Pickles and Another

JurisdictionUK Non-devolved
CourtFirst Tier Tribunal (Tax Chamber)
Judgment Date22 April 2020
Neutral Citation[2020] UKFTT 195 (TC)

[2020] UKFTT 195 (TC)

Judge Asif Malek, Mrs Rayna Dean

Pickles & Anor

Mr. Davison, Chartered Certified Accountant, appeared for the appellant

Mr. Priestley, litigator of HM Revenue and Customs' Solicitor's Office, appeared for the respondents

Whether crediting a directors' loan account which was freely available for the directors/members to draw upon constituted a distribution for the purposes of CTA 2010, s. 1020 – No – Valuation of goodwill for purposes of section TCGA 1992, s. 272(1) – Whether an expert can act as an advocate in the proceedings – No.

The First-tier Tribunal (FTT) found that a payment made in excess of the value of the goodwill on the incorporation of a business was a distribution. However, the FTT failed to reach a unanimous view on the amount of the distribution.

Summary

Mr & Mrs Pickles (the Appellants) had entered into an agreement to sell the trade and assets of a business they carried on in partnership to a company – Holme Farm Produce Ltd (HFPL) – in which they held shares. The value attributed to the goodwill of the business of £1,199,043 and this amount was credited to the Appellants' loan account with HFPL. HFPL was later dissolved at which time the balance owing to the Appellants was £427,180.

Following an enquiry, HMRC issued closure notes on the basis that the market value of the goodwill was significantly less than the amount agreed between the Appellants and HFPL. The difference between the price paid for the goodwill and its market value was assessed to income tax as a distribution within the meaning of CTA 2010, s. 1020.

It fell to the FTT to determine three issues:

  • whether the Appellants' advocate could also act as an expert witness;
  • the amount of the capital gain on the sale of the goodwill by the Appellants; and
  • the amount of the distribution, if any, made to the Appellants by HFPL.

With regard to the first issue, the FTT found that there was an “absolute bar” on an advocate in proceedings acting as an expert witness. In addition to deciding the first issue, this influenced the FTT's decision on the second issue: as the only expert evidence that the FTT could rely on with regard to the valuation of the goodwill was that provided on behalf of HMRC, the FTT accepted HMRC's valuation of £270,000.

When giving oral evidence, Mr Pickles had stated that the partnership had bought the goodwill for £115,000 and in support of this, he had read from a loan agreement. HMRC had not been given notice of this point and the loan agreement had not been included in the papers presented to the FTT. Given the circumstances, the FTT could not place any weight on the evidence of Mr Pickles in this regard and did not accept the Appellants' argument that the goodwill had a base cost of £115,000.

Judge Asif Malek and Mrs Rayna Dean of the FTT were unable to reach a unanimous view with regard to the third issue.

CTA 2010, s. 1020 treats an amount as a distribution where, on a transfer of assets or liabilities by a company to its members, or vice versa, the amount of benefit received by the members exceeds the amount of any new consideration given by the members. For Judge Malek, the transaction created a debt; there could not be a “transfer of assets” until such time as that debt was paid. The amount to be treated as a distribution was the amount by which the sum of the payments (£1,199,043 − £427,180 = £771,863) exceeded the value of the goodwill (£270,000): £501,863. For Mrs Dean, the debt was not a right to receive payment at a later date, as it was payable on demand and that demand could be made immediately.

As the presiding member, Judge Malek had the casting vote and allowed the appeal in part, finding that the closure notices were excessive.

Comment

This is an incorporation where the goodwill was purchased by the company and the consideration for the sale was credited to the individuals' loan account. The two members of the FTT agreed that the value of the goodwill had been overstated and that the amount paid to the individuals in excess of the value of the goodwill was a distribution; but they could not agree on how much had been paid to the individuals: was it the amount credited to the loan account or the amount they had drawn down? The presiding member favoured the latter and allowed the appeal in part.

It seems likely that HMRC will appeal to the Upper Tribunal.

DECISION
Introduction

[1] This is an appeal against amendments made by notice under s28A Taxes Management Act 1970 (“TMA 1970”) (“the Closure Notices”) to the Appellants' self assessment Tax Returns for the tax year ended 5 April 2012.

[2] The resulting adjustments to Mr Pickles' tax return charged him to additional tax of £145,100.02, made up of:

  • £123,660.02 additional Income Tax (IT) (after dividend tax credits); and
  • £21,440.00 Capital Gains Tax (CGT).

[3] he resulting adjustments to Mr Pickles' tax return charged her to additional tax of £145,099.40, made up of:

  • £123,659.40 additional IT (after dividend tax credits); and
  • £21,440.00 CGT.
Brief background

[4] In around 2000 Mrs. Pickles joined her husband as a partner in the business known as Holmes Farm Produce. The business graded and processed potatoes.

[5] By agreement dated 27 March 2011 (the “Sale Agreement”) the business and all its assets were sold by Mr and Mrs Pickles to a related party, Holme Farm Produce Ltd (“HFPL”), with effect from 1 May 2011. It is not disputed that the HFPL was a company established for the purpose of incorporating the partnership and neither is it disputed that the incorporation was driven by commercial considerations. Following the sale Mr. Pickles acted as the managing director of HFPL and Mrs. Pickles oversaw the accounting function.

[6] The value attributed to goodwill on sale, which was credited to the directors' loan account, was £1,199,043. This was based upon a calculation carried out by Forrest Burlinson, the former agents of the Appellants, and is set out at G27 of the bundle. The calculation is based upon two years of actual sales, gross profits and net profits and two years of projections. It does not set out the underlying assumptions or basis upon which the calculation was made.

[7] Mr and Mrs Pickles duly filed their self-assessment returns on 30 January 2013, but omitted to declare, on the face of the return, their capital gain on the sale of the goodwill. This led to the Respondents opening enquiries into the Appellant's self assessment returns on 13 December 2013 and eventually to the Closure Notices on 16 and 20 September 2016. The Closure Notices were based upon agreement having been reached between the Respondents and the Appellant's former agents, Forrest Burlinson, that as of 1 May 2011, the goodwill transferred should be valued at £450,000.

[8] The difference between the originally attributed goodwill figure of £1,199,043 and the agreed value of goodwill of £450,000 was assessed to income tax as a distribution.

[9] On 21 July 2014 HFPL was placed into administration, before being dissolved on 23 October 2015. None of the balance owing on the directors' loan account of £427,180 at the date of the administration was repaid.

The issues

[10] The issues that we were required to determine in this appeal are as follows:

  • By way of preliminary issue, the status of Mr. Davison and his report;
  • The capital gain on the sale of the goodwill by the Appellants to HFPL on 1 May 2011; and
  • The amount of the distribution, if any, made by HFPL to Mr. and Mrs. Pickles pursuant to section 1020 of the CTA 2010.
Preliminary issue

[11] This issue arose because Mr. Davison appeared before us on the day of the hearing as an advocate and at the same time had submitted a valuation report to the Tribunal as an expert pursuant to its directions dated 22 February 2019. Those directions provided that:

The parties are each granted permission to rely on the evidence of the expert witness on the issue of the valuation of goodwill provided any such expert is instructed in accordance with Part 35 and Practice Direction of the Civil Procedure Rules and whose evidence contains a statements [sic] to the effect that the expert has been so instructed

[12] We decided on the day that it was incompatible for Mr. Davison to act both as an advocate for the Appellants and as a Civil Procedure Rules part 35 expert, with reasons for our decision to be given later in writing. Mr. Davison elected to continue as an advocate and not an expert, but even if he...

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