First-tier Tribunal (Tax)

[2011] UKFTT 106 (TC)

TC00982

 

 

 

Appeal number: TC/2010/01038

 

CORPORATION TAX – Amortisation of goodwill – Goodwill of partnership acquired by Appellant for consideration including issue of shares to partners – Whether partners became related parties “at the same time” as Appellant acquired goodwill – Yes – FA 2002 Sch 29 para 118(1)(b) – Appeal dismissed

 

 

FIRST-TIER TRIBUNAL

TAX  

 

 

HSP FINANCIAL PLANNING LTD Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Corpn tax) Respondents

 

 

 

 

TRIBUNAL: JUDGE THEODORE WALLACE

IAN MENZIES-CONACHER

 

Sitting in public in London on 2 December 2010

 

D Powrie FCA, of Powrie Appleby LLP, for the Appellant

 

Christopher Tidmarsh QC, instructed by the Solicitor to HM Revenue and Customs, for the Respondents

 

 

 

© CROWN COPYRIGHT 2011

DECISION

 

1. This appeal was against an amendment to the Appellant’s corporation tax return for the period to 31 March 2004 disallowing a deduction for amortisation of goodwill on the ground that the goodwill did not fall within paragraph 118 of Schedule 29 to the Finance Act 2002.

 

2. The goodwill was acquired from three partners under a sale agreement on 30 January 2004 (“the Sale Agreement”) under which three partners sold the goodwill of the partnership business to the Appellant company in return for consideration which included the allotment to each partner of 30 per cent of the ordinary shares in the Appellant.

 

3. The issue was whether “at the time of the acquisition” by the Appellant of the goodwill the partners were related parties in relation to the Appellant, within paragraph 118(1)(b).  The Revenue contended that at the moment of acquisition they became entitled to acquire the shares and were therefore participators and related parties in relation to the Appellant.  The Appellant contended that under the Sale Agreement the partners only became entitled to the shares once the goodwill had been transferred.

 

The facts

 

4. There were no witnesses.  There was an agreed statement of facts not in dispute and an agreed bundle of documents.  The agreed facts can be summarised as follows.

 

5. Martyn Holmes, Nigel Pole and Gilbert Scoular carried on in partnership a business of independent financial advisers for a number of years prior to 30 January 2004.

 

6. On 22 July 2003 the Appellant was incorporated and on 16 October 2003 the sole subscriber share of £1 was transferred to an employee of the partnership who was appointed the sole director.  On 12 January 2004 a further 999 £1 shares were allotted to the employee and the authorised capital was increased to 10,000 £1 ordinary shares.

 

7. On 30 January 2004 the partners and the Appellant entered into a written agreement for the sale and purchase of the partnership business as a going concern together with the goodwill and certain assets for a consideration, part of which was to be satisfied by the allotment of 3,000 fully paid shares to each partner on the date of the Sale Agreement.  The balance of the consideration, which consisted of the goodwill valued at £1,251,565 and the net book value of the other Sale Assets as defined less the £9,000 attributable to the shares, was left outstanding as a debt.

 

8. Also on 30 January 2004 the Appellant allotted 3,000 ordinary shares to each of the partners and each partner was appointed a director.

 

9. The acquisition of the goodwill was shown as an addition to intangible assets in the Appellant’s accounts to 31 March 2004 and a charge of £13,906 amortisation was included in the profit and loss account and the calculation of profits for corporation tax.

 

10. The Revenue opened an enquiry into the Appellant’s return and issued a closure notice on 22 December 2005 followed by an amended assessment.  The Appellant appealed and subsequently asked for a review.  The review upheld the decision and the appeal was notified to the Tribunal.

 

11. The Sale Agreement included the following:

 

Recital B  “The vendors have agreed to sell and the Purchaser has agreed to purchase from the opening of business on the date of the Agreement (the ‘Sale Date’) the Business as a going concern together with the goodwill …

 

Clause 1 (Sale and Purchase) provided,

 

“1.1 The Vendors sell and the Purchaser purchases with full title guarantee as at and from the Sale Date the Business as a going concern … including … the following assets of the Business (the ‘Sale Assets’):

…

1.1.3 the goodwill of the Business (‘the Goodwill’);

…

1.3 As and when required by the Purchaser the Vendors shall at the expense of the Purchaser execute and sign all such deeds, documents, assurances and do all such acts and things as shall be reasonably required for vesting in the Purchaser the Business and the Sale Assets … PROVIDED THAT as from the Sale Date … the Vendors shall hold … the [Sale Assets] in trust for … the Purchaser.”

 

Clause 2 (Consideration) provided,

 

“…

2.2 The consideration for the sale and purchase of the Goodwill shall be the Goodwill Value [£1,251,565] and the residue of the consideration for the sale hereby agreed shall be the net book value of the Sale Assets (other than the Goodwill) …

2.3 The consideration shall be satisfied as follows:-

 

(a) as to the sum of £9,000 by the Purchaser allotting and issuing on the Sale Date 3,000 ordinary shares of £1 each … to each of the Vendors …; and

(b) as to the balance, being paid by the Purchaser to the Vendors in the manner set out in Clause 4.2.”

 

Clause 4 (Completion) provided,

 

“4.1. Completion of this Agreement shall take place on the date hereof when:-

4.1.1 the Vendors shall deliver to the Purchaser an assignment duly executed by the Vendors and a licence to assign duly executed by the Vendors and the landlord in respect of the Vendors leasehold interest …;

4.1.2 the Vendors shall deliver … such of the Sale Assets as shall be capable of transfer by delivery …;

4.1.3 the Vendors shall and hereby do fully and effectively transfer and assign to the Purchaser all the remaining Sale Assets …;

4.1.4 the Vendors shall permit the Purchaser to … take possession of and conduct of the Business;

4.1.5 the Purchaser shall procure that duly convened meetings are held at which the Consideration Shares are allotted and issued …;

…

4.2 The consideration to be satisfied in cash in accordance with Clause 2.3 … shall be left outstanding as a debt owing from the Purchaser to the Vendors and repayable in accordance with a shareholders agreement entered into … on even date herewith …”

 

12. The minutes of a meeting of the sole director at 2.00pm on 30 January 2004 recorded at paragraph 6 that the Sale Agreement was approved and at paragraph 7 that the meeting adjourned for the Sale Agreement to be executed, which was reported on resumption; paragraph 8 recorded that it was resolved that the shares be allotted and issued fully paid to the three partners.

 

The legislation

 

13. Schedule 29 of the Finance Act 2002, which was repealed by the Corporation Tax Act 2009, enabled a company to amortise goodwill for tax purposes.

 

Paragraph 118(1) of the Schedule provided so far as relevant,

 

“(1) Except as otherwise expressly provided, the provisions of this Schedule apply only to intangible fixed assets of a company (‘the company’) that –

 

(a) …

(b) are acquired by the company after [1 April 2002] from a person who at the time of the acquisition is not a related party in relation to the company; or

(c) …”

 

14. Under paragraph 95 a participator in a company was a related party in relation to such company.  Under paragraph 100 a participator had the same meaning as it has under section 417(1) of the Taxes Act 1988 except that it did not include a person only by reason of being a loan creditor.  Under Section 417(1) a participator includes,

 

“(a) any person who possesses or is entitled to acquire, share capital or voting rights in the company.”

 

Section 417(1) also provides that “references to being entitled to do anything apply where a person is presently entitled to do it at a future date, or will at a future date be entitled to do it.”

 

Appellant’s submissions

 

15. Mr Powrie served a skeleton argument and a response to the skeleton argument for the Revenue.

 

16. His primary contention was that the allotment of the shares to the partners and their appointment as directors occurred after and as a consequence of the acquisition by the Appellant of the goodwill.

 

17. He said that under the Sale Agreement the goodwill was transferred with effect from the opening of business under Recital (B); when the Sale Agreement was signed later in the day, the goodwill was retrospectively deemed to have been transferred from 9.00am at which time beneficial ownership passed.  This was a normal matter of business efficacy.  The acquisition of goodwill was therefore before the partners became entitled to the shares, and so became related parties.

 

18. Alternatively, Mr Powrie submitted that clause 4 of the Sale Agreement provided for an iterative process under which the partners were obliged to perform their obligations under clause 4.1.1-4 before they were entitled to the issue of the shares.  He submitted that there was a moment in time when the Appellant had acquired the goodwill before the parties acquired the right to the shares.

 

19. He submitted that, if it was not accepted that clause 4 provided a timetable determining the order of events, that clause contained conditions precedent to the right to the shares, including the need to produce a licence to assign the property interests executed by the landlord.  If the partners had done nothing after the Sale Agreement they could not have obtained specific performance of the issue of the shares.

 

20. Mr Powrie said that Palmer v Lark [1945] 1 Ch 182 where Vaisey J said at page 184 that payment of purchase money and delivery of conveyance were to be simultaneous was fundamental only where specific performance is ordered; the principle could not be applied to the issue of shares as consideration.  He said that Paynter v James (1867) LR 2 CP 348 relied on the terms of the contract which were different; there was no stipulation in the present case as at page 357 that the “acts are to be concurrent”.  Parway Estates Ltd v Inland Revenue Commissioners (1958) 45 TC 135 was not relevant because it dealt with when the relationship was broken not with when it was created; here no beneficial ownership was possible until the shares were issued.

 

Submissions for Revenue

 

21. Mr Tidmarsh said that the acquisition of the goodwill by the Appellant could not be before the making of the Sale Agreement at the meeting at 2.00pm.  It was open to the parties to deem that the goodwill passed earlier but that was not the same as actual passing.

 

22. He said that on making the Sale Agreement the partners were entitled to specific performance because they were ready, willing and able to perform their obligations.  Their entitlement to acquire the shares was simultaneous to the acquisition by the Appellant of the goodwill.

 

23. He referred to Greenbank Holdings Ltd v Revenue and Customs Commissioners [2010] UKFTT 109; [2010] SFTD 653 where the background to Schedule 29 was considered at [10] to [19].

 

24. He said that paragraph 118 could apply either to intangible fixed assets created before the commencement date, 1 April 2002, or created after.  Pre-commencement assets acquired after commencement were not covered if acquired from a person “who at the time” was a related party.  Paragraphs 387 and 388 of the Explanatory Notes to the Finance Bill 2002 provided an explanation of the mischief: paragraph 118(1)(b) was directed to assets in existence before 1 April 2002 which remained held “within the same economic family” after the acquisition.  Here the goodwill plainly remained in the same economic family.  He said that the Explanatory Notes are admissible aids to construction to show the mischief at which a statute is aimed, see per Lord Steyn at page 2959 in R (Westminster City Council) v National Asylum Support Service [2002] 1 WLR 2956.  He submitted that “at the time of the acquisition” included a person becoming a related party at such time.  This was consistent with the purpose of the statutes as well as with normal language.  There was no difference in principle between a person who became a related person on acquisition and one who was related before: in both cases the transferor started and ended with the same economic relationship to the asset, and the asset moved seamlessly from the transferor to a company where the transferor had the same interest.  A contrary conclusion would mean that the restriction in paragraph 118(1)(b) could easily be side-stepped.

 

25. He said that any absurdity arising from a transaction in which the vendor becomes a very minor participator arises from the definition of related party not from the words “at the time of the acquisition.”

 

26. Mr Tidmarsh submitted that the relevant issue was whether the partners were a related party at the time of the acquisition of the goodwill, not whether they were a related party “immediately before”; it mattered not that they became a related party at the time of acquisition.  The question was whether at the time of the acquisition of the goodwill the partners were within section 417 of the Taxes Act 1988 entitled to acquire the shares.  This turned on the Sale Agreement.

 

27. He said that clause 4.1 set out the events which were to happen on completion; under clause 4.1.5 the partners were entitled to have procured duly convened meetings to allot and issue the shares.  They could compel the issue of the shares.  In normal speech if someone is capable of bringing something about he is entitled to it.  The partners would have been entitled to acquire the shares even if this depended upon prior payment.

 

28. He said that he had cited Palmer v Lark, Paynter v James and Parway Estates in his skeleton argument in order to counter the argument that the obligation to issue the shares was subject to conditions precedent or that there was a conditional contract as opposed to a contract with mutual obligations.  In Parway Estates the argument that the contract was conditional was rejected, see page 147-8.  In Paynter v James it was held that readiness to perform was enough.  For the present purpose there was no difference between conditions precedent and a conditional contract; here the obligations were mutual and not conditional.

 

Reply for the Appellant

 

29. Mr Powrie said that the test had nothing to do with the assets remaining in the same economic ownership since it applied equally whether the participator had 1 per cent of the shares or 100 per cent.

 

30. He submitted that the shares were issued in consequence and after the transfer of goodwill rather than in return for a promise or obligation to transfer.

 

Conclusions

 

31. We have no hesitation in accepting the submissions of Mr Tidmarsh.  The decision is as long as it is because it is only the second decision of which we are aware on paragraph 118 and out of courtesy to the well-expressed skeleton argument and submissions by Mr Powrie.

 

32. In our judgment the Sale Agreement gave rise to mutual obligations all of which arose at the same time when the Sale Agreement was concluded.  We do not accept that there were conditions precedent to the obligation of the Appellant to allot and issue the shares or that the obligation was conditional.  On the Sale Agreement being made the partners became entitled to the shares and thereby became participators.  What mattered was the entitlement to have the shares allotted and issued not when the allotment or issue occurred.

 

33. The fact that Recital (B) may have had the effect that for commercial purposes the transfer of goodwill may have been related back to the opening of business earlier in the day, does not have the effect that as a matter of law for tax purposes the acquisition of goodwill occurred earlier.

 

34. In our judgment the words in paragraph 118(1)(b) “at the time of the acquisition is not a related party” did not apply to the situation in this case when the persons in question became related parties at the same moment in time as the time of the acquisition.  The exclusion of related parties was not limited to persons who immediately before the acquisitions were related parties.  We do not derive great assistance from the Explanatory Note however we do accept Mr Tidmarsh’s submission that the construction of paragraph 118(1)(b) as applying when a person became a participator at the same time as the acquisition is consistent with the purpose of the statute and with normal language.

 

35. The appeal is dismissed.

 

36. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

THEODORE WALLACE

TRIBUNAL JUDGE

 

RELEASE DATE: 4 February 2011