Complex IR enquiry

Complex IR enquiry

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The Revenue shares valuation division are disputing the goodwill valuation on the transfer of a leisure business from a partnership to a company.

The Revenue are arguing the goodwill is inherent in the building and therefore a free goodwill value of £nil applies.

I am arguing that the goodwill is adherent free goodwill rather than inherent goodwill. Adherent goodwill is free saleable goodwill but can only be transferred along with the business premises, either in 1 transaction or separately (per the IR manuals).

Now the Revenue seem to have changed tack and are saying that as no official paperwork transferring the property lease from the partnership to the company was done we do not have the goodwill and premises changing hands at the same time, breaking the rule mentioned above.

I am arguing that for tax purposes it is the beneficial rather than legal transfer of title that is pertinent. The beneficial ownership of the lease undoubtably transferred upon incorporation as these are premises specially adapted for use in this particular leisure industry trade.

The Revenues view that no goodwill exists is a little amusing given that our client has recently received a substantial offer of around £750k for the goodwill !

The valuer at Notts SVD is being extremely aggressive in his attack however.
Bad Lieutenant

Replies (7)

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By martinfoley07
31st May 2006 21:22

...some comments...
...
(i) I sympathise that you are a small firm, and accept it does de facto partly depend on sums involved, but not sure why you assume (with client acquiescence) that can't go to Commissioners?
(ii) it is accepted that HMRC are trying very hard to go for "G/W belongs to premises", not person (all nursing homes for example). But this is miles from being a clear winner for them - in fact, intellectually/economically, their stated position is (IMHO) palpably a nonsense as a generalisation.
(iii) HMRC manual on G/W is, IMHO, very vulnerable (OK, it's plumb wrong) in its analysis. I have said this long before recent SC case, and am pleased the case only tends to highlight the glaring (IMHO) deficiencies in HMRC stance.
(iv) RICS valuers sometimes add to the confusion rather than clarify it, so I also find it helpful the recent SC case drew attention to this area of difficulty.
(iv) interested to see HMRC are apparently not appealing recent SC case. Someone at HMRC has possibly had good sense to realise that appeal would cause them grief - and I agree with thaty. But I believe this should encourage, rather than discourage, those with the will (and admittedly the pocket) to challenge the HMRC stance on this whole aspect of economic goodwill.

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By AnonymousUser
31st May 2006 16:53

Thanks
for all the comments guys (and ladies). I would love to be able to take this to commissioners and wipe the floor with the smug git SVD valuer, but as a Tax Partner in a small firm this is unlikely to happen.

I think the Revenue do try and bully us small firms in these circumstances.

I will certainly not be giving up though and you can be sure that the Balloon case will feature prominently in my next letter !

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By Taxi
31st May 2006 12:40

Here is a link to an article I wrote last week on the Balloon ca
https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=155446&d=448&h=471&f=456&dateformat=%25o%20%25B%20%25Y
The full case transcript is worth a read because it shatters some of HMRC's published guidance in respect of free goodwill. As the case is about franchisees HMRC will undoubtably try to say that its principles do not apply to you.
It would be nice (from my perspective, as these cases are so interesting)if you were able to take this to the Special Commissioners/Lands Tribunal(- grab the legal team from the Balloon case). As a tax person I think that you are on the right track, but you need to get a legal opinion on the issue of beneficial ownership and the lease. A case like this turns on the facts and in my humble opinion this will need to be determined by a property lawyer, if not a tribunal.

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By User deleted
25th May 2006 17:26

Stick by your guns
What you have not said is whether the freeholders acknowledged by their acquiescence to the new arrangements that the transferee was occupying the premises as a tenant or a licencee. It may be worthwhile looking at the terms of the original lease to see what the rights to assign were. I agree with your approach, that at the end of the day it is facts which matter.

Test the argument by looking at extreme circumstances. What if the original tenant had died-would the company have a claim to have a new lease granted in its name? What if the company failed-would the liquidator/administrator have a claim on the lease?

A client had a leasehold interest in a hotel, held through a company. SVD, advised by the local DV insisted that the lease , which had only a few years to run, was of little value-the company was sold for several million pounds as all concerned knew that a new lease would in practice-not law-be granted. We won!!

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By TC1
26th May 2006 11:53

Goodwill when partnership transfers to Limited Company
This particular case is a complex one involving premises and leases - but it raises the general question of how one should value Goodwill in any transfer from unincorporated to incorporated. It is not an arms-length transaction, and, unless one is fortunate enough to have an outside offer to create a MV, the value of the business is surely always vulnerable to IR challange? The IR may have a formula for calculating it - does anyone know what it is?

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By Paul Soper
26th May 2006 13:21

Balloons!
Take a look at the recent case of Balloon Promotions Ltd v HMRC, a case concerning the valuation of goodwill when a Pizza Express retaurant franchise was bought out - the revenue's opinion of goodwill in its various forms is by no means cut and dried. http://tinyurl.com/qp4yu

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By AnonymousUser
26th May 2006 12:39

Flavour of the month

This seems to be the Revenue's pet topic at the moment. They try to say that goodwill attaches to premises instead of the trade so that it can be treated as a lease premium and charged to income tax, instead of forming a director's loan account balance.

Don't back down.

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