In Mertrux v HMRC [2013] EWCA Civ 821 the Court of Appeal confirmed the existence of a franchisee's goodwill for the purposes of a claim for CGT roll-over relief.

The Mercedes-Benz dealer network was reoganised in the UK in 2000. Following a compromise agreement local dealership agreements were terminated and each outgoing dealer was paid a sum under the terms of a transfer agreement by a new incoming dealer. Mertrux Limited, the outgoing dealer treated the sum it received as a payment for goodwill and claimed CGT roll-over relief under s.152 TCGA 1992 on £1,705,502 paid to it on the termination.

HMRC denied the full claim and it argued that the difference between the price paid and tangible assets on the transfer of a Mercedes dealership was not all goodwill. Its officers clearly felt that the purchase price was too high to be genuinely all for goodwill. As a result, it decided on a just reasonable apportionment, disallowing 50% of the payment in the rollover claim as being paid out for compensation for loss of the dealership instead. The issue at the heart of this for HMRC was whether goodwill could exist in a dealership exclusive of the Mercedes brand. 

The First Tier Tax Tribunal found that the transfer agreement did not mention compensation and the incoming dealer had no reason to pay the outgoing dealer compensation. It had no trouble in concluding that the amount paid, therefore, had to be goodwill. The case went to the Upper Tier Tribunal who decided that only 50% of the payment was goodwill as the remaining 50 per cent of the payment represented compensation for the early termination of the dealership itself which constituted the disposal of an asset (the dealership contract) that did not qualify for relief. This was confirmed by the Court of Appeal in 2013. 

Commentary

Goodwill is intangible, so this makes it an extraordinary creature that is extremely difficult to value...unless you have a third-party buyer. In Mertrux HMRC seems to have been suspicious about the terms of the deal, however it is difficult to argue against a price agreed at arms' length. This case follows Balloon Promotions Ltd [2006] STC (SCD) 167. In that case, HMRC also tried to deny relief for another roll-over claim and it argued that a pizza franchisee could not create goodwill exclusive of the franchisor even though a sale price included a premium which could only amount to goodwill. HMRC lost the argument and this lead to a major re-write of its guidance on goodwill and goodwill and Trade-related properties.

Useful guides on this topic

Goodwill: trade-related properties
What are the tax and accounting issues when valuing goodwill in connection with the purchase or sale of a trade-related property? What are HMRC's views? What does case law tell us?

Valuation: Goodwill
What valuation methods are suitable for valuing a business? What are the issues with goodwill and other intangibles? What does HMRC suggest? What do the courts think?

Goodwill and the intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

Goodwill & Tax: changes under the new UK GAAP - FRS102
Companies can obtain a tax deduction for qualifying goodwill purchased in the period commencing on or after 1 April 2002 and ending before 8 July 2015 and which is amortised in accordance with Generally Accepted Accounting Practices (GAAP). 

CGT: Rollover Relief
What is Rollover relief? When a capital gain is made on the disposal of a business asset, it is possible to defer the gain by rolling it over against the cost of acquiring a replacement business asset. What are the conditions for the relief? What is a business asset?

External link

Mertrux v HMRC [2013] EWCA Civ 821


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