a party. Moreover, the amount of the TRP was fixed when the taxpayer notified DCUK of its chosen cessation date, which was before a new dealer had even been identified. It was inherently unlikely that the new dealer paid the whole of the TRP for goodwill. It paid the TRP because DCUK required it to as a condition of becoming a dealer. From the new dealer's point of view, the TRP was the price of obtaining a dealership from DCUK. Clause 3 of the transfer agreement showed that the amounts paid in satisfaction of the TRP were separate from the purchase consideration for the sale of the business and the assets. Only the values attributed to the assets were consideration for the business and assets. It followed that the TRP must have been consideration for something else.
3.The FTT had been wrong to conclude that the new dealer paid the purchase consideration under the transfer agreement for the business and nothing else. In any event, that did not determine what the TRP was obtained or received for by the taxpayer. The FTT's finding that the amount paid in excess of the value of the tangible assets must have been for goodwill suggested that the FTT had failed to appreciate that the taxpayer had rights under the dealer agreement and DoVT which could give rise to a disposal even if no asset was acquired by the new dealer in return for its payment (or by DCUK). Further, the FTT had failed to distinguish between the goodwill of the taxpayer in relation to its own business and the goodwill of DCUK in relation to the Mercedes brand. In disregarding the provisions of the DoVT and finding that the whole payment was consideration...
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