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Baby holding a rattle AccountingWEB HMRC’s victory rattles nursery’s ER claim

HMRC’s victory rattles nursery’s ER claim


The first tier tribunal ruled in HMRC’s favour as a lack of documentation from an incorporation of two nursery schools meant that Ms Delaney’s entrepreneurs’ relief claim was denied.

10th May 2024
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In the case of Delaney v HMRC [2024] UKFTT 214 (TC), Ms Delaney had claimed entrepreneurs’ relief (ER) on gains arising from the incorporation of her business operating two nursery schools, including the goodwill value. 

HMRC contended that the disposal didn’t take place until September 2015, by which point the law had changed to prevent an ER claim for gains from goodwill arising on incorporation on or after 3 December 2014.

The appeal relates to the closure notice issued by HMRC in March 2021 increasing the capital gains tax liability on the incorporation by £196,902.

Business history

Ms Delaney established her first nursery school in 1996, and the second in 2001. Both operated from church premises occupied under personal licences granted to her and renewed periodically.

Around 2011, she was advised to incorporate her business, but it wasn’t until October 2013 that she wrote to the church wishing to put the licences into the name of a new company, under which the businesses would be operated ‘in the future’, rather than hold them personally. 

Her lawyers sent her a letter of engagement on 23 October 2013, agreeing to incorporate two companies and draft a business sale agreement; a contract of employment for Ms Delaney; and a licence agreement to use the “Miss Delaney” name.

Miss Delaney’s Nursery Schools Limited (MDNSL) was incorporated on 21 November 2013. No sale agreement transferring the business was ever drafted. The explanation being that neither she nor the new companies would disagree to the terms. The other documents were also not prepared and the second company was never incorporated. Although her name was trademarked in March 2014, no licence was formally issued.

The church was reluctant to grant a licence to the company, and new premises were found, and therefore a change of use planning consent was obtained. A new headteacher was engaged by the company to oversee the works and to obtain Office for Standards in Education, Children's Services and Skills (OFSTED) registration.

The company’s accounts for the period from incorporation to 31 August 2014 stated it was dormant, and nothing in the accounts proved to the first tier tribunal (FTT) that the beneficial interest in the business had been transferred. The accounts for the year to 31 August 2015 stated a commencement of trade on 1 September 2015.

Surely the contract date is obvious?

Ms Delaney argued that she was under an obligation to transfer the business on the incorporation of MDNSL in November 2013, ie before the changes in the ER treatment of goodwill in December 2013.

The FTT followed the decisions in Jerome v Kelly [2004], and Underwood v HMRC [2008], namely a contract has to exist for there to have been a notional disposal date by reference to an unconditional contract, albeit that the disposal itself could only be dated when it actually took place. HMRC had argued that the disposal could only take place alongside the contract and thus should have been disclosed in Ms Delaney’s 2013-14 self assessment tax return (SATR).

You’d normally expect the documentary evidence of an incorporation to be compelling, but unfortunately what little correspondence there was had been redacted and did little to support Ms Delaney’s case.

Of particular note is the FTT’s finding that “We find that the engagement letter (being between [the solicitors] and the appellant in her capacity as a private individual) cannot represent evidence of an intention by both the appellant and MDNSL to contract for the sale and purchase of the goodwill and any other assets of the business. At best it was a statement of intent of what may or may not have been delivered by Hunters to the appellant in due course.”

I have to say that I’ve not heard of any similar problems with incorporations, and it may be that this was simply a case of the taxpayer not understanding any of the implications of what she was being advised to do – indeed, FTT made that point in connection with her cross-examination. It presumably falls onto advisers to ensure that the paperwork matches the intentions of the taxpayer, who, in turn, obviously has to play their part in then carrying out the transactions.

Several incorporation issues have been determined in HMRC’s favour in recent years, where contemporary documentation either didn’t support valuations or, as here, failed to prove transactions had taken place. Easy pickings for HMRC?

Replies (2)

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By Paul Crowley
10th May 2024 12:41

This really was a hopeless case. Hope the advisors were on a no win no fee basis.

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By FactChecker
10th May 2024 18:17

What sounds to have been a near vacuum of documentary evidence should have been a clear sign of the case having wobbly legs that wouldn't bear its weight.
But to hear that "what little correspondence there was had been redacted" is mind-blowing.

As a barrister once said to me (not in an advisory capacity I hasten to add):
"Ideally you want to have solid, indisputable facts to support your case; but if there's a choice, I would always take a claimant with an aura of trustworthiness and few such facts - over the one with a full set of facts but a demeanour that causes everyone to mistrust those facts"!
Redacting your evidence is never a good sign.

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