Mertrux Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lady Justice Rafferty,Lord Justice Maurice Kay |
| Judgment Date | 09 July 2013 |
| Neutral Citation | [2013] EWCA Civ 821 |
| Docket Number | Case No: A3/2012/2643 |
| Court | Court of Appeal (Civil Division) |
| Date | 09 July 2013 |
[2013] EWCA Civ 821
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (Tax and Chancery Chamber)
The Hon Mr Justice Newey and Judge Sinfield
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Maurice Kay Vice President of the Court of Appeal, Civil Division
Lord Justice Patten
And
Lady Justice Rafferty
Case No: A3/2012/2643
Richard Bramwell QC and Alun James (instructed by Bates Weston LLP) for the Appellant
Akash Nawbatt and Christopher Stone (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 21st May 2013
Approved Judgment
Introduction
Mertrux Limited ("Mertrux") appeals with the leave of this Court against a decision of the Upper Tribunal (Tax and Chancery Chamber) (Newey J. and Judge Sinfield) released on 30 th July 2012. The Upper Tribunal allowed an appeal by HM Revenue and Customs ("HMRC") against the decision of the First-tier Tribunal (Tax) ("the FTT") that Mertrux is entitled to roll-over relief under s.152 of the Taxation of Chargeable Gains Act 1992 (" TCGA") in respect of the sum of £1,705,502 paid to it on the termination of a Mercedes car dealership with Daimler-Chrysler (UK) Limited ("DCUK"). HMRC had accepted that 50 per cent of the payment was attributable to a disposal of goodwill which therefore qualified for roll-over relief. But it maintained (and the Upper Tribunal accepted) that the remaining 50 per cent of the payment represented compensation for the early termination of the dealership itself which constituted the disposal of an asset (the dealership contract) that did not qualify for relief.
Mertrux contends that the FTT was entitled to find as a fact that the whole of the £1,705,502 related to a disposal of goodwill. In the alternative it submits that even if that sum falls to be treated as compensation for the loss of the franchise it still qualifies for roll-over relief as a disposal of goodwill because the two are inseparable.
Facts
The tax appeal was conducted in both the FTT and the Upper Tribunal by reference to an agreed statement of facts which was incorporated into the FTT decision. It is convenient to set out the summary of these facts which is contained in paragraph 2 of the decision of the Upper Tribunal:
"(1) DCUK operated the Mercedes-Benz dealer network in the UK and had agreements with a number of dealers, including Mertrux. The Dealer Agreements contained provisions granting exclusivity to dealers to sell Mercedes cars in certain geographical areas. The Dealer Agreements could be terminated by either party giving the other 24 months' notice. However, DCUK could terminate the Dealer Agreement on 12 months' notice if it were necessary to reorganise the distribution system. In 2000, DCUK decided to reorganise the dealership network. DCUK purported to terminate all the Dealer Agreements on 12 months' notice.
(2) A number of dealers, including Mertrux, began proceedings to challenge the purported termination. The proceedings were settled by agreement. Under 3 the terms of the settlement, Mertrux's Dealer Agreement was amended by a Deed of Variation and Termination ("DoVT") dated 13 July 2001. Under the DoVT, the earlier notices of termination were cancelled and it was agreed that Mertrux's dealership would end on 30 June 2003 (ie on just less than 24 months' notice) unless Mertrux 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.
(3) Clause 4 of the DoVT provided that Mertrux was entitled to a Territory Release Payment ("the TRP") calculated in accordance with the terms of Schedule 2 to the DoVT. The TRP would be adjusted depending on the period for which it was payable. By clause 4 of the DoVT, the TRP could be a "12 month TRP", an "18 month TRP" or a "24-month TRP". A 12 month TRP was an amount equal to Mertrux's profit for a prior year, less certain deductions, and was payable if the dealer chose to continue for the full 2 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 (ie twice the 12 month TRP) was payable if the dealer elected to terminate on either 30 June 2002 or 1 January 2002. Mertrux elected for a cessation date of 30 June 2002 and thus became entitled to the 24 month TRP.
(4) Clause 5 of the DoVT provided for the maintenance by the dealer of "Revised Core Standards" until termination of the dealership. By clause 5.3, the dealer acknowledged that failure to adhere to the Revised Core Standards was likely to have an adverse effect on the business and might lead to a challenge by DCUK to the amount of the TRP.
(5) Clause 8.1 of the DoVT stated that it was assumed that, before the termination of the dealership, an incoming dealer (or DCUK if there was no incoming dealer) would have entered into a transfer agreement ("the Transfer Agreement") by virtue of which it would buy Mertrux's business. Clause 8.1 further provided that, on termination, the incoming dealer (or DCUK if there was no incoming dealer) would pay Mertrux
(a) the TRP;
(b) a contribution to Mertrux's transaction costs;
(c) in certain circumstances, a reimbursement of certain investment costs incurred by Mertrux; and
(d) the price of assets to be transferred pursuant to the Transfer Agreement.
(6) Clause 9.4 of the DoVT provided that the terms of the Transfer Agreement were to be agreed between Mertrux and the incoming dealer (or DCUK, as appropriate). The clause specified that the Transfer Agreement was to provide, among other things, that the incoming dealer (or DCUK) would buy tools and parts from Mertrux. Clause 10 of the DoVT provided for the transfer of staff to the incoming dealer (or DCUK).
(7) By agreement, the termination of Mertrux's dealership was postponed beyond 30 June 2002, without prejudice to its entitlement to the 24 month TRP, because there were difficulties in finding an incoming dealer. On 31 July 2003, Mertrux entered into the Transfer Agreement with Leadley. Clause 3 of 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. Under clause 3, the value attributed to the TRP, which had the same meaning as in the DoVT, was expressed separately from the purchase consideration for the business and assets.
(8) On the transfer, some employees transferred to Leadley but Mertrux retained its premises and the business name. DCUK appointed Leadley as a Mercedes dealer in place of Mertrux. Leadley paid Mertrux £1,752,698. In its corporation tax return for the year ended 31 December 2003, Mertrux treated £1,705,502 of the payment as having been paid entirely on account of goodwill.
(9) HMRC considered that part of the TRP (the "basic" 12 month TRP) was for goodwill and the balance (the "enhanced" TRP ie the amount in addition to the 12 month TRP) was to compensate Mertrux for the early termination of its dealership and did not qualify for roll-over relief. Accordingly, HMRC amended Mertrux's corporation tax return for the period ended 31 December 2003 to show gross capital gains of £852,751 on which corporation tax was chargeable."
The agreements
There are a number of provisions in the relevant agreements which need to be highlighted. Under clause 6 of the original dealer agreement (dated 22 nd January 1999) Mertrux covenanted with DCUK to promote the sale of the products (as defined), and to enhance their reputation and that of the goodwill of the dealer and DCUK. For this purpose the dealer was to display the Mercedes-Benz name and mark at the dealership premises and in its sales literature (clause 7) but the exclusive use of the mark remained vested in Daimler-Benz AG (the manufacturer) and in DCUK who retained complete control over the use of the name and mark (clause 8).
Clause 3.1 of the DoVT (which was a bipartite agreement between DCUK and Mertrux) specified 30 th June 2003 as the longstop date for the termination of the dealer agreement subject to the right of Mertrux (under clause 3.1(1)) (or DCUK in default) to specify an earlier cessation date. Clause 3.2 provided that:
"The Dealer shall by notice in writing to DCUK ("Dealer's Election Notice") specify the period by which the Dealer wishes to extend the term of the Dealer Agreement so that it expires on a specified date ("Cessation Date") provided that:
(a) the latest possible Cessation Date is 30 th June 2003; and
(b) the only possible Cessation Dates are: 1 January 2002, 30 June 2002, 31 December 2002 or 30 June 2003
and shall specify which of its accounts it wishes to be treated as the Accounts to be used for the purposes of calculating the Territory Release Payment (provided that if the Dealer shall fail so to specify, the Dealer's audited accounts for the Accounting Period ended on the date nearest 31 st December 2000 shall be the Accounts used for such purposes)."
The Territory Release Payment ("TRP"), which is the sum in issue on this appeal, was calculated in accordance with clause 4 of the DoVT which provided:
"4. TERRITORY RELEASE PAYMENT
4.1 The Dealer shall be entitled to a Territory Release Payment of the following period (provided that the maximum period of any Territory Release Payment shall be 24 months):
(a) if the Dealer has elected for...
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