Court of Appeal determines correct tax treatment of compensation for early termination of Mercedes Benz dealer agreement
Akash Nawbatt and Chris Stone were instructed by HM Revenue and Customs in Mertrux v HMRC which arose from the reorganisation by Daimler-Chrysler UK (“DCUK”) of its UK distribution network for Mercedes Benz cars. Mertrux had been a Mercedes dealer for over 30 years when it lost its franchise as part of the reorganisation. Mertrux along with other dealers who were served with short notice of termination commenced proceedings to enforce their right to the full notice period. As part of the compromise of those proceedings, DCUK agreed to pay an enhanced payment if the dealer agreed to surrender its right to full contractual notice.
The question before the Court of Appeal was: What was the enhanced payment made for? Mertrux had argued successfully before the First-tier Tribunal that its goodwill was founded upon the dealer agreement which it had with DCUK, so that even if the enhanced payment it received was compensation for giving up its full rights under that agreement, that constituted a disposal of goodwill with the effect that it was entitled to rollover relief on the full amount of the enhanced payment under TCGA 1992.
The Court of Appeal concluded that the enhanced payment was not a payment for goodwill. Goodwill is separate from the sources of goodwill (assets and contracts giving rise to and which enable goodwill to be created). There was no disposal of goodwill just because the contract of central importance to the business and upon which the goodwill was based was surrendered.
Judgment was handed down by the Court of Appeal (Maurice Kay, Patten, Rafferty LJJ, with Patten LJ delivering the leading judgment) on 9 July 2013 and is available here.
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