Goodwill Hunting: When Was The Goodwill Transferred?
A cautionary lesson not to overlook the goodwill of a company when conducting due diligence ahead of a change in ownership. The partners of a dental practice were left without a dazzling smile when HMRC challenged them in respect of the purported transfer of the goodwill on its incorporation.
There are no legal formalities required in respect of the transfer of the goodwill of a business. But if it is part of a wider transfer that includes real estate – legal formalities may well apply.
A legal transfer?
The dental practice was incorporated in early 2014 and, according to its accounts, the new company started trading on 1 December 2014. In the accounts for the year to 30 November 2015 and in subsequent years, the company claimed an amortisation debit based on the market value of the goodwill (£804,500). This was on the basis that the company had acquired the goodwill on or before 1 December 2014 as part of the business.
However, HMRC took the view that the goodwill was not acquired until 23 October 2015 – the date on which the partners entered into a written contract novating the partnership to the company. Therefore, the company could not claim the amortisation debit.
The First-Tier Tax Tribunal found there was an oral agreement on 30 November 2014 to the effect the partnership would transfer its business and all its assets to the company on and from that date. However the FTT also concluded (on the basis of substantial evidence):
· There was no written agreement to that effect on that date;
· A contract for the disposal of land and property must be in writing and signed by the parties, otherwise it is ineffective and unenforceable (The Law of Property (Miscellaneous Provisions) Act 1989);
· The oral agreement didn’t differentiate between the goodwill and the premises, and so the goodwill was inseparable from the transfer of the premises;
· The transfer of the goodwill was therefore also subject to the 1989 Act and had to be in writing.
Novation
Even so, the court did not accept HMRC’s argument that the deed of novation itself amounted to a contract transferring the goodwill. That wasn’t even the parties’ intention (it simply formalised the transfer of the benefit of the NHS contract to the company).
However, the FTT said there can be a de facto transfer of a business and its assets - even without a legally binding agreement. It stated that an intention to transfer a business which is subsequently realised can, as a matter of law, effect a de facto transfer on a date earlier than that realisation. This is a question of fact.
And, on the facts in this case, there was a settled intention by the partners and the company to transfer the entire business to the company on and from 1 December 2014. Formal novation of the contract was not necessary for the effective transfer of the beneficial ownership of the goodwill.
This means the company was entitled to claim relief on amortisation of the goodwill acquired before 3 December 2014.
Key takeaway
Absent clear written formalities to effect a legal transfer of a business, including the goodwill (particularly where premises are also part of the deal), there could nevertheless be a de facto transfer allowing tax reliefs.
However, prevention is better than cure: if involved in the transfer of a business, it is wise to ensure agreements are properly documented; and transfers of the business effected in a legally compliant manner. The risks of costly litigation, as illustrated above, could be minimised if certain steps had been taken early on.
12 Green Smile Ltd and others v HMRC [2023] UKFTT 15 (TC)
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