In Dialog Semiconductor Limited v HMRC [2025] UKFTT 1188 (TC), the taxpayer successfully argued that a payment received in respect of a contractual break clause on an M&A transaction was non-taxable. However, the First-tier Tribunal (FTT) heavily suggested that the taxpayer may not have been successful if HMRC had brought the case on different grounds.
The background
The taxpayer entered into a merger agreement (under Delaware law) with an American company. When the American company pulled out of the merger due to having received an unsolicited higher offer, they made a payment of $137 million to Dialog in line with the terms of the merger agreement. Dialog contended that this amount was non-taxable on the basis that it was simply fulfilment of the terms of a contractual agreement.
Unsurprisingly HMRC disagreed and assessed that it should be treated as a chargeable gain under s22(1)(c) TCGA 1992 (capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights).
The decision
The FTT was only asked to rule on the specific application of s22(1)(c).
HMRC argued that there was a surrender of rights when the right to the termination fee (and associated rights under the merger agreement) were extinguished in return for a capital sum. The FTT disagreed with this interpretation and found in favour of the taxpayer on the basis that there was no forfeiture or surrender of rights or refraining from exercising rights.
The FTT’s view was that the surrender (or forfeiture) of rights required a positive action and, in this case, Dialog had not taken any action, having just received the payment by virtue of exercise of the contract. Similarly, to be treated as refraining to exercise rights, the Tribunal were of the view that they had to fail to do something they should have done, which had not occurred in this case.
Wider implications
In the first instance, this ruling suggests that if compensation payments for termination of M&A contracts (effectively break clauses) are appropriately drafted, they may be non-taxable. However, the FTT was at pains to stress that it only ruled on the specific (and narrow) issue before it – namely the applicability of s22(1)(c). The FTT’s comments strongly suggested that, if HMRC had argued that the payment was taxable under s22 TCGA more generally (as opposed to specifically s22(1)(c)), they may have been more successful.
Critical to this, the FTT did not agree with the taxpayer that the payment was in performance of the contract saying that “viewed realistically, the termination fee was paid to compensate Dialog for losing their rights under the Merger Agreement. Viewed realistically it was therefore paid in return for the loss of those rights.” Furthermore, the FTT stated that the right to the termination fee was a capital asset, following on from a long-established principle set out in Zim Properties Limited v Proctor [1985] STC 90.
This would suggest that, if asked to rule on the wider application of s22, the Tribunal may have considered the payment a capital sum derived from an asset and therefore taxable.
It is also worth noting that this scenario is different to non-fulfilment of trading contracts, where any compensation payment will typically be treated as trading income.
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