Tax Partner Newby Castleman LLP
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Surgeon cuts up HMRC challenge to business sale

28th Mar 2019
Tax Partner Newby Castleman LLP
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When an orthopaedic surgeon sold his practice, and continued to work for the buyer, HMRC claimed that no sale had occurred for tax purposes. Jacquelyn Kimber explains how the taxpayer won.

You would you expect an individual who sells their business to an independent third party to pay capital gains tax, and reduce their tax bill be claiming entrepreneurs’ relief. However, HMRC may take a different view as demonstrated in Richard Villar v HMRC (TC06983).

Villar was a consultant orthopaedic surgeon and built up a successful business, the ‘Richard Villar Practice’. In March 2010, he entered into an agreement with Spire Healthcare to sell his business for £1m, a sum which was largely allocated to goodwill. The transaction completed in July 2011.

Under the terms of the sale agreement, Villar could continue to practice as a surgeon, however, in the UK he could only do so for Spire and would be remunerated at approximately 75% of his previous rate. Villar’s lecturing and other professional activities were unaffected by the agreement with Spire. Villar claimed entrepreneurs’ relief on the sale in his 2009/10 tax return. HMRC opened an enquiry into that return, and subsequently also raised a discovery assessment in respect of the 2010/11 return.

Capital or revenue?

At the heart of the dispute was whether the £1m payment received by Villar under the sale and purchase agreement was capital or revenue. HMRC argued that it was revenue and should therefore be taxed as part of the general business profits.

Alternatively, if the payment was capital, HMRC considered it should be treated as income under anti-avoidance provisions which relate to the sale of income from personal occupation (ITA 2007, Pt 13 Ch 4).

HMRC’s argument

In HMRC’s view Villar didn’t have a business to sell, as there was no business separate to his profession and reputation. Villar was a self-employed surgeon both before and after the transaction with Spire, he had merely changed the way in which he carried out his business. The arrangement with Spire sought to exploit his personal goodwill for their benefit but did not represent a business capable of sale.

HMRC’s concerns over arrangements whereby an individual sells goodwill to a company (usually on incorporation) and claims entrepreneurs’ relief on the sale are well known, but Villar’s situation was very different.

Was there a business?

The fact that Villar had a business to sell was borne out by the valuation attributed to the Richard Villar Practice by a firm of independent valuation specialists, and ultimately by the fact that a third party was willing to pay Villar £1m for it.

The agreement with Spire encouraged Villar to work for them after the sale, but there was no guarantee that he would do so. The tribunal found little difficulty in concluding that the agreement.

Replies (7)

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By EnglishRose
29th Mar 2019 08:28

I am not surprised HMRC lost. It can certainly be hard to decide what is a one person business with value eg when my doctor father died we had to consider if there were any residual value - none in his case as although work still kept coming in he had stopped work 2 year before; but here Spire were prepared to pay to buy it. They would not have done that if there were no value for goodwill.

It is also extremely normal for small business sellers to be required to take on a consultancy after the sale and indeed they often want to, for at least a year or two and it would be very surprising if that meant HMRC did not feel the business had been properly sold.
I can see that in a different case where the buyer is owned by persons connected to the seller of course that would be a different matter, but that was not the case here.

Where a junior colleague or partner buys out an older one and the older keeps working moving to being an employee/consultant that does not remove the fact the younger has bought goodwill and the sale proceeds are capital. It just means that the younger buyer wants a year or two to move the allegiance of the customers over and often a bit of time to be able to afford stage payments of a purchase price.

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By Justin Bryant
29th Mar 2019 09:56

NHS practices are (for obvious reasons) specifically prevented from selling their practices for profit, whereas for private doctors there is no such restriction. I'm surprised that point was not mentioned in the case in support of the taxpayer, whose win was entirely unsurprising on the facts.

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By Terry Hyman
01st Apr 2019 11:51

It's rare for me to be on HMRC's side but I think they missed a trick in their argument. Villar would have had to do some £4m's of work for Spire to recoup their £1m investment. One has to assume that they expected Villar to work for some years to earn this amount of income, even at the rate that insurers are willing to pay for such work.
There is a suggestion that Villar also worked outside the UK, as well as continuing his lecturing and other work. How did he find the time to earn this amount of income purely from operations?
If Villar were to have had reason to stop work very shortly after the agreement took effect how could the payment by Spire be considered to be goodwill, they would have been unlikely to recover their investment since patients would simply have used other consultants not necessarily working with Spire.
I suspect that Villar had other reasons for raising funds up front and this was a good way to do it. Personally I cannot see a good reason to treat this payment other than revenue income.
Anyway, well done to the taxpayer, you appear to have convinced everyone except me.

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Replying to Terry Hyman:
By Julian Stafford
01st Apr 2019 13:49

I agree with Terry Hyman. It was clearly uncommercial. He could have just walked away with the £1m. So there was something else going on and was not arguably a normal sale of business.

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Replying to Terry Hyman:
By ShayaG
01st Apr 2019 18:12

On purely technical grounds I agree with you. There are not differentiable assets other than the goodwill arising from the "Villar clinic". Which says it all really.

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By trecar
01st Apr 2019 12:29

Is it me or is the article missing something at the end?

Regarding HMRC's position I find it difficult to understand why they thought that a business didn't exist. Did they try to understand what happened to the business post sale. If it continued to exist, as implied, then they were entitled to profits, were entitled to grow the practice by employing other surgeons and advertising their services etc, so the facts would show something changed hands i.e. a business. Not surprised they lost.

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By itp3e
01st Apr 2019 14:10

..... that the agreement…???!!

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