Spring Capital Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 February 2015 |
| Date | 10 February 2015 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Guy Brannan
Mr Roderick Thomas appeared for the Appellant
Ms Harry Jones appeared for the Respondents
Corporation tax – Deductions for amortisation of goodwill – Finance Act 2002 (“FA 2002”), Sch. 29 – Whether goodwill purchased on a transfer of trade in September 2004 or whether a migration of trade – Market value of goodwill – Principles for determining market value of goodwill on transfer of trade – Whether a transfer of trading losses to the appellant under Income and Corporation Taxes Act 1988 (“ICTA 1988”), s. 343 – Whether quantum of trading losses can be disputed – Effect of undertaking given by HMRC to the Court of Session in other proceedings – Construction and effect of the undertaking – Contracts (Third Parties) Act 1999 – Whether valid consequential amendment to return to 2008 return under Finance Act 1998 (“FA 1998”), Sch. 18, para. 34 – Whether valid claims for relief for the purposes of Finance Act 1998 (“FA 1998”), Sch. 18, para. 51 – Appeals dismissed in relation to deductions for amortisation of goodwill – Issue of quantum of losses under ICTA 1988, s. 343 adjourned pending outcome of separate appeal by predecessor company.
The appellant had claimed, in a number of company tax returns, that a tax deduction should be available for the amortisation of goodwill and also that losses were available that were carried forward from a trade that had allegedly transferred under ICTA 1988 s. 343. The First-tier Tribunal (FTT) decided that the appellant was not entitled to the amortisation of goodwill but was entitled to use of s. 343 losses subject to a subsequent hearing to validate the exact of quantum of said losses.
Spring Capital Ltd (the appellant) appealed against several decisions of HMRC in respect of accounting periods ended 9 March 2005 to (and including) 30 April 2009. The main dispute in respect of a number of these periods related to whether the appellant is entitled to a deduction under Finance Act 2002 (“FA 2002”), Sch. 29 in respect of the purchase of goodwill. In addition, the appellant claimed that it is entitled to carry forward losses under ICTA 1988, s. 343. There were also issues for determination relating to: the effect of an undertaking given to the Court of Session in Scotland in relation to other proceedings on 19 May 2010 concerning whether the appellant's return for the accounting period ended 30 April 2008 was a valid amendment and, finally, whether the appellant made valid claims for amortisation relief in respect of goodwill in relation to periods ended the 30 April 2005, 2006, 2007 and 2008.
In a nutshell, the appellant argued that on 22 September 2004 a related company transferred its seafood business to a common director (“Messrs Thomas”). Then, on the same day, Messrs Thomas are said by the appellant to have transferred the seafood business to the appellant for consideration equal to market value – the agreement being evidenced, according to the appellant's evidence, by a minute of agreement dated 22 September 2004. HMRC, on the other hand, stated that there is no evidence that the tripartite transaction described in the preceding paragraph took place. HMRC stated that there was no written agreement evidencing the transfer to Messrs Thomas and there was no sale agreement evidencing the transfer then from Messrs Thomas to the appellant. The accounts of the appellant for 2005 and 2006 make no mention of the appellant having acquired the goodwill attaching to the seafood trade and nor does contemporaneous written correspondence.
The 2005 corporation tax returns of the appellant did not reference the acquisition of the goodwill or transfer of the trade and these alleged facts were only brought to HMRC’s attention in 2007 via an amendment to the returns. Also HMRC were unable to reconcile losses transferred with the trade. HMRC duly issued closure notices to the appellant in respect of 9 March 2005, 30 April 2005 and 30 April 2006 on 28 November 2008 returns, in accordance with the directions of the General Commissioners. Essentially, the closure letters stated that HMRC were not satisfied as a result of enquiries that there was a loss available to be carried forward from the transferee company and, moreover, HMRC were not satisfied that the common ownership test contained in ICTA 1988 s. 343 and s. 344 had been satisfied. The final paragraph of each closure notice stated: “I invite the company to amend the return that has been the subject of enquiry.”
The question of the purchase of goodwill was latterly raised and HMRC issued an information notice on this point when subsequent company tax returns claimed the relief. There then followed a complex dialogue between the appellant and HMRC concerning the exact nature of the business transfer.
Both parties accepted that the burden of proof lay upon the appellant in respect of this appeal. The judge also added that the burden of proof remains upon the appellant even in cases where HMRC allege fraud or dishonesty. In this case, in relation to the claims for a deduction in respect of purchased goodwill, HMRC argued that the evidence put forward by the appellant in relation to the tripartite transaction was not credible. They are, therefore, effectively pleading dishonesty. Except in penalty cases, it is established law that in challenging an assessment (including a closure notice or indeed a consequential amendment), even where HMRC make allegations of dishonesty, the burden of proof lies upon the appellant (Brady (HMIT) v Group Lotus Cars plc TAX[1987] BTC 95.
HMRC in the Spring Capital appeal said that the claims for intangibles relief were not valid, and some are out of time. More fundamentally, HMRC said that there was no business acquisition in September 2004, and therefore no entitlement to intangibles relief. This is essentially based on the lack of documentation and the fact that the transaction is not properly accounted for in any business accounts and records.
To complicate matters further an “Undertaking” was given in relation to proceedings in Edinburgh in which HMRC sought to have the original company restored to the register of companies (having previously been struck off the register) in order to enforce liabilities to PAYE and National Insurance contributions. The appellant's primary submission was that the Undertaking precluded HMRC thereafter from making enquiries into the quantum of the losses carried forward and utilised by the appellant, pursuant to ICTA 1988 s. 343 for periods 2005 onwards. In essence, the appellant submitted that the Undertaking had the effect of preserving the appellant's right to utilise the losses that existed in the original company on the day the Undertaking was given, i.e. 19 May 2010.
The court stated that the Undertaking confers no rights on the appellant. The Undertaking was given in relation to proceedings to restore the original company to the register. The appellant was not a party to those proceedings. The whole tenor of the wording of the Undertaking reflects the context in which it was given, i.e. outstanding enquiries into the tax affairs of the original company.
The main question in this appeal relates to the entitlement of the appellant to claim deductions in respect of the amortisation of goodwill for all periods under appeal. HMRC argued that the original trade (and therefore any goodwill attaching to the trade) was transferred directly to the appellant and that it was not transferred by the company to Messrs Thomas and Messrs Thomas did not then transfer the trade to the appellant. Instead, HMRC argued that the facts were consistent with a gradual migration of the trade from the original company to the appellant in the final few months of 2004, with the trade of the original company ceasing by 31 January 2005. There was, therefore, no purchase of goodwill and no amortisation deduction.
Mr Thomas claimed that on 22 September 2004 the original company transferred its seafood trade to Messrs Thomas and that on the same day Messrs Thomas transferred the trade to the appellant for an amount equal to the market value of the trade – which the FTT referred to as the “tripartite transaction”. The court considered Mr Thomas' evidence, which was challenged in cross-examination, in relation to these two alleged transactions and did not find it credible. Consequently, the FTT concluded that the appellant was not entitled to deductions in respect of a purchase of goodwill. The following reasons were given:
1) The first mention to HMRC of the tripartite transaction came in a letter from Mr Thomas to Mr Stewart (HMRC) dated 8 April 2011 (two days after it was referred to in the appellant's Notice of Appeal), almost 6 1/2 years after it was alleged to have taken place on 22 September 2004. There were many opportunities in the correspondence when such a tripartite transaction would naturally have been mentioned by Mr Thomas to HMRC had it occurred on 22 September 2004. Mr Stewart repeatedly requested details concerning the appellant's claim to have purchased goodwill, but this information was not forthcoming. Even allowing for the strained relationship between Messrs Thomas and Mr Stewart, it beggars belief that a taxpayer seeking to claim a very substantial amount of tax relief would not have supplied HMRC with details of the relevant transaction at the earliest opportunity. The FTT did not accept Mr Thomas' suggestion that he merely answered the questions put to him by Mr Stewart: “no more, no less”. The FTT stated that in many instances Mr Thomas did not do even that. Mr Thomas's replies to Mr Stewart's enquiries indicated that the tripartite transaction was the product of ex post facto imagination rather than a genuine transaction that took place on 22 September 2004.
2) Furthermore, the FTT stated that the minute used as evidence by the appellant was first produced to HMRC by the appellant's...
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