UK and International Tax news
FTT Finds for Taxpayer in Termination Fee Case
Monday 10th November 2025
The FTT has allowed the taxpayer’s appeal in a case involving the tax treatment of a termination fee arising under a merger agreement.
In Dialog Semiconductor Ltd v HMRC [2025 UK FTT 1188], the taxpayer [D] had entered into the merger agreement drawn up under Delaware Law which provided for a termination fee of USD 137.3m. The target company (T) pulled out of the merger when it received a higher offer and paid the termination fee to D.
D maintained that the fee was non-taxable on the basis that it was merely the fulfilment of the terms of a contractual agreement. HMRC disagreed on the grounds it should be treated as a chargeable gain under s22(1)(c) TCGA92, being a capital sum received in return for forfeiture or surrender of rights, or for refraining from exercising rights.
D’s arguments as to why the termination fee did not fall within s 22(1)(c) included:
(1) the fee was not received “in return for” D’s forfeiture of, surrender of, or refraining from exercising any rights. Instead, it was paid to D by T unilaterally to give effect to a term of the merger agreement.
(2) there was no “forfeiture” of rights, “surrender” of rights, or “refraining from exercising” rights by D. Instead, as is normal in commercial situations where both sides perform their obligations under a contract and thereby discharge it, some of D’s contractual rights were executed by the counterparty and other rights fell away without D forfeiting them, surrendering them, or refraining from exercising them.
(3) D’s bundle of rights under the merger agreement was not an asset for CGT purposes.
HMRC’s case was that D had various contractual rights under the merger agreement and these were assets. The fee was a capital sum paid to release D from its contractual rights and therefore the real source of the capital sum was the termination of the merger agreement. It followed that the payment was made in return for D forfeiting/surrendering/refraining from exercising its rights.
The FTT held that the termination fee did not fall within s 22(1)(c) only in relation to the question of there being no forfeiture, surrender or refraining. The FTT also held that their decision was not authority that the termination fee was not a capital sum derived from an asset. The implication being that in different circumstances, such a payment could fall within s 22 TCGA 1992.
If you would like more detail on the above decision, please contact Keith Rushen on 0207 486 2378.
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