Gabelle Tax Analysis: Upper Tribunal favours HMRC in CGT roll-over case
HMRC V Mertrux Limited
The Upper Tribunal in HMRC v Mertrux Limited, in a decision published on 7 August 2012, has ruled in favour of HMRC, restricting the CGT roll-over relief claimed by the company following the disposal of its Mercedes car dealership business.
The case highlights the importance of establishing all the facts and reasons why payments are made for business assets especially where the transaction involves businesses of this nature.
The appeal related to a claim for roll-over relief on a payment received by Mertrux on the termination of its Mercedes dealership. The termination itself arose from the decision by Mercedes in 2000 to make substantial changes to its dealer network and terminate certain dealer arrangements. Following challenges made by Mertrux and other dealers, Mercedes significantly improved the terms and entered into a compromise agreement with the dealers.
The compromise agreement provided that Mertrux would sell its business to Mercedes or a new dealer nominated by it for which Mertrux would receive a Territory Release Payment (TRP) which would be paid by the new dealer, which in this case was Leadley. The level of the TRP was dependant on the cessation date chosen by Mertrux; the sooner the termination of the dealership the higher the TRP. Mertrux elected for a cessation date of 30 June 2002 thus entitling the company to the maximum TRP.
Mertrux treated the payment received as consideration for the disposal of goodwill on the sale of its business. HMRC took the view that only half of the payment was for goodwill and restricted the roll-over claim accordingly. The FTT allowed Mertrux’s appeal against HMRC’s decision and held that the payment was for goodwill.
On appeal by HMRC, the Upper Tribunal has reversed the earlier decision concluding that the FTT was wrong in its view that the consideration was for goodwill and nothing else and had therefore erred in law. The view of the Upper Tribunal was that the additional TRP obtained was consideration for Mertrux agreeing to the early termination of the Dealer Agreement. Their view was that this was the disposal of an asset and the asset was a contractual right not goodwill. In arriving at their decision they highlighted the following points:
- When considering the contractual documents and surrounding circumstances, the natural inference is that the company received the additional TRP in return for its agreement to early termination of the Dealer Agreement;
- The TRP was calculated in accordance with the provisions of the revised Dealer Agreement to which Leadley was not even a party. The TRP was fixed when the cessation date was chosen even before Leadley was identified;
- The TRP was paid because the dealership required it as a condition of becoming a dealer. From Leadley’s perspective, the TRP was the price to pay for obtaining a dealership;
- The transfer agreement shows that the amounts paid in satisfaction of the TRP were separate from the purchase consideration for the sale of the business and the assets. It follows that the TRP must have been consideration for something else.
Practitioners advising on similar compromise arrangements involving dealership or franchise operations - where the natural assumption made is that consideration received is for goodwill eligible for CGT roll-over relief - should take note of this case.