A United Kingdom court (Upper Tribunal – Tax and Chancery Chamber) recently handed down the judgment of Countrywide Estate Agents FS Limited v Commissioner for Her Majesty’s Revenue and Customs [2011 UKUTS 470 (TCC)].
A group of companies conducted various business activities. The group included an estate agency, a financial services provider and a life assurance provider.
These businesses were closely related. Generally, clients would approach the estate agency to purchase property. The estate agency would introduce the clients to the financial services provider in respect of financial services relating to the purchase of property. The financial services provider would, in addition to securing mortgages, advise on related life assurance products. In this regard, the clients would be referred to the life assurance provider.
At some point the decision was taken that the life assurance provider would cease its operations. The financial services provider then entered into an agreement with an external life assurance provider to the effect that it would exclusively refer clients to the external life assurance provider for 15 years.
As consideration the financial services provider would receive an up-front payment of £25 million as well as commission on each product sold as a result of the referral.
The financial services provider (Taxpayer) accounted for the £25 million as being capital in nature but Her Majesty’s Revenue and Customs (HMRC) contended that the amount should have been taxed as a revenue profit.
The court framed the question as being whether the taxpayer parted with its property for a purchase price or whether it was a method of trading by which it acquired the £25 million as a trade profit. It had to be determined what the £25 million consideration was for.
The taxpayer contended that it had parted with its goodwill, being a capital asset. Its goodwill was its customer base, which rested on its name and reputation, its association with the estate agency and its geographical spread. The taxpayer’s view was that it gave up the right to exploit its own customer base.
The court, however, disagreed. It could not see how the taxpayer had parted with any significant portion of its goodwill. The taxpayer’s goodwill depended on its position in the market and its association with the estate agency. The agreement with the external life assurance provider left those elements unchanged. The fact that the taxpayer would exclusively refer clients to the external life assurance provider did not detract from its goodwill as it had always referred clients to only one life assurance provider.
The court also commented that the taxpayer’s profit-making apparatus was not depleted or destroyed by entering into the agreement and thus it could not be said that it had parted with any capital asset.
What had actually happened is that, without parting with it, the taxpayer had used its goodwill in order to generate a revenue profit. That is, the taxpayer had engaged in a method of trading.