Accountant’s personal goodwill did not exist
Chartered accountant Neill Dyer [TC07567] asserted that he had sold personally held goodwill to his company for £1.2m, and claimed entrepreneurs relief (ER) on the gain. HMRC and the FTT disagreed.
To understand why HMRC was dismissive of the idea that Dyer could transfer personally held goodwill to his company it is necessary to review the history of Dyer’s accountancy practice.
Dyer established an accountancy practice (Dyer & Co) as a sole trader in 1988. Between May 1996 and August 2003, Dyer traded in a partnership as Dyer & Co.
In August 2003, Dyer formed Dyer & Co Accountants Limited (Accountants). On 21 August 2003, the partnership transferred its accountancy practice to Accountants. On 1 September 2003, Accountants started trading as Dyer & Co.
On 11 June 2004, Dyer formed Dyer & Co Services Limited (Services), he was the majority shareholder and a director. Services remained dormant until January 2007 when it acquired Accountants’ tangible business assets and began trading on 1 February 2007.
Accountants ceased trading on 31 January 2007 and went into liquidation on 20 July 2007. After winding up in 2009, it was finally dissolved on 3 February 2012. Services remains trading. On 4 September 2014, Neill Dyer sold goodwill that he owned personally to (Services) for £1.2 million.
In Dyer’s 2014/15 tax return, he reported employment income of £12,000 and a capital gain of £1,086,000. He claimed ER on the capital gain, resulting in tax due of £143,001.42.
HMRC rejects existence of goodwill
HMRC held that Dyer did not own any goodwill personally in September 2014, and so he had no goodwill to sell to Services.
Further, HMRC contended that the payment of £1.2 million did not represent a distribution by Services, and should be treated as earnings under s62 ITEPA 2003.
HMRC amended Dyer’s return on 13 March 2018 to show employment income of £1,212,000 and removed the capital gain. This resulted in tax due of £574,401.42 (an increase in tax of £431,400).
Dyer maintained that, at all times up to 4 September 2014, he owned the goodwill of the Dyer & Co business until it was transferred to Services for £1.2 million.
Acquisition of goodwill unclear
Due to contradictory evidence, the FTT was presented with four different versions of events as to how and when Dyer acquired the goodwill:
- Dyer always retained the goodwill because he did not transfer it to Accountants when he transferred the other business assets of Dyer & Co (the partnership) in August 2003
- Dyer retained the goodwill of Accountants when it transferred its business to Services in 2007
- Dyer purchased the goodwill on 1 January 2008 (as mentioned in the minutes of the Board of Directors of Services, dated 4 September 2014)
- Dyer purchased the goodwill from the liquidator of Accountants in July 2009 for £100,000.
Versions 3 and 4 were eliminated by Dyer himself. He admitted that the board meeting minutes mentioned in 3) were wrong. He also acknowledged that £100,000 paid to the liquidator of Accountants did not solely relate to goodwill, as the payment was made to settle all claims which the liquidator of Accountants had or might have had with Dyer and Services in connection with the liquidation.
As to version 1, the only evidence presented that Dyer intended to retain the goodwill was his testimony. Although Dyer’s representative highlighted that the accounts of Accountants did not show any goodwill under intangibles, the FTT noted that this did not establish that Dyer retained the goodwill.
Equally, in respect of version 2, no evidence bar Dyer’s testimony was presented to establish that Dyer retained any goodwill when Accountants transferred its business to Services.
In any event, the FTT held that, even if Dyer had retained any personal goodwill, whether in 2003 or 2007, it would not have existed or had any value in 2014.
This is because, by 2014, Services would have established its own goodwill independently of any goodwill that Dyer had formerly enjoyed as a sole practitioner or partner.
Valuation not in point
The goodwill valuation of £1.2 million was carried out by Services itself, rather than by an external third party. HMRC never accepted this valuation of £1.2 million, as it did not accept that the goodwill existed.
Consequently, the FTT was only asked to make findings as to whether Dyer owned any goodwill capable of being assigned to Services in September 2014. Had the FTT found in the taxpayer’s favour, then the value of the goodwill would have been subject to further discussion between HMRC and Dyer.
Ultimately, the FTT found that, on the balance of probabilities, Dyer did not own any goodwill that was capable of being assigned to Services in September 2014. Dyer’s appeal was dismissed.
While the FTT did not find in the taxpayer’s favour this time, it’s possible that the decision will be subject to appeal.
Further, it’s worth noting that, had a sale of goodwill occurred on or after 3 December 2014, ER would not have been available in any case, as measures were brought in to deny ER claims in relation to goodwill and related assets on the transfer of a business to a close company, where the individual transferring the goodwill is a related party.