Mertrux Ltd v HM Revenue and Customs

For capital gains tax purposes, compensation paid on the termination of a dealership contract is derived from the contractual rights surrendered, even where the dealership has generated goodwill. Goodwill and the contractual or licensing rights that enable a business to operate are distinct assets. Goodwill independently generated by the dealer may be disposed of with the business and qualify for roll-over relief, but goodwill attributable to a trade mark licence owned by the franchisor is not the dealer’s asset. A payment calculated by reference to profits lost on early termination is therefore compensation for the loss of the right to trade under the dealership agreement and falls within section 22(1) of the Taxation of Chargeable Gains Act 1992. Any qualifying and non-qualifying elements may require apportionment.

Mertrux operated a Mercedes-Benz dealership under agreements with Daimler-Chrysler (UK) Limited. Following a reorganisation of the dealer network, the parties agreed that the dealership would terminate, with Mertrux receiving a Territory Release Payment calculated by reference to the chosen cessation date and profits. Mertrux later transferred its business and assets to an incoming dealer and claimed roll-over relief under section 152 of the Taxation of Chargeable Gains Act 1992 for the whole payment.

The First-tier Tribunal treated the payment as consideration for goodwill. The Upper Tribunal allowed HMRC’s appeal, holding that the payment was compensation for early termination of the dealership contract. The central issue was whether the payment was derived from goodwill, from the contractual dealership rights, or from both.

1. Appeal dismissed. The Territory Release Payment was separate from the consideration for the business and assets transferred to the incoming dealer. The contractual documents distinguished the payment from the asset purchase price, and the payment became due on termination of the existing dealership independently of the arrangements made afterwards.
2. Under section 22(1) of the Taxation of Chargeable Gains Act 1992, it was necessary to identify the asset disposed of or the asset from which the capital sum was derived. The payment compensated Mertrux for surrendering its contractual right to continue trading as a Mercedes dealer. That was sufficient to constitute a disposal of an asset for capital gains tax purposes.
3. Goodwill was legally distinct from the contracts and other assets which generated it. Goodwill independently generated by Mertrux’s customer and service relationships survived termination and was dealt with as part of the transferred business. Goodwill attributable to use of the Mercedes mark belonged to the mark owners and was not an asset of Mertrux.
4. The payment was calculated by reference to profits lost through earlier termination and could not be characterised solely as consideration for goodwill. At the least, it was paid for the release of both the dealership rights and any separable goodwill, making the contractual rights a sufficient and decisive source of the payment. The First-tier Tribunal had therefore erred in treating the whole amount as consideration for goodwill.
5. Lord Justice Patten gave the leading judgment. Lord Justice Maurice Kay and Lady Justice Rafferty agreed.

• Court of Appeal (Civil Division) — [2013] EWCA Civ 821: dismissed Mertrux’s appeal.
• Upper Tribunal (Tax and Chancery Chamber) — [2012] UKUT 274 (TCC): allowed HMRC’s appeal from the First-tier Tribunal and held that only the goodwill element qualified for roll-over relief.