Tribunal finds that transfer of a business occurred when there was a settled intention to transfer it

In 2 Green Smile Ltd v HMRC [2023] UKFTT 00015 (TC) the First-tier Tribunal (FTT) allowed the taxpayers' appeals, finding that a de facto transfer of a business had occurred at the time at which the parties had a settled intention to transfer the business, notwithstanding there was no written contract at that time.

Background

Ameeka Patel and Rajiv Ruwala (the partners) carried on a dental practice business in partnership (the partnership). The business performed private and NHS dental services, which were provided under the Standard General Dental Services Contract with NHS England. 

The partners established a company, 2 Green Smile Ltd (the company), to succeed to the business. On or around 30 November 2014, there was an oral agreement, reflected in a board minute of the same date, between the partnership and the company pursuant to which the partnership would transfer the business, including goodwill and premises, to the company. 

The company began trading on 1 December 2014, providing dental services in succession to the partnership. However, due to a delay on the part of the NHS, the partnership did not transfer the NHS contract to the company until October 2015.     

In its accounts for the year ended 30 November 2015, and in subsequent years, the company claimed an amortisation debit based on the market value of the goodwill, which it claimed to have acquired on or before 1 December 2014 as part of the business. HMRC’s view was that the goodwill was not acquired until the contract for the provision of NHS dental services was novated to the company on 23 October 2015, such that the amortisation debit was not available.

HMRC enquired into the company accounting periods ended 30 November 2015 to 2017, inclusive, and assessed a charge to corporation tax of £49,811.52. HMRC also amended the partnership’s tax return for the year ending 6 April 2016, bringing into charge an additional £115,974.00, and issued assessments to the partners accordingly. 

Both the company and the partnership appealed. The main issue for the FTT to determine was the date on which the goodwill was transferred from the partnership and acquired by the company.

FTT decision

The appeals were allowed. 

The FTT noted that there are no legal formalities required to transfer goodwill, and that goodwill can be transferred by an oral agreement. However, the FTT determined that, as there was no written contract for the transfer of the business premises on or before 1 December 2014, the goodwill could not have been acquired by the company on or before that date. That was because section 2(1),  Law of Property (Miscellaneous Provisions) Act 1989 (the 1989 Act), provides that any contract or agreement purporting to dispose of an interest in land which is not in writing is unenforceable, and the oral agreement was an entire indivisible agreement to transfer all of the assets of the partnership to the company such that the transfer of the goodwill was not severable from the transfer of the premises. The FTT also held that the grandfathering provisions contained in section 26(5), Finance Act 2015, did not apply as they require the existence of a valid and enforceable contract. 

However, the FTT decided that the NHS goodwill, as well as the goodwill associated with the private practice of the partnership, was capable of effective legal and equitable transfer independently of any transfer or novation of the benefit of the NHS contract. Further, the FTT was satisfied that the evidence before it made it clear that, prior to 30 November 2014, there was a settled intention by the partners and the company to transfer the whole of the business to the company on and from 1 December 2014, and that the partners considered that there had been an effective transfer of the business on or before that date. 

Accordingly, the FTT concluded that a de facto transfer of the goodwill had taken place on 1 December 2014 and all income subsequently generated from the dental business belonged beneficially to the company. As a result, the company was liable to pay tax on that income and was entitled to amortise the goodwill as claimed in its tax returns, while there was no income to be added back to the partnership as reflected in the assessments which had been issued to the partners.

Comment

This decision makes clear that goodwill is capable of transfer by way of oral agreement, subject to the exception in the 1989 Act, and it will be helpful to taxpayers in circumstances where documentary evidence relating to the transfer of goodwill is limited. The possibility of a de facto transfer of a business means that taxpayers will need to be alive to the fact that the date of transfer may be earlier than the date referred to in any formal documents effecting the transfer and the tax consequences that may arise as a consequence of any such de facto transfer. 

The decision can be viewed here.