Whether a payment made to the taxpayer by the purchaser of its entire shareholding in another company, as consideration for entering into a non-competition agreement, was a sum reflected in the share sale price agreed under the share sale agreement which attracted the substantial shareholdings exemption under TCGA 1992, Sch. 7AC and was not therefore taxable as a disposal of goodwill

In 2005 the taxpayer, Williamson Tea Holdings Ltd, agreed to sell its entire shareholding in another company B to a third party M for in excess of £17.5 million. B's sole asset was a majority shareholding in another company W which was an Indian company operating tea plantations in India and quoted on the Mumbai stock exchange. HMRC accepted that the sale of the shares in B attracted the substantial shareholdings exemption under Sch 7AC TCGA (Taxation of Chargeable Gains Act) 1992.

In the share sale agreement, the taxpayer had agreed to enter into a non-competition agreement (NCA) with M for a consideration in excess of £3.7 million which had been calculated as £13.5528 per share of B.

In the relevant corporation tax return of the taxpayer, the sum paid under the NCA was not treated as consideration received for the disposal of an asset. HMRC sought to amend on the basis that the payment under the NCA was taxable as a capital sum derived from a disposal of goodwill within the meaning of section 22 TCGA 1992.

HMRC contended that the taxpayer had been involved in the tea trade in India for many years and undoubtedly owned an asset in the form of goodwill, including reputation and know-how. The payment under the NCA was not part-consideration for the sale of the shares in B and, by entering into the NCA, the company had turned the asset of goodwill to account by agreeing not to exploit its reputation in those territories for a defined period of time. HMRC contended that the judgment in Kirby (HMIT) v Thorn EMI plc laid down the rule that any agreement not to compete involved a disposal of goodwill, which was accordingly chargeable as a capital gain.

The taxpayer appealed against the amendment to its corporation tax return for the accounting period ended 31 March 2006 arguing that it was clear from the contractual documentation and the manner in which the consideration for the NCA had been calculated that it was a disguised premium for the control holding in W held by B with the result that, if section 22 applied, the NCA was derived from the shareholding in B to which the substantial shareholding exemption applied.

The taxpayer further contended that Thorn was not authority for the proposition that the taxpayer had to be taken to have been the owner of group goodwill. They contended that the furthest Thorn went was to place an onus on the taxpayer to show that the NCA was not derived from goodwill belonging to it. There was no rule of law, or presumption of fact that, the goodwill generated by the trading activities of a wholly owned subsidiary belonged to the parent company.

The Tribunal allowed the taxpayer's appeal and said that the existence of goodwill was a question of fact. Whether it existed and its exact composition varied between different trades and in essence goodwill was the difference between the value of tangible assets of the business and the purchase price. There might be a natural inference to be drawn that goodwill existed whenever parties entered into an NCA. And the fact that goodwill was not referred to in a share sale agreement was not determinative in law that it had not been disposed of.

In the sale of a business as a going concern, if the terms of a non-compete agreement which affected the proprietor's freedom to exploit the goodwill of the business, involved the payment of a capital sum, such capital sum would be regarded as derived from a disposal of goodwill and treated as a chargeable capital sum within section 22.

However, the present case was not such a sale of a business as a going concern in which assets could be separately identified and disposed of for an agreed consideration. It was a share sale agreement. Whether or not goodwill existed, it would have been inherent in the share valuation and reflected in the share sale price agreed under the share sale agreement and, as such, subject to the substantial shareholder exemption.

The factual information presented by the taxpayer showed that the share valuation had been agreed pursuant to an accepted valuation methodology linked to average productivity over a number of years. HMRC had not shown that the overall total price of £21.35m in the share sale agreement included an amount in excess of the true and fair value by which the shares had been priced and agreed between the parties. HMRC had also not presented any factual argument to demonstrate convincingly that goodwill existed and had been separately valued and disposed of under the NCA.

The share sale agreement made no reference to goodwill. The business involved was that of growing tea, and as primarily an agricultural business HMRC had not established that reputation or goodwill was relevant to any degree.

The Tribunal found that it was not the case that the NCA was a disguised sale of goodwill as the terms of the NCA were in fact embodied within the share sale agreement despite the NCA having completed at a later date as was standard commercial law practice.

The NCA did not therefore either expressly or by implication involve an agreement not to exploit reputation or goodwill and the consideration paid for the NCA therefore attracted the substantial shareholdings exemption under TCGA 1992, Sch. 7AC.

The full text of the judgment is available at http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00589.html