Case update: termination fees and the disposal of rights – Dialog Semiconductor v HMRC

In Dialog Semiconductor Ltd v HMRC [2025] UKFTT 1188 (TC), the First-tier Tribunal considered whether a termination fee received under a merger agreement constituted a disposal for capital gains purposes under section 22(1)(c) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). The case turned on a narrow but significant point of statutory interpretation, with broader implications for taxpayers when considering whether certain receipts in M&A transactions are subject to tax.

The case also illustrates that, with M&A transactions now often effected under increasingly complex legal agreements, it is important to understand the exact commercial terms under which payments are being made. It is therefore vital to fully grasping how both the commercial context and legal drafting of specific clauses can have significant impacts on the UK tax treatment of such payments.

Background

Dialog Semiconductor Ltd (Dialog) entered into a merger agreement in 2015 to acquire Atmel Corporation, a US-based microchip manufacturer. The agreement, governed by Delaware law, included a clause requiring Atmel to pay Dialog a termination fee of USD 137.3 million (approximately £97 million at the time) if Atmel accepted a superior offer from another bidder, subject to Dialog’s right to match the offer, prior to the closing of the transaction.

That scenario materialised when Atmel accepted an offer from Microchip Technology Inc in early 2016. Dialog, having decided not to match the third-party offer, received the termination fee under the terms of the agreement and filed its tax return on the basis that the receipt did not give rise to a chargeable gain (i.e. not subject to tax). HMRC disagreed, issuing a closure notice on the grounds that the payment constituted a disposal of rights under section 22(1)(c) of TCGA 1992 and was therefore taxable as a chargeable gain.

The preliminary issue

The Tribunal was asked to determine a single preliminary issue: whether the termination fee fell within section 22(1)(c) of TCGA 1992, which applies where a capital sum is received “in return for forfeiture or surrender of rights, or for refraining from exercising rights”. HMRC agreed that if the fee did not fall within this provision, the closure notice would be withdrawn and no additional tax would be payable.

The arguments

Dialog argued that:

• (a) The fee was not received “in return for” any forfeiture of, surrender of, or refraining from exercising any rights;
• (b) Dialog had not forfeited, surrendered, or refrained from exercising any rights. Both parties to the merger agreement had performed their obligations and the contract had therefore been discharged in accordance with its terms; and
• (c) The rights under the merger agreement were not chargeable assets for the purposes of TCGA 1992.

Due to the way in which the legislation is drafted and the specific point under review, it was only necessary for one of the above arguments to be successful for Dialog’s case to be successful.

Tribunal’s findings

The Tribunal undertook a detailed review of the merger agreement and the relevant Delaware law, supported by expert evidence. It found that Dialog’s rights under the agreement, including restrictions on Atmel’s conduct and the opportunity to consummate the merger, were valuable and enforceable. The termination fee was paid, at least in part, to compensate Dialog for the loss of those rights. On Dialog’s first ground of appeal, the Tribunal found against Dialog, concluding that the payments were “in return for” rights under the merger agreement.

However, the Tribunal concluded that the fee was not received due to Dialog forfeiting, surrendering or refraining from exercising its rights. Instead, the payment was triggered by Atmel’s unilateral decision to accept a superior offer. Dialog did not take any positive action to relinquish its rights; it simply chose not to match the competing bid which then resulted in the pre-agreed termination fee becoming payable.

The Tribunal accepted Dialog’s submission that “surrender” implies a positive act by the taxpayer leading to the loss of rights, that “forfeiture” implies the loss of a right as a result of failing to take an obligatory action (or taking action in breach of obligations), and that “refraining from exercising” a right implied a choice not to make use of that right. HMRC had only disagreed with the interpretation of “surrender”, putting forward a broader interpretation encompassing any extinguishment of rights in return for a capital sum. The Tribunal had rejected HMRC’s broader interpretation, instead distinguishing a “surrender” from the operation of a break clause, which merely creates the possibility of termination.

The Tribunal did go on to consider Dialog’s third argument, albeit very briefly, before concluding that the rights under the termination fee clause were clearly a capital asset.

No disposal under s 22(1)(c)

On the basis set out above, there was no forfeiture, surrender or refraining and therefore the Tribunal held that section 22(1)(c) did not apply. Dialog had not forfeited, surrendered or refrained from exercising its rights and the appeal was therefore allowed. The result being that HMRC was instructed to withdraw the closure notice.

However, the Tribunal noted that it had not determined whether the termination fee was a capital sum derived from an asset under the broader scope of section 22(1). This broader question was outside the scope of the preliminary issue. The implication is that HMRC might have succeeded had it framed its argument differently, for example, by relying on the general provision in section 22(1) rather than the specific examples in section 22(1)(c). Given that the matter was described as a “preliminary issue”, it remains to be seen whether there is scope for HMRC to continue litigation and take an alternative line of reasoning on the tax treatment of the termination fee payment.

Commentary

This case illustrates the importance of precise statutory interpretation in determining the tax treatment of termination payments. While HMRC’s argument was ultimately unsuccessful, the Tribunal’s reasoning suggests that a more broadly framed case, focusing on the derivation of a capital sum from an asset, might have led to a different outcome.

The decision also highlights the complexity of applying UK tax law to contracts governed by foreign legal systems and complex M&A transactions more generally. The Tribunal relied heavily on expert evidence about Delaware law, including the treatment of termination fees as liquidated damages and deal protection mechanisms.

For UK companies engaging in international M&A, this case serves as a reminder to consider not only the commercial and legal implications of deal terms but also their potential tax consequences. Termination fees, break clauses and other contingent payments may give rise to chargeable gains depending on how they are legally structured and drafted.

For tailored advice and support when considering whether certain receipts in M&A tax transactions, please contact us.