Tribunal allows taxpayers' appeals against discovery assessments as company could not distribute goodwill it did not own

In Mark Alan Smith & Robert Andrew Corbett v HMRC [2023] TC8977, the First-tier Tribunal (FTT) allowed the taxpayers' appeals against discovery assessments as the company, through which they operated, did not own the goodwill associated with the business it carried on; the goodwill was owned personally by the taxpayers and therefore there had been no distribution of goodwill by the company.

Background

Robert Andrew Corbett and Mark Alan Smith (collectively, the Appellants) were IFAs.  Mr Corbett incorporated his sole trade business into Simpsons Independent Financial Advisors Ltd (SIFA) in June 1999 and Mr Corbett was appointed a director. Mr Smith, who had worked for Mr Corbett since 1995, became a shareholder in SIFA in 2001 and a director of the company in 2006. 

Simpsons Wealth Management LLP (SWM) was formed in June 2011. The original members of SWM were SIFA, the Appellants and their  wives.

Pursuant to a business transfer agreement dated 1 July 2012, SIFA's business was transferred to SWM.

Mr Corbett’s capital account in SWM was credited with £1,179,000 and Mr Smith’s capital account was credited with £1,017,000. Both credits were recorded as “goodwill introduced”.

In December 2014, HMRC opened enquiries into SIFA’s corporation tax return for the period ended 30 September 2013 and SWMs partnership return for the year ended 5 April 2013. 

HMRC considered that SIFA had made a distribution to the Appellants, for the purposes of section 1000, Corporation Tax Act 2010, of goodwill which was credited to the capital accounts of the Appellants in SWM and accordingly the distribution was assessable to income tax, pursuant to section 383, Income Tax (Trading and Other Income) Act 2005. 

Initially, HMRC issued assessments to SIFA for corporation tax in respect of a capital gain which it said arose on the disposal of the goodwill, but it subsequently agreed that there was no such gain.

HMRC then issued discovery assessments to each of the Appellants, pursuant to section 29, Taxes Management Act 1970, for the year ended 5 April 2013, in the amounts of £361,160.43 and £418,744.92, respectively. HMRC's position was that there had been no transfer of goodwill because the goodwill was already owned by SIFA and therefore the amounts credited to the Appellants’ capital accounts constituted distributions from SIFA.

The Appellants appealed the discovery assessments to the FTT. 

FTT decision 

The Appellants' appeals were allowed. 

The central question for the FTT to determine was whether SIFA had made a distribution to the Appellants.

The FTT heard witness evidence from the Appellants themselves as well as from Mr Pink, an advisor to SIFA/SWM and Mr Killick, the accountant responsible for the preparation of the accounts for SIFA and SWM. Having heard all of the evidence, the FTT was persuaded that the Appellants' clients belonged to them personally rather than SIFA. It was their personal reputation that resulted in the income earned from those clients and not the reputation of SIFA. The personal relationships which Mr Corbett and Mr Smith had with their clients was a valuable asset and whilst in employment those relationships provided SIFA with an opportunity to generate income, but the underlying relationships were vested with the Appellants.

The accounts of SIFA and SWM were GAAP compliant and provided a 'true and fair view'. The accounts demonstrated that SIFA was never the owner of the goodwill in question. The fact that SIFA's accounts showed acquired goodwill from another business demonstrated that the accounting standards relating to intangible assets had been considered and applied by SIFA. To conclude that over £2.2m of value had been omitted from the accounts over a period of several years would be to conclude that the balance sheet valuation of the company was so materially inaccurate that the accounts could not have represented a 'true and fair view' and the FTT was unwilling to come to that conclusion on the evidence before it.

The FTT concluded that as the relationships that made up the goodwill were relationships of the Appellants personally, there could be no distribution by SIFA of the goodwill as it did not own that goodwill.

Comment

Following the Muller UK & Ireland Group LLP & Ors v HMRC [2023] TC08742 case, HMRC takes the view that goodwill can only ever belong to the entity that carries on the business to which the goodwill relates. The FTT’s view in this appeal is more consistent with the analysis of Lord Nicholls in Kirby v Thorn EMI Plc [1987] BTC 462, that whilst goodwill is associated with the operations of a business, this does not mean that goodwill can only ever be owned by the company operating the business. 

Whilst this case dealt specifically with relationships within a financial advisory business and may not be relevant to other types of business, the decision could be relevant to other professional services where client relationships attach to individuals in the same, or similar, way.

The decision can be viewed here.