In this case the Upper Tribunal Tax and Chancery Chamber considered whether a payment received by the taxpayer for the sale of its motor dealership wholly constituted consideration for the disposal of goodwill in respect of which roll-over relief was available; or whether half of the payment was compensation for termination of its dealer agreement in respect of which relief was not available.

Background

The taxpayer Mertrux Ltd ran a motor dealership selling old Mercedes cars under a dealer agreement with DCUK. Under the terms of the agreement, it could be terminated by either party with 24 months’ notice. DCUK gave notice that it intended to terminate its dealer agreement as part of a business reorganisation and as a result a number of dealers challenged that action by proceedings.

These proceedings were settled by a deed of variation and termination that provided for the termination of the dealership and its transfer to a new dealer or DCUK. Under the agreement the taxpayer was entitled to a ‘territory release payment’ (TRP) which could be for a 12-month, 18-month or 24-month period.

The taxpayer transferred its business to a new dealer leaving them entitled to a 24-month TRP treating the amount received from the new dealer (£1,705,502) as paid entirely on account of goodwill. A claim for rollover relief was made under Section 152 TCGA 1992.

It was HMRC's view that part of the TRP (referred to as the ‘basic’ 12-month TRP) was for goodwill and the balance was to compensate the taxpayer for early termination of its dealership (which would not qualify for roll-over relief). Accordingly, HMRC amended the taxpayer's corporation tax return to show capital gains of £852,751 on which corporation tax was chargeable.

The First-tier Tribunal (FTT) allowed the taxpayer's appeal against that decision, concluding that the amount paid over the value of 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 consideration was in respect of goodwill and qualified for roll-over relief ([2011] UKFTT 398 (TC); [2011] TC 01253).

HMRC appealed to the UTT on the ground that the FTT had erred in law and reached a conclusion not available on facts.

Decision

The Upper Tribunal allowed HMRC's appeal. Because HMRC accepted that half of the TRP was obtained by the taxpayer for a disposal of goodwill, the issue was whether the balance was consideration for goodwill or something else.

HMRC's main argument was that the FTT had not taken into consideration that under the dealer agreement, Mertrux Limited had a right to continue as a Mercedes car dealer for 24 months under the deed of variation and termination and therefore that that was an asset separate from the taxpayer's goodwill. HMRC cited the case of O'Brien (HMIT) v Benson's Hosiery (Holdings) Ltd [1980] AC 562; 53 TC 241.

The UTT considered the relevant legislation in Section 152 TCGA 1992 (which referred to consideration that a person obtained for a disposal) and Section 22 TCGA 1992 (which dealt with the treatment of certain capital sums derived from assets). Both those provisions showed that the standpoint of the taxpayer was important in determining what the TRP was consideration for. This 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 deed of variation and termination.

Whilst the TRP was specifically paid under the transfer agreement, the actual amount was calculated in accordance with the provisions of the deed of variation and termination. The new dealer was not even a party to this. Furthermore, the amount of the TRP was fixed when Mertrux Limited notified DCUK of its chosen cessation date, and this was before a new dealer had even been identified.

The UTT concluded that 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 and that 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 deed of variation and termination 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).

Therefore in disregarding the provisions of the deed of variation and termination and finding that the whole payment was consideration for goodwill, the FTT had erred in law.

It was the UTT's decision that the only possible finding was that the additional TRP obtained by the taxpayer was consideration for the taxpayer agreeing to the early termination of the dealer agreement. That was a disposal of an asset and the asset was a contractual right and not goodwill.

The full text of the case is available at http://www.tribunals.gov.uk/financeandtax/Documents/decisions/hmrc_v_mertrux%20.pdf