Armstrong & Haire Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 July 2020 |
| Neutral Citation | [2020] UKFTT 296 (TC) |
| Date | 17 July 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 296 (TC)
Judge Anne Fairpo
Mr Elliott, Counsel appeared for the appellant
Ms Browne, Litigator, appeared for the respondents
Corporation tax – Amortisation of goodwill – Whether the business in question was a business carried on by a related party before 1 April 2002 – Whether a valid discovery had been made – Whether the discovery was stale – Appeal dismissed – CTA 2009, s. 884 and FA 1998, Sch. 18, para. 41–44.
The First-tier Tribunal (FTT) dismissed the taxpayer's appeal against a discovery assessment made to disallow the amortisation of goodwill in the taxpayers return for the year to 30 November 2012 and a closure notice disallowing a tax deduction for amortisation of the same goodwill in the year to 30 November 2013. The tribunal concluded the discovery assessment was validly made, and that the goodwill in question was that of a business commenced before 1 April 2002. As the goodwill was acquired from related parties to the taxpayer, it fell outside of the corporate intangible fixed assets regime and could not be deducted.
The taxpayer company acquired the assets of two dental practices on 1 December 2010. The two practices had previously operated from the same premises and shared some costs, and the owners of those practices were equal shareholders in, and directors of, the taxpayer. The practices that had been acquired had been trading under the ownership of the shareholders since 1996. On the acquisition, in the company's accounts an amount of acquired goodwill of £1.4m was recognised, to be amortised over five years. The company claimed tax deductions in its tax returns for amortisation, under the corporate intangibles fixed asset regime of CTA 2009, Pt. 8, at £280,000 pa.
In 2014, HMRC opened an enquiry into the taxpayer's return for the period to 30 November 2013. This led to HMRC concluding that the goodwill being amortised was goodwill acquired from a related party which arose from a business carried on before 1 April 2002 and was therefore outside the intangible fixed asset regime. A closure notice for the period to 30 November 2013 disallowing the goodwill was duly made.
HMRC also sought to amend the taxpayers returns for the periods to 30 November 2011 and 30 November 2012 in respect of this matter. These amendments were the subject of a non-statutory review within HMRC, which concluded in July 2016 they should not have been made. On 23 September 2016, HMRC issued a discovery assessment in respect of the period to 30 November 2012, disallowing the goodwill amortisation in that year.
At the tribunal, the taxpayer argued that the company's business was a new business, distinct from, the businesses previously operated by the shareholders. They argued that for the purposes of CTA 2009, s. 884, which determines when goodwill of a “business in question” is treated as created, this new business should be regarded as the “business in question”. As it only came into existence in 2010, the goodwill then fell within the intangible fixed assets regime. HMRC contended the “business in question” for s. 884 was the business (or businesses) acquired, and, as these had commenced before 1 April 2002, the goodwill was a “pre-FA 2002 asset” and not amortisable.
The FTT agreed with HMRC. Goodwill cannot be separated from the business in which it was created, and the “business in question” in s. 884 must mean the business in which the goodwill was created. The tribunal judge commented that explanatory notes to the legislation stated that “no goodwill is created by the acquisition of a business or by the accounting recognition/capitalisation of goodwill”.
“Business in question” thus referred to the acquired businesses and there was no need to consider the issue of whether the taxpayer's business was a new business or a continuation of the acquired businesses. The FTT thus found that the goodwill was a pre-FA 2002 asset and was not amortisable in the hands of the taxpayer.
The taxpayer argued that it had disclosed sufficient information in its tax returns to prevent HMRC issuing a “discovery assessment”. In addition, the tax returns of the shareholders had disclosed that they had acquired in 1996 the businesses sold to the taxpayer in 2010. In any event, the latest a “discovery” in respect of the period to 30 November 2012 could be considered to be made was September 2015 when the closure notice in respect of the 2013 period was made, and HMRC attempted to amend the 2012 return. Not issuing a discovery assessment until September 2016 rendered the issue “stale” and the assessment invalid.
The FTT considered that the information provided by the taxpayer was not sufficient to prevent a discovery assessment being raised. Furthermore, the disclosures made in the shareholders' returns could not be expected to be known to the officer in the taxpayer's case. Accordingly, an officer was entitled to raise a discovery assessment based on what they themselves ascertained. Analysis of the enquiry timeline led the FTT to conclude the discovery was made in June 2015. However, as the issue had continued to be worked upon by HMRC up to the issue of the discovery assessment in September 2016, it could not be regarded as stale.
HMRC had argued that there had been two discoveries; in August 2016 after the non-statutory review had concluded the amendment to the 2012 return should not have been made, a new officer took up the enquiry and that officer concluded the failure of the non-statutory process was, in effect, new evidence of an insufficiency in tax collection for the 2012 period. The FTT did not agree with this.
The taxpayers appeal against the closure notice and the discovery assessment failed, the latter on both issues, and was thus dismissed.
A key principle of the intangible fixed assets regime, at the time of the transaction in this case, was that assets created before 1 April 2002 could only enter the regime through transactions between unrelated parties. The taxpayers' arguments aimed at overcoming this hurdle were rejected comprehensively by the FTT. Whilst, in principle, pre-April 2002 goodwill acquired from a related party is brought into the intangible assets regime for acquisitions after 1 July 2020, it will generally be treated as a restricted asset, and the section remains relevant in terms of making that determination.
The decision also shows that taxpayers looking to make full disclosure to ensure discovery assessments cannot be raised should not rely on disclosures made in returns by other taxpayers (even if they are related parties). In purely procedural terms, the time taken by the non-statutory review did not give the taxpayer grounds for arguing “staleness” but nor did the cancelling of HMRC's amendment of the 2012 return create a new “discovery” opportunity.
[1] These are joined appeals relating to:
- a closure notice issued on 15 September 2015 under paragraph 32 to Schedule 18, Finance Act 1998 to disallow a tax deduction of £280,000 for the appellant's accounting period ended 30 November 2013; and
- a discovery assessment issued on 23 September 2016 under paragraph 41, Schedule 18, Finance Act 1998 in the amount of £56,000 in relation to the appellant's accounting period ended 30 November 2012.
[2] The appellant acquired the assets of two dentistry businesses on 1 December 2010 and began trading as a dental practice on that date. The preceding businesses had been carried on separately since 1996 by two self-employed dentists who operated from the same site and shared certain overhead costs. Each of these businesses ceased trading on 30 November 2010.
[3] The two dentists had equal shareholdings in the company following the transfer of the assets and each was a director of the company.
[4] The appellant's accounts for the period ended 30 November 2011 recognised goodwill as an intangible fixed asset of the business with a cost of £1.4m, to be written off in equal instalments over a five year period. Amortisation of £280,000 was charged in the profit and loss account for that period. The same amount was charged for the accounting period ended 30 November 2012 and 30 November 2013.
[5] On 16 December 2014, HMRC opened an enquiry into the accounting period ended 30 November 2013.
[6] On 6 January 2015, the appellant's representative replied to HMRC and advised them to review the ongoing enquires into the shareholders' individual tax returns for the tax year that the businesses were acquired by the appellant, relating to the valuation of the goodwill.
[7] On 22 January 2015, Officer Weston replied and noted that the shareholders' tax returns stated that the businesses had been acquired by the shareholders on 1 December 1996. She requested an explanation as to how the amortisation of the goodwill had been treated.On 22 January 2015, Officer Weston replied and noted that the shareholders' tax returns stated that the businesses had been acquired by the shareholders on 1 3 December 1996. She requested an explanation as to how the amortisation of the goodwill had been treated.
[8] In a letter dated 23 March 2015, Officer Weston rejected the appellant's argument that the acquired businesses had been created in 2006 as a result of changes in NHS contracts and stated that she considered that it appeared that the businesses had been in existence since at least 1996, and asks for comments and the basis on which goodwill in respect of private work had been treated.
[9] On 17 June 2015, Officer Weston wrote to the appellant's representative and stated that she had not had a response to her letter of 23 March 2015 and that, in the absence of any evidence to the contrary, she “maintained that the goodwill was acquired by the company from a related party that carried on the same...
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