Roger Preston Group Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 February 2021 |
| Neutral Citation | [2021] UKFTT 38 (TC) |
| Date | 09 February 2021 |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 38 (TC)
Judge Christopher McNall
Jolyon Maugham QC and Colm Kelly, Counsel, instructed by Squire Patton Boggs (UK) LLP, appeared for the appellant
Richard Chapman QC and Jennifer Newstead-Taylor, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Intangible assets – Appellant acquired a licence as part of a business acquisition – Licence accounted for as an intangible asset – Whether such accounting was correct – Accounting was correct – Appeal allowed – CTA 2009, s. 712.
The First Tier Tribunal allowed an appeal by the taxpayer company against amendments made by HMRC to the taxpayer's returns for the years 31st December 2008 to 31st December 2013. The amendments disallowed amortisation deducted for tax purposes on an intangible asset acquired by the appellant in 2008, on the basis that the asset was incorrectly recognised. The tribunal found that it was correct to recognise the asset in the appellants accounts and on that matter of principle the appeal was allowed.
In 2008 the appellant had acquired the trade and assets of a partnership – J Roger Preston and Partners (“JRPP”). The partnership operated an engineering consultancy in a number of countries; in the UK it carried its business through a UK incorporated limited company, Roger Preston and Partners Ltd (“RPPL”). The shares in RPPL were owned by the partners in JRPP. The appellant acquired the shares in RPPL as part of the overall acquisition of the JRPP business.
The arrangements for operating the UK business had been in place since 1994. In that year, JRPP had entered into a licence agreement with RPPL, granting the company to use assets of the partnership, both tangible (e.g. premises) and intangible (e.g. trademarks and knowhow) in the practice of consulting engineering. In addition, JRPP undertook to provide the company with advice and assistance in carrying out its business, and to market and promote the business. There were further provisions ensuring the partnership's control over RPPL and ensuring the company could not unilaterally increase its control over the business. JRPP did not licence its goodwill to RPPL, and RPPL agreed to safeguard the goodwill of the partnership, and that any increase in the value of goodwill accrued to the benefit of the partnership, not the company.
Under the licence agreement, RPPL paid an annual fee to JRPP. This was computed using a formula which took into account RPPL's turnover, and the number of hours provide by the partners of JRPP to RPPL in each year. The annual fee was capped at 95% of RPPL's pre-tax profits. The tribunal noted that, on average, RPPL retained around 13% of its pre-tax profits.
The tribunal was presented with a contemporaneous memorandum detailing the reasons for the re-structure of the business in 1994. The decision does not set out those reasons, but there is no suggestion that tax avoidance played a part. The tribunal did state that the memorandum noted there could be additional national insurance and corporation tax costs arising from the transaction, although these did not seem to be significant.
During the period 1994–2008, RPPL and JRPP filed accounts and tax returns reflecting the operation of the licence. HMRC enquired into the partnership's tax return for the year ended 5 April 2004, and, in the course of the enquiry, it was provided with the licence and information explaining the commercial rationale for the 1994 restructure. The enquiry concluded in 2006 with no amendments to the partnership return. HMRC also enquired into the return for RPPL for the period to 5 April 2005; that enquiry also concluded without amendment to the company's return.
In April 2008, the partners of JRPP sold the partnership business and assets, and their shares in RPPL to a Dutch consulting engineering group, the Grontmij Group. The business and assets were sold to the appellant, a UK subsidiary of the group, and the shares in RPPL to another UK company in the group, Grontmij Ltd. The appellant paid just under £14.5m for the business and assets acquired from the partnership, and Grontmij Ltd paid £0.5m for the shares in RPPL. It was an agreed fact that the vendors and purchasers were arm's length commercial parties, and the sale and purchase of the business and shares were on arm's length terms.
The partners in JRPP also entered into service contracts with the appellant for the post sale period, and such service contracts included restrictive covenants in the event of that employment being terminated.
Thereafter, the business was carried on as previously, with the appellant in the place of JRPP, with RPPL continuing to use the licence and paying fees to the appellant. The appellant recorded its purchase of the licence in its audited accounts at a value of £13.243m and amortised the licence over a ten-year period. The amortisation was treated as deductible for corporation tax purposes.
HMRC's underlying premise in disallowing the amortisation deductions of the asset for corporation tax was that the initial recognition of the asset was incorrect. Under FA 2002, Sch. 9, para. 2(1), now CTA 2009, s. 712(1), “intangible asset” for corporation tax purposes takes the meaning it has for accounting purposes. Accordingly, absent specific provisions to the contrary, the tax treatment for an intangible asset follows its accounting treatment. HMRC did not suggest there were any legislative provisions that would disallow the amortisation in this case, and therefore the disallowance they made was on the basis that the accounting treatment of the asset was incorrect; it should not have been recognised by the appellant under generally accepted accounting principles (GAAP), and there should have been no amortisation to deduct.
The tribunal noted that the appellants accounts for the period to 31 December 2008 had been audited by KPMG LLP, and that the auditor had reported that the accounts (which included the intangible asset) were drawn up in accordance with accounting standards. The evidence from audited accounts of RPPL, both pre and post the acquisition, were consistent with the existence of the licence, as were various other accountants' reports prepared for the purposes of the acquisition and the Dutch group's consolidated accounts.
The tribunal also took expert evidence from Mr Alex Marsden, a forensic accounting partner at BDO LLP, for the appellant and from Mr Andrew Simms, a Chartered Accountant in the leadership team of HMRC's Financial Professionals Unit, for HMRC. Mr Marsden and Mr Simms agreed on a number of issues. These included that an asset that was a “financial asset” could not be an intangible asset under GAAP.
Mr Marsden was clear that the licence acquired by the appellant was an intangible asset, not a financial asset. Mr Simms pointed to a Price Waterhouse Coopers accounting manual in which it was noted that it could sometimes be difficult to distinguish between an intangible and a financial asset. The tribunal agreed. However, it noted that the licence in question bore a close similarity to an example of what the manual described as an intangible, rather than a financial asset.
The tribunal “comfortably preferred” the evidence of Mr Marsden, who argued the asset was correctly recognised as an intangible asset in the appellant's accounts.
HMRC had also contended that, as well as there being no intangible assets to be acquired from JRPP, neither was there an acquisition of goodwill. The significance of this was that, if the licence was not regarded as an intangible asset, but the sum paid to the partners of JRPP represented a purchase of goodwill, this itself would, in principle, have been amortisable. HMRC's decision to deny the deductions was explained to the appellant during the enquiry process as at least in part due to any goodwill in the partnership not meeting HMRC's interpretation of goodwill under HMRC's guidance. The tribunal declined to consider HMRC's guidance as it was not a source of law, so HMRC's reasoning was not further explained. However, it was agreed between the parties that goodwill cannot be separated from a business. Mr Simms had been instructed by HMRC to prepare his expert witness statement on the basis that a business had not been transferred by JRPP to the appellant.
The tribunal concluded that JRPP was carrying on a business prior to the sale; its activities outside the UK were carried on directly by the partnership; it provided services to RPPL on which it incurred costs and from which the company derived revenues (which Mr Simms conceded represented a business); and the Courts had previously held that granting licences could be a trade or business. The tribunal was satisfied that if JRPP had terminated the licence, the business of RPPL would have ceased, and the tribunal also cited a number of cases which supported the view that the goodwill generated during the licence term accrued to JRPP not RPPL. The tribunal was satisfied that the appellant obtained control over the business of the partnership through the acquisition and was thus entitled to recognise any goodwill associated with the business in its accounts.
HMRC had also relied on the FTT decision of Iliffe News and Media Ltd [2012] TC 02365, which had found that the purported assignment of the goodwill in unregistered trademarks, without the transfer of the underlying business, was void. HMRC were effectively arguing that the business of JRPP had been transferred to RPPL in 1994, and the goodwill had transferred with it. This explains the instructions given by HMRC to Mr Simms, but the tribunal disagreed; the licence was not itself an attempt to transfer goodwill without a business transfer, and JRPP had continued to have a business after 1994. The situation was thus quite different...
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Roger Preston Group Ltd
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