Save content
Have you found this content useful? Use the button above to save it to your profile.

HMRC wins CGT rollover relief case

26th Sep 2012
Save content
Have you found this content useful? Use the button above to save it to your profile.

HMRC has won an upper tribunal case against a car dealership about tax relief on capital gains tax.

The upper tribunal (Commissioners for HM Revenue & Customs and Mertrux Limited, UKUT 274 TCC), ruled in favour of HMRC, which restricted the CGT rollover 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, said Martin Mann, director at Gabelle, which advises accountancy firms on tax.

Rollover relief

The appeal was about a claim for rollover 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 revised agreement stated 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 chose a cessation date of 30 June 2002, which entitled 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 rollover claim accordingly. The first-tier tribunal allowed Mertrux’s appeal against HMRC’s decision and held that the payment was for goodwill.

The Decision

The upper tribunal reversed the first-tier tribunal’s decision. It said that the first-tier tribunal view that the consideration was for goodwill and nothing else and had therefore erred in law.

The upper tribunal said 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 the upper tribunal highlighted the following points:

The allocation of purchase price to assets can materially alter the tax profile of the deal done, for both parties, said Andrew Prowse of tax adviser Field Fisher Waterhouse.

As rollover relief could only apply to a gain on the disposal of goodwill and would not apply to the gain on a termination of the exclusivity right, the judgment means that (subject to any appeal) half of the overall gain comes into charge to tax rather than being rolled over into other assets.

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.