Facts
- Van den Berghs Ltd, a United Kingdom margarine manufacturer, entered into long-standing contractual arrangements with a Dutch company operating in the same sector.
- These arrangements provided for extensive profit sharing, mutual restrictions on competition, and co-operation in matters such as supply, research, and marketing. They therefore shaped how each party carried on its business across several jurisdictions.
- The contracts were intended to endure, and until termination they effectively tied key aspects of Van den Berghs Ltd’s commercial strategy to that of its Dutch counterpart.
- Several years later the parties decided to bring the relationship to an end. As compensation for the cessation of all mutual rights and obligations, the Dutch company paid Van den Berghs Ltd a single lump sum.
- For United Kingdom tax purposes the company argued that the receipt was capital, whereas the Inland Revenue treated it as trading income assessable to corporation tax.
Issues
- Whether the lump-sum payment received on terminating the inter-company agreements constituted a capital receipt or income for the purposes of computing taxable profits.
- Whether the character of the terminated arrangements—namely, their length, breadth, and effect on the company’s trading operations—was decisive in classifying the receipt.
Decision
- The House of Lords allowed Van den Berghs Ltd’s appeal and held that the payment was a capital receipt.
- Their Lordships reasoned that the agreements were not isolated trading contracts comparable to ordinary sales; rather, they formed part of the fixed framework within which the company’s trade was conducted.
- Termination therefore removed a structural element of the business, producing an enduring alteration to the company’s profit-making apparatus.
- A lump-sum consideration for surrendering that framework was capital in nature and not part of the circulating revenue of the trade.
Legal Principles
- The capital/income distinction depends on the nature of the asset or right surrendered and the effect of the transaction on the taxpayer’s profit-earning structure.
- Payments received for relinquishing or transferring an element of the profit-making structure—such as a restrictive covenant, licensing network, or enduring commercial alliance—are capital receipts because they affect the business at its roots.
- Conversely, sums arising from the ordinary flow of trading transactions, or from the performance or cancellation of everyday supply contracts, are income.
- Relevant factors identified by the House of Lords include:
- Duration: long-term, comprehensive agreements point to capital; short-term contracts point to income.
- Scope: arrangements that govern wide aspects of production, pricing, or marketing are more likely to be structural.
- Effect of termination: if ending the arrangement frees or alters a significant part of the enterprise, the consideration is capital.
- Form of consideration: a single, non-recurring lump sum is an indicator of capital, whereas periodic payments tend to be treated as income.
Conclusion
Van den Berghs Ltd v Clark confirms that compensation for giving up a core element of a company’s profit-earning framework is capital for United Kingdom tax purposes. By treating the lump-sum payment as a capital receipt, the House of Lords drew a clear line between receipts that merely swell trading profits and those that replace or eliminate part of the fixed apparatus through which profits are earned. The decision remains a leading authority on the capital/income dichotomy and is regularly cited when taxpayers or courts must decide whether a termination payment represents a structural adjustment (capital) or a trading gain (income).
