Accountant loses appeal over £1.2m goodwill claim

An accountant has been left facing a potential £431,400 tax bill after losing a case at First Tier Tribunal (FTT) over a claim for goodwill on the sale of his business, with HMRC arguing it did not exist

Neill Dyer was appealing against HMRC’s decision to amend his 2014-15 self assessment tax return and include £1.2m as employment income, resulting in extra tax due of £431,400. [Neill Dyer and Commissioners for Her Majesty’s Revenue and Customs, TC/2018/06521, [2020] UKFTT 72 (TC)].

Dyer said that in September 2014, he sold goodwill which he owned personally to Dyer & Co Services Ltd, a company of which he was a director and the majority shareholder, for £1.2m. 

In his self assessment tax return for 2014-15 Dyer showed employment income of £12,000 and a capital gain of £1,086,000. He claimed capital gains tax (CGT) entrepreneurs’ relief on the disposal producing an amount of tax due of £143,001.

HMRC did not agree that Dyer owned any goodwill personally at the time of the purported sale, as no asset existed in 2014 to be transferred. HMRC amended Dyer’s 2014-15 self assessment tax return to remove the gain. 

The amended assessment showed employment income of £1.2m with no capital gain producing an amount of tax due of £574,401, that is additional tax of £431,400.

The gain arose on the disposal of goodwill that Dyer owned personally to Dyer & Co Services Ltd in September 2014. Between 1988 and 2003 Dyer had carried on an accountancy business as a sole trader and subsequently in partnership.

In August 2003, Dyer & Co Services Ltd was transferred to a new company called Dyer & Co Accountants Ltd, with Dyer as the sole shareholder and director.

Dyer confirmed to the tribunal that there was no transfer agreement, but that it was his intention to retain the goodwill, demonstrated by the fact that Dyer & Co Accountants Ltd never showed any goodwill in its accounts.

Subsequently in 2007, Dyer & Co Accountants Ltd ran into financial difficulties and its business was transferred to Dyer & Co Services Ltd (which had been incorporated in 2004). There was no transfer agreement, but there was evidence that Dyer & Co Services Ltd had purchased the tangible assets from the liquidator of Dyer & Co Accountants Ltd.

The liquidator of Dyer & Co Accountants Ltd subsequently made a claim under the Insolvency Act against Dyer in his capacity as director of Dyer & Co Accountants Ltd, on the grounds that, as no payment for goodwill had been made by Dyer & Co Services Ltd, there had been a transaction at undervalue.

In July 2009, Dyer made a payment of £100,000 to the liquidator in settlement of that claim (and others).

In September 2014, Dyer entered into an agreement to sell the goodwill, which he claimed to have retained personally, to Dyer & Co Services Ltd for £1.2m, on the basis of a valuation that Dyer & Co Services Ltd itself carried out.

The minutes of the board meeting to approve the transaction wrongly stated that the goodwill had been purchased by Dyer in January 2008 but Dyer was unable to explain to the FTT how the error had arisen. In his self assessment return, Dyer claimed an acquisition cost of £100,000 (the amount paid to the liquidators of Dyer & Co Accountants Ltd).

HMRC’s view was that no asset had been transferred to Dyer & Co Services Ltd in 2014 as the goodwill was incapable of existing separately from the business and that the payment of £1.2m should be treated as employment income.

The FTT was only required to decide on the point of whether Dyer owned any goodwill in September 2014, and not on the issue of the valuation of the goodwill, which both parties had agreed to set aside.

Contradictory evidence

There was contradictory evidence about how and when Dyer acquired the goodwill. The four possibilities were, firstly, that he had retained the goodwill on the transfer to Dyer & Co Accountants Ltd in 2003. Alternatively, he had retained the goodwill of accountants when it transferred its business to Dyer & Co Services Ltd in 2007.

The third option was that the goodwill was purchased in January 2008; or, as a fourth possibility, that it was purchased from the liquidator in July 2009.

As regards the first and second possibilities, the tribunal found the only available evidence was Dyer’s testimony, which had on occasion been contradictory and therefore, on the balance of probabilities, the FTT concluded that Dyer had not retained any goodwill.

Even if he had done so, it would not have had any value in 2014 as Dyer & Co Services Ltd would by then have established its own goodwill.

Dyer himself acknowledged that remaining two possibilities were incorrect and therefore the tribunal concluded that Dyer had not owned any goodwill capable of being assigned to Dyer & Co Services Ltd in September 2014.

The tribunal also dismissed an earlier submission that the payment of £1.2m should be treated as a cash distribution under Corporation Tax Act 2010 s.1020 (CTA 2010), on the basis that that section is only brought into play where a member transfers an asset to the company and receives consideration worth more than the value of the asset.

In this case no asset had been transferred. Moreover, Dyer & Co Services Ltd had insufficient retained profits to pay a distribution of £1.2m.

Dyer’s appeal was therefore dismissed.

Stephanie Webber, Croner-i tax writer, said: ‘Although goodwill has to attach to a business, it is less clear whether or not goodwill can be in separate ownership from the business to which it is tessideattached, although it appears to be HMRC’s view that, where a business is transferred as a going concern, any goodwill will be transferred to the new proprietor (see Capital Gains Manual 68010). 

‘However, the onus to prove that an assessment to tax is excessive lies with the appellant, and in this case the appellant was in any event not able to produce adequate evidence to support his contention.

‘It is also interesting to note that if the transaction had occurred on or after 3 December 2014, entrepreneurs’ relief would not have been available in consequence of anti-avoidance legislation concerned with the transfer of goodwill to a close company, now found in Taxation of Chargeable Gains Act s. 169LA (TCGA 1992).’ 

Neill Dyer and Commissioners for Her Majesty’s Revenue and Customs, TC/2018/06521, [2020] UKFTT 72 (TC)

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