R & C Commissioners v Pickles and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 September 2022 |
| Neutral Citation | [2022] UKUT 253 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 253 (TCC)
Mrs Justice Bacon (Chamber president), Judge Phyllis Ramshaw
Upper Tribunal (Tax and Chancery Chamber)
Income tax – Deemed distribution – CTA 2010, s. 1020 – Interpretation ‘market value’ – Correct approach to determining market value of benefit received – What constitutes ‘new consideration’ – HMRC appeal allowed, taxpayers’ cross appeals dismissed.
In R & C Commrs v Pickles & Anor [2022] BTC 529, the Upper Tribunal, overturning the decision of the First-tier Tribunal in Pickles & Anor [2020] TC 07681, held that a distribution arose in relation to the transfer of goodwill to a company for a consideration in excess of the market value of the transferred goodwill and that the value of the distribution should be calculated by reference to the face value of the debt representing the transfer consideration.
Mr & Mrs Pickles (the taxpayers) entered into an agreement to sell the trade and assets of a business they had previously carried on in partnership to a company in which they held shares. The sale agreement attributed a value of £1,199,043 to the goodwill of the business and this amount was credited to the taxpayers’ loan accounts with the company. The company was later dissolved at which time the balance owing to the taxpayers 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 taxpayers and the company. 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 which applies where, on a transfer of assets or liabilities to a company by its members (or vice versa), the amount of the benefit received by the members exceeds the amount of any new consideration given by the members.
Although the FTT had been unable to reach a unanimous view with regard to the valuation of the distribution, it held that the transaction created a debt but 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), i.e. £501,863. HMRC appealed on the grounds that:
- the FTT erred by failing to identify the transfer of goodwill as the ‘new consideration’ for the purposes of s. 1020;
- the FTT was wrong to conclude that the taxpayers only ‘received’ a benefit when payments were made to them in satisfaction of the debt;
- the FTT had erred in its approach to the valuation of the benefit received by reference to amounts drawn down by the taxpayers. Rather, the value of the benefit is simply equal to the monetary amount of the debt agreed by the parties.
Grounds (1) and (2) were not contested. On ground (3), the Upper Tribunal (UT) rejected HMRC’s submission that s. 1020(3) was not engaged where the benefit was a promise to pay a sum of money, and that it is only relevant if it is not possible to otherwise ascertain the amount or value of the benefit. Subsection (3) has no caveats – it applies to all cases falling within subsection (1). The amount or value of both the new consideration and the benefit are to be determined in accordance with market value.
The UT concluded that ‘market value’ for the purpose of s. 1020 was not to be interpreted as the ‘open market’ value as defined in TCGA 1992, s. 272 or any other similar provisions. Had the drafter of the legislation intended that to be the case, a definition to that effect would have been included. The UT agreed with HMRC that directly imported definitions used for the purposes of other taxes could not be imported for these purposes as the statutory provisions were different.
The UT held that market value should be determined from the perspective of the value to be attributed to the loan balance by a member of a company, with the attributes of the taxpayers, and with full knowledge of the facts surrounding the transaction. Since it is common ground that the sum of £1,199,043 was attributed to goodwill, the effect of the sale agreement was that the benefit to the taxpayers was the promise made by the company to pay to them the amount of £1,199,043 either in the form of cash or as a debt payable on demand. There was no evidence suggesting that the parties did not consider and intend £1,199,043 to be the value of the promise. The promise arose as a result of the agreement by the taxpayers to transfer the goodwill. The agreed amount was arrived at as a result of a third-party valuation of the goodwill. The promise was objectively recorded in the sale agreement as being payable in cash or payable on demand as a debt. Additionally, the company credited the amount of £1,199,043 to the directors’ loan account. There was no evidence to suggest that the promise was not genuine, or that the parties did not intend for the amount to be paid.
The UT held that the market value of a promise to pay must be assessed by reference to the facts as they are known at the time of the transaction. On that basis, it concluded that the market value of the benefit, on the facts of this case, was to be taken to be its face value of £1,199,043. It followed that the value of the distribution could be determined by deducting the agreed goodwill valuation from this amount.
In deciding that the value of the distribution was the face value of the debt (representing the price agreed for the transferred goodwill) minus the market value of the goodwill, the Upper Tribunal rejected the taxpayers’ argument that the valuation should be reduced to reflect the fact that the company did not have sufficient net assets at the time of the transfer to pay the outstanding loan amounts. The outcome was determined on the specific facts of the case and should not be taken as a blanket ruling that the face value of the debt should be used in all such cases.
Comment by Paul Davies, Senior Tax Writer at Croner-i.
Ms Laura Poots, of counsel appeared for the appellant
Mr Conrad McDonnell, of counsel appeared for the respondents
[1] The Commissioners for Her Majesty's Revenue and Customs (HMRC) are the appellants and also the respondents in the cross appeal. Mr and Mrs Pickles (together the taxpayers) are the appellants in the cross appeal and respondents to HMRC's appeal.
[2] The main issue in the appeal and cross appeals is the interpretation of the term “market value” in s. 1020 of the Corporation Tax Act 2010 (CTA 2010) and the correct approach to determining the market value of the benefit received by the taxpayers. The identification of what constitutes “new consideration” for the purpose of s. 1020 is also in issue.
[3] Prior to 2011 the taxpayers carried on a business in partnership, known as Holme Farm Produce. The business graded and processed potatoes. It had machinery, vehicles and other capital assets, some intangible fixed assets, trading stock and debtors. In 2011, the taxpayers set up a company for the purpose of incorporating the partnership, Holme Farm Produce Limited (HFPL), and subscribed for £95,000 worth of shares.
[4] By agreement dated 27 March 2011 (the sale agreement) HFPL agreed to purchase the assets of the Holme Farm Produce business (not including the land, which was retained by the taxpayers) as a going concern, completion to take effect on 1 May 2011. The sale was for an agreed sum plus the assumption by HFPL of the trading liabilities of the business at the time.
[5] It is common ground that the value attributed to goodwill on the sale was £1,199,043, based on a calculation carried out by Forrest Burlinson, the former agent of the taxpayers. The calculation was based on two years of actual sales, gross profits and two years of projections. The amount of £1,199,043 was credited by HFPL to the directors' loan account. Following the sale Mr Pickles acted as the managing director of HFPL and Mrs Pickles oversaw the accounting function.
[6] On 30 January 2013 the taxpayers filed their returns for the tax year 2011/2012. They omitted to declare their share of the capital gain on the sale of the goodwill. HMRC opened enquiries into their returns on 13 December 2013 and, pursuant to s. 28A of the Taxes Management Act 1970, on 16 and 20 September 2016 it issued closure notices amending the taxpayers' self-assessment returns for the year 2011/12. The adjustments to the tax returns resulted in:
- for Mr Pickles' tax return: £123,660.02 additional Income Tax (after dividend tax credits) and £21,440.00 Capital gains tax (CGT); and
- for Mrs Pickles' tax return: £123,659.40 additional Income Tax (after dividend tax credits) and £21,440.00 CGT.
[7] The closure notices were issued on the basis of agreement having been reached between HMRC and Forrest Burlinson that, as at 1 May 2011, the...
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