There are two tax cases that looked at money paid in connection
with the acquisition of a business. The very early first case was
Royal Insurance Company v Watson [1896] 3TC500. The Royal Insurance
Company acquired the business of the Queen Insurance Company. They
took over the employment contract of the manager, but with an
ability to pay him a lump sum in commutation of his annual salary.
They then paid him the lump sum and claimed to deduct it in
arriving at their assessable profits. The House of Lords held that
payment of this amount was part of the 'purchase money' for the
business and was capital expenditure.
Exactly the same point was made in CIR v New Zealand Forest
Research Institute Ltd [2000] 72TC628, although expressed in modern
terms. Here the company took over a business from the New Zealand
government and had to take over the employees’ contracts on
terms that deemed them to have always worked for the company. The
consideration for take-over was calculated by deducting the accrued
liabilities to the workers from the value of assets. The purchaser
then claimed these liabilities as revenue deductions when they were
actually paid. The Privy Council decision was
'The payments were a capital expense, because
expenditure which is part of what was paid for the acquisition of
assets is capital expenditure; a discharge of a vendor’s
liability to a third party, whether vested or contingent, can be
part of a purchase price, and it does not matter if the payment is
not made at once but pursuant to an arrangement whereby the
purchaser agrees to be substituted as debtor to the third
party'. This is a Privy Council case decided on the basis of
New Zealand law so is not immediately applicable to UK cases, but
does provide a good insight into the modern day decisions of four
Law Lords.
The views set out above received recent support from the
Special Commissioners in Triage Services Ltd v CIR. In a management
buyout, Triage took over activities formerly undertaken by another
company. Triage paid £8m for the business and under a separate
‘repairs’ agreement the vendor agreed to offer Triage
work commanding gross fees of £63m over the coming seven
years, with provision for compensation if this did not happen.
There was evidence that the amount of the purchase price (£8m)
was calculated taking into account both the value of repair work to
be sent Triage’s way and the time period over which this was
to be done. Expert accountancy evidence supported the treatment
adopted in Triage’s accounts: capitalise the payment as being
for goodwill and write it off over the seven-year duration of the
’repair’ agreement. Triage argued that the greater part
of the £8m should be attributed to the ‘repairs’
agreement and was a revenue payment deductible for tax purposes.
The Commissioners accepted the HMRC argument that the £8m was
a capital payment to acquire a business and was not deductible.
The capital/revenue guidance at
BIM35655 also discusses this point and
has further case law material.
