The possibility that in certain circumstances a receipt under an exclusivity agreement may have to be repaid does not cause it to be characterised as a loan (see Smart v Lincolnshire Sugar Co. Ltd [1937] 20TC643). The two issues to consider are:
Whether a receipt under an exclusivity agreement is revenue or
capital, or mixed, depends upon the purpose for which it is paid -
see, for example, Evans v Wheatley [1958] 38TC216, CIR v Coia
[1959] 38TC334, McLaren v Needham [1960] 39TC37 and Walter W
Saunders Ltd v Dixon [1962] 40TC329.
The terms of the written agreement need to be considered but,
in the Walter W Saunders case, Wilberforce J also took into account
correspondence and discussions, which supplemented the terms of the
agreement. Other evidence of purpose will be particularly important
in circumstances where the written agreement itself is silent as to
the purpose for which the payment was made. For instance, payments
may have been staged as invoices became available for work done;
the supplier may have been involved in the design or planning
consent etc; or the payment may have been held in trust by
solicitors pending acquisition of land for expansion. It may also
be appropriate to verify that a payment said to have been made for
a capital purpose can in fact be related to specific capital
expenditure.
Where the trader is free to spend the lump sum as they
choose, the lump sum should be regarded as a trade receipt (Ryan v
Crabtree Denims Ltd [1987] 60TC183) even if the sum was in fact
used to meet capital expenditure.
If however the evidence supports the conclusion that the sum
was received specifically to meet capital expenditure, and was in
fact used for that purpose, it may be accepted that the receipt is
capital in nature and should not be included in arriving at the
measure of trading profits, (but see CA14100 onwards if capital
allowances are claimed on the expenditure in question).
Where a lump sum for entering into an exclusivity (solus)
agreement is potentially repayable, accountancy evidence may not
support the contention that the full amount should be brought into
account on receipt. This is so when, as is usually the case, the
right to the income is contingent on the trader continuing to
operate under the terms of the agreement throughout its duration.
Proper accountancy practice would normally be to recognise as a
trade receipt the reduction in each accounting period of the amount
that is repayable, as this would correspond to the amount earned in
each period under the accountancy concept of accruals. The tax
treatment will follow the accountancy treatment, with the result
that the lump sum will be spread over the period of the agreement
(see the Court of Appeal decision in Threlfall v Jones [1993]
66TC77).
In cases of doubt or difficulty, advice may be sought from
CT&VAT (Technical).
