Nature of deduction
S Ltd maintained and repaired information technology equipment. Two main functions were involved: a diagnostic and servicing function and a repair function. In 1997, S sold its in-house repair function to a management buy-out vehicle, Triage Services Ltd. Triage purchased the business as a going concern, paying S £8 million under a linked package of four contracts which were commercially and contractually interdependent.
Nature of deduction
S Ltd maintained and repaired information technology equipment. Two main functions were involved: a diagnostic and servicing function and a repair function. In 1997, S sold its in-house repair function to a management buy-out vehicle, Triage Services Ltd. Triage purchased the business as a going concern, paying S £8 million under a linked package of four contracts which were commercially and contractually interdependent. Under the sale and purchase agreement, Triage acquired the assets and leases relating to part of S's business, and took over the employees engaged on the activities. No customer contracts were taken over, nor was Triage given the right to trade in S's name. Under the repair services agreement, S had to provide Triage with work worth £63 million over the next seven years. The £8 million was not split between assets and goodwill. But in its accounts, Triage added acquisition costs of £220,000 to the £8 million and then £349,000 was deducted. The latter sum related to the tangible fixed assets taken over from S. The balance of £7,871,000 was treated as a goodwill payment and capitalised. One-seventh of that figure was amortised each year and deducted in calculating the profits.
In 2002, Triage decided that it should have claimed a yearly depreciation charge in its corporation tax accounts for 1998 and 1999 and made an error or mistake claim. The Revenue rejected the claim saying that the payment was capital expenditure. Triage appealed.
The Special Commissioners analysed the transactions of 1997. They said that from the vendor's perspective, it did not dispose its whole business. As for the appellant, it had acquired a complete business as a going concern. S was the only customer at the outset, although others were planned. The repair services agreement created the customer and service provider relationship between S and the appellant. It went further, in that it guaranteed substantial amounts of work for the appellant over a long period. It also supported the fact that a business was being transferred as a going concern by providing the year one cash flow facility. As far as the relevant employees were concerned, they were doing the same work before and after the sale for in effect the same customer.
The £8 million was paid under the sale and purchase agreement, not the repair services agreement, and the amount was not split between assets and goodwill. The payment of £7,871,000 was a capital payment. The repair services agreement was an ordinary commercial contract and was fundamental to the viability of the appellant. It cemented the acquisition of the goodwill of the acquired business and the payment could not be separated from that fact.
The taxpayer's appeal was dismissed.
Triage Services Ltd (SpC 519)
Leave given
HMRC have been granted leave to appeal the Court of Appeal's decision in Jones v Garnett to the Lords. The Professional Contractors Group has confirmed that it will continue to support the taxpayers in this case and anticipates that it will be several months before the appeal is heard, with the judgment likely to be handed down towards the end of the year.
