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In this decision, the First-tier Tribunal (Tax Chamber) (“FTT”) dismissed an appeal against discovery assessments which disallowed amortisation relief claimed by the Appellant company for three types of goodwill acquired from a partnership. The decision examined the applicability of each of the circumstances set out in s882 CTA 2009 before concluding none of them had been satisfied. It also provided guidance on the meaning of carrying on a business pursuant to s884 CTA 2009. In rejecting the appeal, the FTT reached a number of key conclusions:

1. partners can potentially rebut the presumption that individual partners do not own the goodwill of the business (in whole or part) by expressly recording the division in a partnership agreement;
2. whether a partner is an equity or salaried partner has no bearing on whether they can be treated as carrying on the business for the purpose of s884;
3. when determining whether and when a partner carries on a business, the FTT will consider, inter alia, (1) if they are in a partnership as per the definition in s1 of the Partnership Act 1890 and (2) their role in the day-to-day running of the practice;
4. a fundamental aspect of the self-assessment regime is that taxpayers must ensure that they retain adequate records (backed up by an external valuation as relevant in the case of a goodwill transfer) sufficient to support the information provided in their returns, including evidence to support claims made for relief.

What are the practical implications of this case?

This decision should be a warning to partners when changing profit sharing ratios/acquiring additional businesses and companies acquiring partnerships. The key to successfully obtaining amortisation relief for goodwill is strong and independent contemporaneous evidence to support its valuation. In this case, such evidence was lacking:

1. It was argued that one of the Appellant’s directors (Mr Hewitt) did not carry on the business of the acquired partnership (“AVC”) until 2005 but the lack of a partnership agreement between him and the retiring partner (Mr Alexander) meant they were unable to evidence this. Instead, the FTT considered alternative evidence (including Mr Hewitt’s title of “Partner” on their website) to conclude he was carrying on a business with Mr Alexander before 1 April 2002. As such, the Appellant could not access the Intangibles Regime in Part 8 of the CTA 2009 to claim amortisation relief for post 2002 goodwill.
2. Even though the parties agreed that the goodwill of the business acquired by AVC in 2012 could fall within the Intangibles Regime, there was insufficient documentary evidence and detail surrounding the acquisition to prove that the conditions under that regime had been satisfied. Independent and documented valuations of the goodwill of a business should be undertaken as part of any acquisition process.

What was the background?

1. On 1 May 2000, DCS Alexander Partnership began trading with two partners, Mr Alexander and Mr Hewitt.
2. On 30 April 2005, Mr Alexander retired and Mr Hewitt continued to run the practice as a sole trader under the new name “AVC”.
3. Mr Walker commenced work at the practice in 2006 but he and Mr Hewitt did not enter into a partnership until 1 August 2008 (still trading as AVC).
4. At some time in 2012, AVC purchased the large animal business of Dalbair Veterniary Centre. Goodwill of £165,805 was shown in AVC’s partnership accounts following the purchase (the “Dalbair Goodwill”).
5. On 27 January 2014, the Appellant (“AVGL”) was incorporated with both Mr Hewitt and Mr Walker as directors and each having a 50% share in the company. AVGL acquired AVC. Goodwill of approximately £1.9m was recognised in AVGL’s accounts for the first 18-month period to 26 July 2015.
6. On 16 October 2015, AVGL filed its CTSA returns for APE 26 January 2015 and 26 July 2015. Amortisation of £56,250 in respect of goodwill acquired on incorporation was charged to the 18-month period to 26 July 2015 and that full amount was claimed as deductible.

The key issue the First-tier Tax Tribunal (“FTT”) were asked to determine was whether each of the following goodwill elements (collectively the “3 Goodwills”) fell within the provisions of the intangible fixed assets rules in Part 8 of the CTA 2009 (the “Intangibles Regime”):

1. The goodwill acquired originally by Mr Hewitt when he acquired Mr Alexander’s interest in the DCS Alexander partnership in 2005 (“DCS Alexander Goodwill”);
2. The Dalbair Goodwill;
3. The goodwill introduced when Mr Walker and Mr Hewitt became partners in 2008 (“Mr Walker’s Goodwill”)

A secondary issue of whether the discovery assessments for APEs 26 Jan 2015 and 26 July 2015 were valid was also determined by the FTT.

What did the tribunal decide?

The circumstances in which the Intangibles Regime will apply are set out in s882 CTA 2009 (cited at paragraph 86 of the decision). The FTT held that none of those circumstances applied to any of the 3 Goodwills.

The majority of the decision focused on the DCS Alexander Goodwill, and the FTT found:

1. AVGL acquired the goodwill from AVC (it having established the goodwill whilst Mr Alexander was a partner under the former name of DCS Alexander Partnership). As AVGL acquired the goodwill rather than created this goodwill, s822(1)(a) did not apply.
2. Mr Hewitt and Mr Walker (as partners of AVC) were related to AVGL (as directors) and therefore s882(1)(b) did not apply.
3. None of the three cases under s882(1)(c) applied. Case A was not satisfied as the goodwill was acquired from a partnership and not a company. Case B was not satisfied because what was transferred between the former partners was the beneficial interest of the retiring partner in his share of the partnership property, this was distinct from a transfer of the goodwill itself. Case C was not satisfied as the goodwill was not treated as acquired after 1 April 2002 from a person who at the time of the acquisition was a related party in relation to the company (s882(1)(c) & (5)).

In relation to Case B the FTT noted that “we have not seen nor has the Appellant satisfied us that there was any agreement in place between Mr Hewitt and Mr Alexander … to displace the analysis of the goodwill being partnership property”. It is therefore implied that partners can rebut the presumption that individual partners do not own the goodwill of the business by recording the same in a partnership agreement.

The FTT’s other conclusions

1. The Dalblair Goodwill – whilst the parties agreed in theory that this goodwill was capable of falling within Case B, there was insufficient evidence and detail surrounding the acquisition to prove that the condition had been satisfied.
2. Mr Walker’s Goodwill – the evidence suggested no goodwill has been contributed by Mr Walker becoming a partner. Specifically, the FTT mentioned Mr Walker’s employment since 2006 and Mr Hewitt’s concession that no goodwill had actually been contributed as relevant factors in reaching this conclusion.
3. Validity of the discovery assessments – the FTT provided a helpful summary of the tests and conditions for issuing a valid discovery assessment at paragraphs 57-80 of the decision, before concluding they were valid.
4. Scottish partnerships: the FTT also considered how its conclusion would change if DCS Alexander Partnership was a Scottish partnership before ultimately concluding its determination in respect of the treatment of the goodwill would remain the same.

Original article can be found here: Warning for partnership personnel changes? (Armour Veterinary Group v HMRC) – Lexis Nexis