TAXtv: Countrywide capital decision upheld

An upper tribunal has upheld a decision that HMRC was correct in ruling a £25m payment made to Countrywide for an exclusive agreement was a revenue receipt and not a capital receipt.

As featured in the January episode of TAXtv, Tim Good runs through the facts of the long-running case [Countrywide Estate Agents FS Ltd v HMRC] and explains why it’s of interest to the profession.

The upper tribunal heard Countrywide’s appeal against the first tier decision, but concluded last month that the tribunal was correct to decide that the £25m in this case was revenue.

In return, for an exclusive agreement, Friends Provident would pay Countrywide £25m and then make a payment in respect of any life products that were actually sold to Countrywide customers.

The case centred on whether the receipt by Countrywide of £25m was a capital receipt or on revenue account. If a capital receipt, then it would not have been subject to tax, unless it was argued that it was a disposal of goodwill; but if it was a revenue receipt, then it would have been subject to Corporation Tax.

Countrywide’s argument was that this was in effect a capital receipt, disposing of part of its goodwill to Friends Provident, in return for the £25m payment.

Tim Good explained: “From time to time companies and others will receive one-off lump sum payments and they might be completely tax free, taxed as capital or taxed as revenue. What it further raises though is how the tax treatment ties in with the accounting treatment.”

“I’m not privy to how Countrywide accounted for this £25m, but one would have thought that it should be accounted as deferred income and that in their accounts Countrywide could have recognised the receipt as part of its profits over that period of 15 years.”

Under normal tax principles, the Corporation Tax profit should be the same as the accounting profit, subject only to such adjustments as authorised or required by law, which would mean that the £25m should be taxed in line with the way it has been accounted for in the company's accounts.

Continued...