Company could not distribute goodwill it did not own

In Mark Alan Smith & Robert Andrew Corbett v HMRC [2023] TC8977, the First Tier Tribunal (FTT) found that a company did not own the goodwill associated with the business it carried on. HMRC's Income Tax assessment on the purported distribution of the goodwill, by the company, failed. The goodwill was not the company's asset to distribute. 

• Mr Corbett incorporated his sole trade business into Simpsons Independent Financial Advisers Ltd (SIFA) in 1999.
• Mr Smith had worked for Mr Corbett since 1995. He became a shareholder in SIFA in 2001 and a director in 2006.
• Both Mr Smith and Mr Corbett gave evidence that Mr Smith's clients 'belonged' to him though this did not form part of any formal employment contract.
• Both individuals were independent financial advisors. In 2011 they became members of a partnership, Simpsons Wealth Management LLP (SWM) together with their wives and SIFA.
• In 2012 the business of SIFA was transferred to SWM and in return:
  • Mr Corbett’s capital account in SWM was credited with £1,179,000 and Mr Smith’s with £1,017,000,
  • These credits were recorded in the accounts as goodwill introduced.
• HMRC enquired into the Corporation Tax return for SIFA and into SWM’s partnership return.
  • They initially assessed SIFA for £525,886 of Corporation Tax on a capital gain on the disposal of goodwill but later agreed that there was no such gain.
  • HMRC instead assessed Mr Smith and Mr Corbett to Income Tax totalling £779,905 on the basis that there had been no transfer of Goodwill because the goodwill was already owned by SIFA, therefore the amounts credited to the taxpayers’ capital accounts must have been distributions from SIFA. The taxpayers appealed.

The FTT allowed the appeal.

• The FTT believed the evidence of the appellants that Mr Smith's clients belonged to him. It was his personal reputation that resulted in the income earned from those clients and not the reputation of SIFA and the same applied to Mr Corbett and his clients.
• The accounts of SIFA and SWM were GAAP compliant providing a true and fair view and these showed that SIFA was never the owner of the goodwill in question. The fact that the SIFA accounts did show acquired goodwill from another business showed that the accounting standards relating to intangible assets had been considered and applied by the company.
• To conclude that over £2.2m of value had been omitted from the accounts over a period of several years would be to conclude that the balance sheet valuation of the company was so materially inaccurate that the accounts could not have represented a true and fair view and the FTT was unwilling to do so on the evidence provided by HMRC.
• As the relationships that made up the goodwill were relationships of Mr Smith and Mr Corbett and did not belong to SIFA, there was no asset capable of transfer, therefore, there could be no distribution.

Although it did not affect the decision, the FTT went on to consider the nature of goodwill. They did this in light of the fact that following the Muller case HMRC takes the view that goodwill can only ever belong to the entity that carries on the business to which the goodwill relates. The FTT’s view, however, was that whilst goodwill is associated with the operations of a business this does not mean that goodwill can only ever be owned by the company operating the business.

In the present case, the FTT found that the personal relationships of Mr Smith and Mr Corbett represented a valuable asset. Whilst in employment those relationships provided SIFA the opportunity to generate income but the underlying relationships were vested with the individuals and could be taken from SIFA without restriction. This case deals specifically with relationships within a financial advisory business and may not be relevant to other types of business, but the decision could equally apply to other professions where client relationships move with individuals.

As an FTT decision, there is of course no legal precedent being set here.

Useful guides on this topic

Goodwill & Tax: Changes under the new UK GAAP, FRS102
How is Goodwill treated under UK GAAP and FRS102? What are the tax implications?

Goodwill and the intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

Goodwill & incorporation: Tax issues
What are the tax issues in respect of intangible property (IP) assets, such as goodwill, on incorporation? What tax reliefs apply if you buy and sell goodwill and IP? What are the valuation and clearance procedures?

External link

Mark Alan Smith & Robert Andrew Corbett v HMRC [2023] TC8977