Tribunal Rules on Treatment of Goodwill as Distribution in Tax Case

Citation: [2023] UKFTT 912 (TC)
Judgment on

Introduction

In the case of Mark Alan Smith v The Commissioners for HMRC [2023] UKFTT 912 (TC), the First-tier Tribunal (Tax Chamber) tackled the pivotal issue of whether a distributive event to the appellants, subject to income tax, had occurred via a transfer of goodwill credited to their capital accounts in Simpsons Wealth Management LLP (SWM). This decision illuminates the complexities involved in the treatment of goodwill as an assessable distribution for tax purposes, particularly when distinguishing between the assets of a company and those that are personal to individuals within that company. The legal principles applied centered on generally accepted accounting practice (GAAP), statutory tax rules, and case law interpretations of the term ‘distribution’.

Key Facts

The appellants, Mr. Smith and Mr. Corbett, were directors of Simpsons Independent Financial Advisors Ltd (SIFA), later transferring their business to SWM. As part of this transfer, their capital accounts in SWM were credited with large sums under the notation ‘goodwill introduced’. HMRC issued discovery assessments on the basis that these credits were distributions made by SIFA, assessable to income tax. The appellants contested this, arguing that the goodwill was personal to them and thus could not constitute a distribution from SIFA.

The case involved several key legal principles:

  1. Section 46 of the Corporation Tax Act 2009 dictates that trade profits must be calculated per GAAP, except where adjusted by law for taxation. This ‘golden rule’ was reinforced by the Supreme Court in the NCL Investments Limited case, asserting the authority of GAAP-compliant accounts to indicate a company’s true and fair profit or loss evaluation.

  2. Definition of Distribution: Defined under section 1000 of the Corporation Tax Act 2010 (CTA), with section 383 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) including such distribution within the scope of income tax charge.

  3. Goodwill Nature and Ownership: The Tribunal noted that no statutory provisions explicitly determine what constitutes goodwill or its ownership. The case law reviews, including IRC v Muller & Co Margerine Limited (Muller) and Kirby v Thorn EMI plc (Thorn), offered perspective – the former emphasizing that goodwill is inseparable from the business to which it adds value and the latter allowing for its association with individuals distinct from a business entity.

  4. HMRC v Smith & Williamson Corporate Services Limited and Patrick Smiley (Smiley): This case influenced the Tribunal’s decision by differentiating between goodwill as a company asset and personal relationships leveraged for business gain, which do not amount to a transferable asset.

Outcomes

The Tribunal, taking into account the supremacy of GAAP-compliant accounts, found no basis for concluding a distribution occurred, as the accounts did not reflect any asset value of goodwill belonging to SIFA before the stated dates of contribution to SWM. Thereby, the appeal was allowed, and no distribution by SIFA was identified in this transfer of goodwill.

Conclusion

The critical takeaway from the Mark Alan Smith v The Commissioners for HMRC case is the Tribunal’s nuanced understanding of goodwill in the context of the financial advisory business. The legal analysis underscores the boundaries between corporate assets and those inherent to individuals, affirming the primacy of GAAP-compliant financial accounts in ascertaining the true and fair view of a company’s financial health. Accordingly, for tax purposes, goodwill attributed to individuals, absent from a company’s accounts, cannot be deemed a distributed asset for income tax assessments. This outcome is instructive for legal professionals considering the tax implications of distributing intangible assets such as goodwill and the significance of GAAP in such tax disputes.

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