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HMRC internal manual

International Manual

Transfer Pricing: Transactions and Structures: business structures: marketing and distribution - commissionaires: challenges

Can the commissionaire structure be set aside?

In cases where the principal in a commissionaire structure (see INTM441040) is registered in a low tax country, but the facts show that there is little in the way of substance to the operations there, it may be worthwhile considering whether the principal might be resident in the UK. Case teams should consult the guidance on company residence at INTM120000 onwards for more information on how to tackle such cases.

A commissionaire structure may not work in the UK in the same way it would in a civil law country (see INTM441050). There is also the question of whether a large independent classic buy/sell distributor would be prepared to transfer functions and risks to another party.

There may be cases where the facts show that the commissionaire structure would not have been established if the commissionaire and the principal were unconnected parties.

Other issues to consider on change from distributor to commissionaire

The movement in functions may mean that a different trade is being carried on, subsequent to the change. This can have a number of effects under other parts of the UK domestic legislation. These might include the cessation of a trade and the disposal of capital assets. Case teams should contact CSTD Business, Assets & International before raising the following points, having first obtained the full facts.

If the distributor was loss making, then there may be a case for arguing that those losses cannot be carried forward and set against the profits arising from the UK’s new activities as a commissionaire. This will involve a detailed fact finding exercise to establish exactly what the functions and risks were both before and after the switch.

The distributor will also be holding stock at the point at which the switch is made to a commissionaire. Generally the stock will be sold to the principal at cost. If the trade of the distributor is treated as discontinued, then CTA09/S164 will apply and the stock will be treated as being disposed of at market value.

The change to a commissionaire structure may involve making staff in the UK redundant, legal costs, closing down business premises and so on. At arm’s length an independent distributor would very likely expect some form of compensation to cover these costs. There is a European Directive (86/653/EEC) on commercial agents, which entitles them to compensation, even if such compensation is not contractually provided for in the agency agreement. A UK company might be covered by this directive. In a controlled situation there would be unlikely to be such a payment; but case teams will be considering the situation as if the principal and the agent were independent third parties. In that case there would be the expectation that compensation would be paid.

As well as the direct costs of changing the business structure, the distributor is being asked to forgo its potential to make profits on particular functions and risks. In an ongoing relationship, where an independent distributor was asked to still sell the same goods in the UK, but for a much lower reward, the distributor may well ask for payments to compensate the distributor for the drop in profits it is going to suffer over the next few years. An independent principal might be inclined to pay such compensation, in order to ensure that the former distributor is ‘fully on board’ with the new way of doing business. Such compensation payments might be trading receipts.

There may have been a disposal of goodwill or other valuable intangibles. If the UK was a successful distributor, the switch to undisclosed agent will usually be accompanied by a significant drop in profits. Someone else is now earning those profits. The UK distributor has disposed of a significant part of its potential to earn profits; that may be a disposal of a capital asset.

The distributor will have marketed goods in the UK under an agreement. Foregoing its rights under that agreement may be a disposal of an asset. The facts may show that there is no written agreement, or one that may be terminated at very short notice. At arm’s length, it would be unusual for a distributor to accept a short-term agreement and so case teams should consider that the situation between the connected principal and distributor should be treated as though the parties were subject to a long-term agreement, if the facts showed that this is in fact the case.

There may be other intangible assets that are effectively disposed of when the switch is made from distributor to undisclosed agent, for example customer lists. These may have value, which would give rise to a taxable profit on their disposal. See the HMRC manual on Corporate Intangibles Research and Development for guidance on the taxation of the disposal of intangibles.