Beadnall Copley Limited v The Commissioners for HMRC

This is an appeal against five Closure Notices disallowing, as a deductible expense for corporation tax in the five accounting periods up to 31 October 2017, the appellant’s claim for amortisation of goodwill arising on incorporation, in 2013, of the business operated by the appellant.

We had a Hearing Bundle extending to 362 pages and an Authorities Bundle extending to 220 pages. We had Skeleton Arguments for both parties. We heard no evidence since the facts are not in dispute and it is a matter of agreement that the notices of enquiry were issued within the statutory time limits.

HMRC have identified a clerical error relating to the Closure Notices for the periods ending 30 April 2014 and 31 October 2014 as follows:

HMRC requested that if the appeal were to be dismissed then the relevant Closure Notices should be varied by the Tribunal.

The parties were agreed that the clerical error did not invalidate the Closure Notices and that there were no procedural defects. We agreed. HMRC has discharged its onus of proof in relation to procedural issues. The Closure Notices were timeously and competently issued.

Mr Cruddas argued that the Opinion of Counsel that had been lodged as an annex to Mr Marshall’s Skeleton Argument should be excluded since it could not be viewed in context. Mr Firth did not appear and no instructing paperwork or notes of any calls or meetings had been lodged. It may be that he was not in possession of all of the facts. For example he narrated simply that when Mr Copley retired he transferred his rights and interests to Mr Beadnall. As our findings in fact make clear that is not the whole story.

We allowed Mr Marshall to refer to the arguments in the Opinion on the basis that he simply adopted them as his arguments.

On 4 February 1999, Mr A D Beadnall and Mr D J Copley signed a Partnership Agreement for a partnership styled Beadnall & Copley (“the Partnership”) to run an estate agency business which, in fact, had been in existence since 11 November 1991. We do not have a copy of the Partnership Agreement.

Mr Copley retired on 31 October 2010 bringing the Partnership to an end. The parties were not agreed on the terms of that departure. Mr Beadnall continued the business as a sole trader. Eventually on 26 September 2011, they signed a Deed of Retirement which confirmed the termination of the Partnership the previous year and the relevant terms of which include:

Clause 9.1:

Although the Partnership Property was described as goodwill and all of the assets, in fact, the fixed assets were purchased separately for a price of £30,111. All of the other assets and liabilities remained in Mr Beadnall’s sole trader business which was responsible for collecting the remaining debtors and meeting its remaining liabilities.

The sum of £450,000 was described as 50% of the market value of the business. Mr Beadnall then continued to run the same business as a sole trader until 5 April 2013 when the appellant was incorporated. Mr Beadnall was the appellant’s sole director and shareholder. On incorporation of the appellant, Mr Beadnall transferred the sole trader business to the appellant.

The appellant recognised £900,000 of goodwill in the first set of accounts. 50% of the goodwill was attributed to Mr Beadnall’s original share of the partnership business and treated as pre-2002 goodwill which is not eligible for amortisation. That treatment is a matter of agreement between the parties.

The other half of the goodwill has been amortised in the appellant’s corporation tax self-assessment returns for the accounting periods ending 30 April 2014 and subsequent periods up to and including the accounting period ended 31 October 2017. It has been treated as an acquisition of what was described as Mr Copley’s share of the goodwill.

It is not in dispute that

The parties are agreed that the tax rules for dealing with intangible fixed assets are contained in Part 8 Corporation Tax Act 2009 (“CTA”). Section 715 of CTA provides that Part 8 applies to goodwill as it applies to an intangible fixed asset and that goodwill has the meaning it has for accounting purposes.

Provided that the relevant conditions are met, relief is available for the amortisation of goodwill under Section 729 CTA.

Section 882 CTA sets out the general timing rule to identify which assets fall within Part 8 of CTA. The relevant provisions read as follows:-

Section 884 CTA reads:-

It is a matter of agreement that the only substantive issue is whether Mr Beadnall, as an intermediary within the meaning of Section 882(4) CTA ie Case B, had “acquired the asset”, namely, the goodwill, “on or after 1 April 2002 from a third person”, namely Mr Copley.

HMRC identify three sub-issues in that regard namely:-

Mr Marshall agreed that those were the sub-issues.

HMRC argue that:-

The appellant argues that:-

Both Mr Firth, and therefore Mr Marshall (so henceforth we refer only to the appellant when referencing argument) and HMRC quoted from Laddie J at paragraph 19 of Byford which reads:

HMRC, appropriately, quoted more extensively from that paragraph as Laddie J went on to say:

There is no dispute that in this instance, as in Byford, there was no special provision in the partnership agreement, and for the reasons we set out below that is an important point.

The appellant’s argument is somewhat confusing. On the one hand the appellant accepts that Byford expressly statesthat the partners do not own partnership assets but on the other hand the appellant goes on say that because paragraph 19 accepts that partners have an interest in the net realised value upon dissolution that is merely “…to confuse the legal question of ownership with the practical question of realisability.”.

We say confusing because the issue for us is to establish, as a matter of law who owned the goodwill which was an asset of the Partnership.

The appellant argues that HMRC’s reliance on Byford is misconceived because HMRC confuse the legal position with the practical position and if the partners do not own the assets, it cannot be the partnership so it must be the partners.

That is certainly a circular, and in our view, a tortuous argument.

In support of that argument the appellant relied on Arden LJ, as she then was, at paragraph 60 in HMRC v Anson (Footnote: ³ ) where she said:

It is also consistent with Lord Jauncey in Hadlee and another v Commisioner of Inland Revenue (Footnote: ⁴ ) (“Hadlee”) where he approved Richardson J in the Court of Appeal of New Zealand in the following terms:

We have added that emphasis since the question is who owned the goodwill prior to 31 October 2010 when Mr Copley retired.

In oral argument Mr Marshall said that Hadlee was not relevant because it turned on differences in the laws of New Zealand and Australia whereas Mr Firth’s opinion was that Hadlee was supportive of the appellant’s case. We take only from Hadlee the very persuasive fact that Lord Jauncey was quoting from, and endorsing, Lindley and Banks on Partnership which is the authoritative textbook on partnership.

The appellant relied upon Lee v Jewitt (Footnote: ⁵ ) for the proposition that a partner can have title to goodwill. That case was concerned with whether legal expenses had been incurred for the purposes of defending title to goodwill.

An issue in the underlying litigation was the nature of payments made by incoming partners to the existing partners. The partnership agreements stipulated that the payments were for goodwill but in that litigation, relating to dissolution of the partnership, the new partners argued that the payments had been a premium and should be returned. The Special Commissioner noted that the litigation was settled after the High Court Judge concerned expressed an opinion, understandably given the contractual arrangements, that it was not a premium but was for goodwill. He went on to consider the terms of correspondence relating to the litigation which made it clear that the purpose of the litigation was to argue that the payments were not a premium but had been for goodwill.

We do not find that that case assists us, firstly because it turns on its own facts but secondly because it did not consider whether it was payment for the equitable or beneficial interest in the partnership and thus the underlying assets.

HMRC relied on Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (Footnote: ⁶ ) where the High Court of Australia said at paragraph 12:

We agree with that analysis.

It seems clear to us that whatever the arguments might be about “realisability”, the individual partners did not own the goodwill prior to the dissolution of the partnership. The legal position is that, as was stated in Byford, the partners did not own the underlying assets including the goodwill. They both had a beneficial interest in the goodwill but did not own it in whole or in part.

The appellant’s argument that the partnership could not own it since the partnership was not a legal entity is a red herring. The partners had a future interest in the value of the goodwill on the dissolution of the partnership.

We came to our decision on this sub-issue when discussing the outcome shortly after the hearing. We are fortified in our view by the recent decision, Thomas v LUV ONE LUV All Promotions Limited and Another (Footnote: ⁷ ) (“LUV”) where the court considered Byford and endorsed the views of Mr Justice Laddie. In particular, at paragraph 16, it found that all of the partners

That takes us to the second sub-issue.

Mr Marshall’s argument was that Byford was a very rare case because when a partnership dissolves it would be “rare” for all of the individual partners to want to retain goodwill. That is quite simply wrong. Not only are we a specialist Tribunal and therefore aware that there are frequently arguments about the right to goodwill but LUV makes that explicit.

In Byford, Laddie J did consider Burchell at paragraph 24 and in particular stated:

He explained that the former partners in Burchell were found to have owned the name and goodwill as tenants-in-common because they had an agreement to that effect. The appellant argues that the Retirement Agreement was such an agreement.

We disagree. The Partnership was dissolved in 2010 and the Retirement Agreement negotiated at arms-length and concluded almost a year later. At the point of dissolution of the Partnership the ownership of the goodwill did not vest in the individual partners. Mr Copley’s interest remained a beneficial interest in his share of the Partnership Property. That is reflected in the terminology used, on legal advice and at arm’s length, in the Deed of Retirement and in particular at Clauses 3.1 and 4.1 (see Paragraph 9 above).

For all of the reasons given above, Part 8 of CTA does not apply and in particular because Mr Beadnall did not acquire goodwill from Mr Copley. The goodwill was not created after 2002, nor was it acquired from an unrelated party and nor does it fall within the provisions of Section 882 CTA.

The appeal is dismissed but the Closure Notices described in paragraph 3 above are varied to the effect set out in paragraphs 3(4) and (5) above.

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.