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It doesn't get much worse than this - the  £1.2m sale of goodwill was treated as PAYEable. Talk about tax planning backfiring! Ouch!!

http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11526/TC0...

Presumably HMRC would not accept the para 69 price adjuster clause reduced the £1.2m PAYEable sum (to nil). One wonders if he could get the contract set aside for mistake? With c£400k tax at stake one also wonders why he did not engage an experienced tax barrister to represent him e.g. see this bit from para 16 "Ms Ross Martin did not seem to appreciate that it is necessary to establish the facts before considering how the decided cases might apply to the appeal." Indeed, and as a tax lawyer rightly once told me "we aren't going anywhere without the facts are we?" and "an ounce of good facts is worth a tonne of good law" (or words to that effect).

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Psycho
By Wilson Philips
21st Feb 2020 19:59

A genuinely interesting read.

Unless I’ve missed some comment, did it not occur to the appellant to argue instead that the payment, if not for goodwill, should have been treated as a loan?

Presumably the amount treated as earnings would have given rise to a sizeable CT loss - although HMRC would no doubt argue that such ‘remuneration’ was excessive and restrict the CT deduction. But it is a basic principle that earnings are usually paid in return for service. In arguing that the sum should be treated as earnings it is implicit that HMRC should accept that the taxpayer has provided a service commensurate with that sum. If it is not commensurate with that sum then the sum should be considered as payment for something else, or as a loan.

On the price adjuster point, this would have required consideration of what the fair value of the goodwill actually was. But as already made clear, the issue was not the valuation of goodwill but whether there was transferable goodwill. Since it was held that there was in fact no goodwill to transfer the price adjuster clause is of no relevance.

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Replying to Wilson Philips:
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By whitevanman
22nd Feb 2020 14:07

I think neither side made a particularly good job of presenting a case here (comments from the Tribunal appear to support the view). Certainly there is a shortage of facts.
I would agree that, in a "normal" case, there might have been scope to argue a loan. The problem here is that, overall, one could have little confidence in the paperwork. The clause 69 point could cut both ways. On the one hand it might be seen as a safeguard to ensure only the fair price (OMV?) was paid. On the other, why was it necessary? Who would discover the price was "wrong"? Why did they apparently not take steps to get it right in the first place? The clear implication is that they didn't really care and the only time it would become an issue would be when, if at all, HMRC challenged the tax treatment. In which case they would rather adjust the consideration than pay tax!
So, the argument that there was a loan might have sounded hollow. Of course that is not a good reason for failing to make the argument.
As to the treatment of remuneration, there is no indication that this point has or has not been considered. It may not have been raised and if the CT return is not the subject of enquiry, the time limits may have expired. Even if still open, HMRC would no doubt be happy to allow a CT loss if they succeeded in getting tax and NIC on the sum.
As to the amount, there is a general proposition that HMRC cannot decide what a company should pay for the services it receives. There are one or two specific cases where they may mount a challenge but I don't think this is one. If the company chooses to pay its Director £1.2m, so be it. HMRC will only be concerned to ensure it is correctly taxed.

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Replying to whitevanman:
Psycho
By Wilson Philips
22nd Feb 2020 14:30

I broadly agree.

My point was that, notwithstanding the somewhat shambolic arrangements, it seems pretty clear that the intention of the parties was to make a payment for goodwill. Having established that there was in fact no goodwill, I’m just surprised that HMRC’s treatment of it as remuneration does not appear to have been challenged.

“Para 69” clauses are usually there to protect the parties in the event that HMRC successfully argue that the value of the asset sold was different to the price paid. But in the event that there was no asset actually transferred the provision becomes redundant - you can’t change the price of something if that something doesn’t exist.

On the excess remuneration point, HMRC used to say exactly that in their Manuals. However, that text was removed a few years ago, which does raise doubt as to whether they’d be so ready to accept that position.

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Replying to Wilson Philips:
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By whitevanman
22nd Feb 2020 15:09

Of course the point was not argued but, ifyou accept there was in fact no goodwill asset, you have to ask what the payment was for. The Tribunal agreed that it was not (indeed could not be) a distribution. All that was left was remuneration and they seem to have accepted HMRC's argument on that.
As I have said, there is an absence of facts and there may well be other factors that played into the decision.
I did see a case where the equivalent of clause 69 stated that the price would be varied if HMRC enquired and a lesser figure was agreed. Not helpful to the client!
As to excessive remuneration, I appreciate HMRC's manuals may have been altered but I cannot think of a challenge they could mount (and that was not available previously). I suspect the changes in guidance are down to "need". Why would they want to challenge when they will collect tax and NIC on remuneration?

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Replying to whitevanman:
Psycho
By Wilson Philips
22nd Feb 2020 15:33

Why is it the case that “all that was left” must be remuneration? All that was established was what the payment was not for. Why not treat it as an advance under section 455? After all, that is how HMRC argue that a dividend that is not a dividend should be treated.

Why wouldn’t HMRC raise challenge of excess remuneration? Why not if it increases the tax take? The fact that income tax/NI is due is irrelevant in the context of excess.

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Replying to Wilson Philips:
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By whitevanman
22nd Feb 2020 18:40

As I and you have said, no-one argued that it was a loan. The 3 alternatives considered were those I gave in my last post. So remuneration was the only choice left. Also as stated in my last, the facts would, possibly, have militated against the loan argument if it had been raised.
As to excessive remuneration, the fact is that it is for the company to decide what is in its commercial interests and not for HMRC to argue what should be paid to Directors. If they did argue that £1.2m was excessive, what evidence have they of a more appropriate amount?
Suppose they could give an amount (say £200k) what would be the "benefit" to the Treasury? Instead of a CT loss of say £1m there would be neither profit nor loss. The tax and NIC on the £1m excess would be "lost" and the only recovery would be from either increased CT in future or some tax and NIC on further amounts of remuneration in the later years (if any).
HMRC are not (should not be) in the business of just getting the most but, nor should they be opening enquiries and raising argument in cases where the result would simply reduce the tax take. So even if they could argue the case, I would suggest this is not the type of case where they would choose to do so.

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Replying to whitevanman:
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By unearned luck
24th Feb 2020 02:12

I'm with Justin - if, as was the case, the tribunal held that Dyer didn't own the goodwill in 2014 both parties have made a mistake in thinking that he did; a mistake that is fundamental to the contract so that it is void. The journal debiting GW and crediting the loan a/c should be undone. If that results in the loan a/c being overdrawn then the usual tax consequences follow. It seem very odd that a submission on these lines was not made.

Another argument not made (possibly not made to avoid the grossing-up of the £1.2m) is that Dyer is due a credit for the PAYE that the company is liable to pay to HMRC. As things stand the tribunal has found that his SA should be increased by the tax due on a salary of £1.2m and reduced by the CGT declared. The company is liable, via the Reg 80 determination, to both NIC and PAYE on the salary. So, absent a concession, HMRC could get the income tax twice.

A possible consequence of the tribunal's findings (that Dyer has no evidence that he retained the GW when he incorporated the practice in 2003) is that there is an undeclared 2003 capital gain and all HMRC have to do is argue (and prove) that they have newly found this out and that Dyer's omission was deliberate to get the tax on that capital gain. The tribunal's conclusion is new and it seems unlikely that a chartered accountant in general practice would be in ignorance of the MV rule for disposals between connected persons. He should have had contemporaneous evidence if he was going to do an unusual thing (retain GW).

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By Justin Bryant
24th Feb 2020 10:34

The judge can be fairly criticised I think* for not giving a full explanation for why this necessarily has to be s62 earnings or why, as a private contract, the parties cannot agree that the MV adjuster clause causes the consideration to be nil or the contract is otherwise frustrated etc. (there was a clawed-back bonus case with similar arguments). (In particular he does not say the contract is a sham/quasi sham or there was fraud etc., so there is no justification for simply ignoring it altogether merely coz the subject matter of the contract was found not to exist.)

Also, in this other recent case in the link below, a payment of money was construed very widely indeed but only due to its context re pension anti-avoidance penalty legislation, but there is no such penalty context in s62 ITPEA 2003.

https://www.accountingweb.co.uk/any-answers/more-arden-bashing

So similar arguments deployed by the taxpayer in that case could perhaps win in an appeal in this case.

*I note he specializes in VAT, which explains why on its face this looks like a bad judgment that does not really hang together for the above reasons.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
24th Feb 2020 10:45

But do you not agree the point, Justin, that the MV adjuster clause can only, logically, have effect if there was an asset the consideration for which needs to be adjusted? If the Tribunal had concluded that there had been a transfer of goodwill, but that its value was only £1 (or nil) then the clause could have been applied. But the issue was not the value of goodwill but whether it existed in the first place. If there was nothing to transfer, there was no price to adjust. Further, as noted above, the non-existence of the subject matter of the contract effectively voids the contract - and all clauses therein. A contract doesn’t need to be sham, fraudulent etc to cause it to be voided.

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Replying to Wilson Philips:
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By Justin Bryant
24th Feb 2020 11:03

No. If you can cite some case law/legislation for that view I will comment on it. Furthermore, if you say it was void (the judge did not find it was void) then it does not exist and per my above pension case comments there should be no penalty (in terms of a s62 charge etc.) for that (the recipient merely has to return the money to the company, so it's then a tax nothing). See an example of a void contract here:

https://www.accountingweb.co.uk/any-answers/the-first-iht-home-loan-sche...

Moreover, per my above comments the judge did not state any of that in the judgment did he (so even if I'm wrong it remains a badly worded judgment)?

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Replying to Justin Bryant:
Psycho
By Wilson Philips
24th Feb 2020 12:41

I was merely putting forward a discussion point - it was too much to hope that you’d agree with me.

I agree to sell you an asset for £x. We agree that if the fair MV proves to be different after payment the price will be adjusted. Stupidly, you don’t carry out any due diligence and pay me £x. It turns out that the asset doesn’t exist - under what authority will you seek remedy? The price adjuster clause?

In any event, I don’t think that the judgement was particularly badly-worded. I think that the case was badly argued.

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Replying to Wilson Philips:
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By Justin Bryant
24th Feb 2020 13:04

If you read the above pension case (which I assume you have not done) you will see there are various arguments as to why it's a tax nothing.

Yes; it was a badly argued case per my above comments, but that's all a bit rich coming from a judge whose judgment does not read at all well and he should at least have properly addressed the legal grounds for finding that PAYE necessarily applied, rather than simply citing s62 as some kind of automatic default provision i.e. even if he's right to ignore the MV adjustment clause (which I doubt), why wasn't the cash held on constructive trust for the company (like an illegal dividend) and why was there no comparison with clawed back bonus cases etc. (this case seems much less PAYEable than a clawed back bonus case) and any half decent FTT judge should be able to consider basic stuff like that without being prompted to?

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Replying to Justin Bryant:
Psycho
By Wilson Philips
24th Feb 2020 13:18

Strangely, it seems that we are broadly in agreement, save for the price-adjuster point. Let’s leave it at that.

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By fawltybasil2575
24th Feb 2020 13:08

I entirely agree the views of eminent contributors above, to the effect that FTT, having found (correctly on the basis of the “facts” which emerged from the hearing, albeit such “facts” being contrary to the contentions by the Appellant) that NO goodwill was disposed of to the acquiring company for the simple reason that no such goodwill was owned by the purported vendor, then the “contract” for such purported disposal was a nullity.

In simple terms, “GENERAL LAW TRUMPS TAX LAW" and hence FTT were IMHO wrong to agree the HMRC contention that the payment of £1.2m MUST, by default, have been employment earnings under S.62 ITEPA 2003. Paragraph (11) of the Judgement (a judgement to which Justin has kindly supplied a link) states that:-

“The cases cited above are binding on us and show that the burden is on Mr Dyer to satisfy us, on the balance of probabilities, that the amount of tax charged by the closure notice amending Mr Dyer’s self-assessment tax return is excessive. In this appeal, that means that MR. DYER MUST SATISY US [my emphasis – IMHO an invalid assertion (see my next paragraph below)] that it is more likely than not that, in September 2014, he owned the goodwill of the Dyer & Co business which he asserted was sold to Services.”

FTT somewhat ironically failed to put forward any “facts” (surprisingly in view of its insistence upon berating the representatives of the Respondents and the Appellant, especially the latter, for such failure to supply facts) to support its bland conclusion that the Appellant “MUST (emphasis added) satisfy us that it is more likely than not that, in September 2014, he owned the goodwill of the Dyer & Co business which he asserted was sold to Services ”. Such conclusion is a non sequitur (it was the obligation of the Appellant to disprove the HMRC assertion that a S.62 liability arose - nothing more and nothing less).

The voiding of the contract will have the knock-on EFFECT that the “payment” (a credit to the Director’s Loan Account as the appellant’s representative advised the FTT) becomes repayable, the DLA thus becoming the vehicle for such repayment. Hence no doubt a resultant adverse balance on the DLA will arise– whilst the OUTCOME is the same as if the payment had been debited to DLA in the first instance, the distinction could be very important in terms of Penalties.

An application for permission to appeal (under closing Paragraph 89 of the Judgement) is in time and IMHO is the best way forward, and hopefully has been or will be submitted.

Basil.
EDIT. My above post was submitted before seeing Justin's 12.59 post.

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Replying to fawltybasil2575:
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By Justin Bryant
24th Feb 2020 13:17

I more or less agree with all that and as this will almost certainly be appealed (for the reasons we state broadly) it will be interesting to see what the outcome of that is.

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Replying to fawltybasil2575:
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By unearned luck
25th Feb 2020 20:09

…"it was the obligation of the Appellant to disprove the HMRC assertion that a S.62 liability arose - nothing more and nothing less."

Not quite, Basil - he also had the burden of proving he had made the capital gain since that was his case.

Two things to prove mathematically gives four possible outcomes. We can discount the one where it is both a cap gain and employment income, this leaves three outcomes of any appeal:

1. There was CGT due on the sale of goodwill (taxed at the ER rate) - the appellant's case with a cat in hell's chance of succeeding, not least because he has blown his one and only opportunity to adduce evidence.
2. There is IT due £1.2m of employment income (with no credit for the PAYE the company is liable to pay) - HMRC's successful case at first instance
3. There is neither sale of goodwill nor employment income - the view of the respondents to this query with the majority holding that there is no transaction to be taxed - the minority view is that the transaction is a loan. This, I think should be the main ground of appeal with the GW argument abandoned.

"FTT somewhat ironically failed to put forward any “facts”..."

It is for the appellant, of course, to adduce evidence in his defence (something Ross Martin was told off for not doing), the job of the FTT is to record the facts put forward that it considers to be proved. It seems that neither evidence nor submissions were made to counter HMRC's employment income assertion. The argument was lost by default. No doubt this explains the unusual detail in which the tribunal explained that the burden of proof was on the appellant.

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Replying to unearned luck:
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By Justin Bryant
04th Mar 2020 14:55

But the taxpayer's burden of proof (and his representative's unimpressive representation) does not excuse the judge for failing to address or even consider the above basic contractual legal points does it, especially with such a large amount of tax at stake? As has been commented here before, good judges actively consider such points regardless of whether they are in a taxpayer's favour. See also:
https://www.accountancydaily.co/accountant-loses-appeal-over-ps12m-goodw...

Furthermore, per para 35 of the case below the Tribunal has a +ve duty to find the correct tax has been assessed (so they are required to at least consider obvious potential defences like those above to reduce the assessed tax): http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11550/TC0...

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By fawltybasil2575
27th Feb 2020 12:36

@ unearnedluck

Please allow me to address the two points raised in your post at 20.09 on 25 February 2020.

[1] Your comment of “Not quite, Basil – he also had the burden of proving he had made the capital gain since that was his case”.

Whilst I was of course not present at the hearing, my interpretation of the Judgement is that FTT very soon established that there was no disposal of goodwill. My comment thus related to that point in the hearing at which that “no goodwill” point had been established. At THAT POINT, therefore, it would NOT have been appropriate to undertake the “burden of proving he had made the capital gains…” [I apologise if my post was unclear in that regard].

[2] Your addressing MY POINT that ‘FTT somewhat ironically failed to put forward any “facts”…’.

Whilst you are of course correct that the “job of the FTT is to record the facts put forward….”, the FTT has a FURTHER obligation (as indeed the Judgement correctly states) to SEARCH FOR facts not submitted by the two parties.

If I understand your post correctly, you believe that the FTT was correct in adopting the policy of “HMRC have said the payment is employment income so, as no facts have been supplied to disprove that assertion, then we agree that HMRC interpretation”. I certainly do NOT agree that the FTT were correct in such approach – they should have PROACTIVELY sought to ascertain the facts (not just wait for those facts to be drawn to their attention)

I thus stand entirely by MY POINT that ‘FTT…failed to carry out its obligation to put forward any “facts”…’ ( ie “facts” to support their acceptance of the HMRC’s IMHO invalid contention).

Basil.

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