Allocating your purchase price on a business transfer
28 September 2012
A recent case has highlighted the importance of allocating the
purchase price on a business transfer between the different assets
transferred.
The case
The
Mertrux case concerned the sale of a Mercedes
dealership. Under Mertrux’s dealership agreement with
Daimler-Chrysler (UK) Ltd, Mertrux was entitled to a territory
release payment in the event that it was taken over by a new dealer
or required to surrender its dealership to
Daimler-Chrysler. The payment was to reflect the exclusive
territorial sales rights that would be given up by Mertrux in those
scenarios.
Mertrux transferred its dealership to a new dealer and received an
overall payment of £1.7m. Daimler-Chrysler appointed the transferee
an authorised dealer.
Mertrux took the view that the whole of the
gain arising on the disposal was a gain on the sale of goodwill
(the case related to a time before the new tax rules on
intangibles). HMRC argued that 50% of the gain was referable
to Mertrux agreeing to the early termination of its exclusivity
rights.
This mattered because, if HMRC were correct,
only 50% of the gain was eligible for capital gains tax rollover
relief.
The Upper Tribunal, in its 14 August 2012
judgment, has allowed HMRC’s appeal (overturning the decision of
the First-Tier Tribunal). The Upper Tribunal found that it was
necessary to consider what Mertrux was doing for the payment
received (not just what the buyer thought it was paying for).
The Tribunal placed emphasis on what the
contracts provided, rather than simply what the tax computations
said.
The implications
The allocation of purchase price to assets can
materially alter the tax profile of the deal done, for both
parties. In this case, 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.
It is important to get your tax advisers
involved at an early stage of a business sale or acquisition. The
legal documentation should reflect the agreed tax position between
the parties in order to provide contemporaneous evidence.
Specifically, franchised businesses should
think carefully about what the purchase price properly relates to
in a case where the arrangements involve terminations of
exclusivity rights.
We can help to guide you through this process
in order to optimise the tax treatment of your transaction.
Andrew
Prowse is a Partner in the Tax Group of Field Fisher Waterhouse LLP
in London.
This article was originally published in
the firm's Tax
Deductions Blog to which new content is regularly
added.