In Kieran Looney, Kieran Looney and Associates v HMRC [2020] UKUT0119, the Upper Tribunal (UT) dismissed a claim that a contractual early termination fee was capital compensation and that payments received were the income of a related offshore entity which was not a party to the contract.

The question of whether certain payments received are capital or revenue in nature is generally one of fact and degree and judicial common sense, taking account of the specific circumstances of the case.

Kieran Looney Associates (KLA) entered into a three-year contract to provide management training to the senior management of a commodities trading company for an annual fee of £3m. In the first year the contract was terminated early with the customer paying:

  • A £1m termination fee to KLA.
  • £2.8m to the Swiss bank account of a Panamanian company owned by Mr Looney. It was never established whether this was the annual contractual fee or a non-refundable deposit provided for by the contract.

The First Tier Tribunal (FTT) rejected Mr Looney’s case that the:

  • £1m payment was capital compensation for the acquisition of a secret process/intellectual property rights in his unique computerised management performance system.
  • Another £2.8m paid by the customer was not part of KLA’s income and related to other entities owned by him.

The FTT agreed with HMRC that the termination fee was a trading revenue receipt; the purpose of the payment was to compensate KLA for the lost opportunity to trade and profit from the remaining two years anticipated under the contract.

They also found that the contract had not been novated or assigned by KLA meaning that the £2.8m received was part of KLA’s income.

The Upper Tribunal (UT) agreed, dismissing the appeal and finding that there:

  • Was nothing in the contract to suggest that the termination fee was made in respect of intellectual property rights or secret processes.
  • Was no evidence that the value of any intellectual property rights had been reduced as a result of the contract.
  • Was no evidence that Mr Looney or KLA had transferred, novated or assigned the rights under the contract or that the customer had agreed to any such variation.

The Tribunal also noted that Mr Looney’s submissions contradicted those made by him in a failed High Court case where he sought damages for breach of contract since in that case he had claimed damages for loss of earnings but not for breach of intellectual property rights.

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External links

UT: Kieran Looney, Kieran Looney and Associates v HMRC [2020] UKUT0119 

FTT: Kieran Looney and Associates (Partnership) & Kieran Looney v HMRC [2018] TC6770 

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