In Neil Pickles and Sharon Pickles v HMRC [2020] TC07681, goodwill was overvalued on the incorporation of a farm and then credited to the directors’ loan account without declaring Capital Gains Tax (CGT). Was this a distribution? The First Tier Tribunal (FTT) struggled with the issues.

  • The taxpayers incorporated their farming partnership into a company.
  • Goodwill on sale was valued at £1.1m and credited to the Directors’ Loan account (DLA) in the new company.
  • No capital gain was declared by either partner and as a result, HMRC investigated the taxpayers' affairs.
  • HMRC subsequently revalued the goodwill at £450k and then raised an assessment on the directors for the balance between the sale price and HMRC's revised valuation.
  • HMRC asserted that the difference between the actual value of the business and what was credited to the directors amounted to a Distribution for Income Tax.
  • The taxpayers appealed the decision.

Section 1020 CTA 2010 sets out the rules for when certain transfers of assets may be regarded as a distribution.

The FTT had difficulty with HMRC's case that a credit to a loan account, which creates a liability in the company's accounts, could be described as a distribution.

It determined that the market value of goodwill was only £270k upon incorporation.

It found that the company had subsequently gone into liquidation and that as a result, the taxpayers had withdrawn only £771k in cash from their loan accounts and not the full amount credited to the DLA.

With no case law on this topic, the FTT decided that the amount of the value of any distribution according to s.1020(1) had to be the difference between the amount of the asset transferred by the company i.e. the cash withdrawn from the loan account and the market value of the asset transferred to the company by its members, i.e. the goodwill, This was £501k (£771k less £270k).

The FTT concluded that a debt owing to the directors was not a distribution.

UPDATE: HMRC have appealed to the Upper Tribunal. The case is due to be heard in 2022.

Useful guides on this topic

Goodwill & incorporation
What are the tax issues in respect of goodwill on incorporation? What tax reliefs apply if you buy and sell goodwill? What are the valuation and clearance procedures? Is there still tax relief on the sale of goodwill?

Goodwill & valuation
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?

Directors' loan account toolkit
What are the tax issues when a director is owed money by their company or vice versa?

Dividends and distributions
How do you tax a distribution or dividend received from a company?

External links

Neil Pickles and Sharon Pickles v HMRC [2020] TC07681

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