08 November 2023
The decision in a recent case brought by taxpayers against HMRC is in line with a widely held view that ‘personal’ goodwill introduced into a limited liability partnership (LLP) as part of the transfer of a business is not taxable.
The case involved the transfer of a financial advice and services business from a company (Simpsons Independent Financial Advisors Ltd, ‘SIFA’) to an LLP (Simpsons Wealth Management LLP, ‘SWM’) under a business transfer agreement. The agreement provided for the transfer of the business as a going concern and the transfer of all assets used in the business, including the goodwill, trade name, and customer lists.
The partners of the LLP were the appellants (Mr Corbett and Mr Smith), SIFA, and the spouses of the appellants.
The value of the assets transferred to the new LLP by each respective partner was credited to their LLP capital account:
- The amount contributed by SIFA was limited to the value of the fixtures and fittings and cash transferred. No goodwill was recognised in the accounts of SIFA in respect of the personal relationships of either appellant.
- The amount contributed by each appellant was in respect of personal goodwill (£1.179 million by Mr Corbett and £1.017 million by Mr Smith). On the evidence, the contributions were at market value. It was on these amounts that HMRC raised discovery assessments for income tax.
The key question before the FTT was whether the amounts representing goodwill credited to the partner capital accounts were distributions from SIFA to Mr Corbett and Mr Smith under the corporation tax rules, such that it was assessable to income tax in their hands. The judgment noted that there are no statutory provisions to determine what constitutes goodwill or how its ownership is to be determined. In this case, it was not the nature of the asset in question which was disputed but who it belonged to before it was contributed to the LLP (ie SWM).
HMRC argued that the goodwill must have belonged to SIFA, as goodwill is inseparable from the business to which it adds value. HMRC sought to infer that goodwill passed from the company to the appellants as a result of the business transfer agreement and it thereby represented a taxable distribution.
However, the FTT found in favour of the taxpayers, that the goodwill never belonged to the company and therefore could not have been contributed by the company on their behalf. It noted that the accounts of both SIFA and SWM were not directly contested by HMRC and so there was no evidence that these did not provide a true and fair view of both entities. The FTT found that as the company owned no goodwill in respect of the personal relationships of the appellants, the company could not make a distribution of the goodwill and so there was nothing to which a tax charge would apply.
The judgment highlights the importance of ensuring any accounts or financial statements represent a true and fair view and are compliant with Generally Accepted Accounting Practice.
The judgment also stated that whilst goodwill is associated with the operation of a business, this is not the same as concluding that associated goodwill can only be owned by the business/company.
With a general election on the horizon and potentially changes to business taxation on the agenda, this case highlights how HMRC could scrutinise any change in the way the business is operated. In this case the taxpayers have been successful in their appeal but there are many other ways in which a tax charge could inadvertently arise if business restructures are not carefully planned out.