In Neill Dyer v HMRC [2020] TC07567, an accountant’s claim that he had retained personal ownership of the goodwill of his practice, following its incorporation was rejected by the First Tier Tribunal (FTT). No such asset existed and his claim for Entrepreneurs’ Relief (ER) when he did dispose of his asset was rejected.
- Mr Dyer had run a successful accountancy practice since the late 1990s. He had admitted a partner at one stage and in 2003, operating again as a sole trader, he Incorporated his business.
- The new company failed three years later after he was admitted to hospital and his co-director ran up gambling debts.
- On seeking advice from an insolvency specialist, the accountancy practice and clients were moved to a new company in 2007.
- The liquidator of the old practice took action against Mr Dyer claiming that the transfer of the old business to the new company was transacted at an undervalue.
- Mr Dyer claimed that there was no undervalue as he had always owned the company’s Goodwill personally.
- After horse-trading between the lawyers on both sides, the liquidators’ claim was settled for £100k by Mr Dyer.
- The old business flourished in the new company once Mr Dyer was fit and back to work and turnover resumed to its old levels. The company had been formed between Mr Dyer and one of the practice’s managers. They decided to give shares to another manager. Mr Dyer transferred some of his shares to her and he assigned his ownership of goodwill back to the company for £1.2m and claimed capital gains tax (CGT) Entrepreneurs’ Relief (ER) under the Associated Disposal rule.
- HMRC rejected the claim and raised an income tax assessment.
On appeal, the FTT decided that the case was more complex than the time allowed for the hearing and chose only to decide on whether Mr Dyer owned any goodwill that was capable of being assigned to his company.
The FTT found a date error in the deed transferring goodwill and that the new company had also bought out another practice just after it had taken over the insolvent practice. It was uncertain as to what exactly was settled with the liquidator.
Mr Dyer was unable to remember many of the precise details, however none of the companies had accounted for goodwill.
The FTT decided that Mr Dyer had not established, on the balance of probabilities, that he owned any goodwill that was capable of being assigned.
The FTT concluded that the £1.2m was income.
Comment
It is no longer possible to claim ER on the disposal of goodwill upon incorporation, although the ER legislation acknowledges that it exists as an asset. This is a decision of the FTT and thus sets no precedents. It contains some fact-specific complexities, and some other issues arise which are not immediately apparent from the judgment. It may be subject to appeal.
Useful guides on this topic
Incorporation Zone
How to transfer a business into a company
Entrepreneurs' Relief: at a glance
When does Entrepreneurs' Relief apply? What is the rate of Entrepreneurs' Relief? How to claim Entrepreneurs' Relief.
Entrepreneurs' Relief: Associated Disposals
When does Entrepreneurs' Relief apply for associated disposals of business assets?
Goodwill and the corporate intangible regime
How does the corporation tax intangible regime work? What is the treatment of goodwill for corporation tax? Do companies account for goodwill differently?
Valuation of goodwill
What valuation methods are suitable for valuing a business? What are the issues with goodwill and other intangibles? What does HMRC suggest? What do the courts think?
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