Milton Park Holdings Ltd & Anor v The Commissioners for HMRC

Mr Sykes KC, on behalf of the Appellants, submitted that the central issue in dispute is whether the accounts of MPHL were prepared in accordance with GAAP, specifically in relation to the recognition of goodwill following the acquisition of the MPP care home business. MPHL did acquire a business and was entitled to recognise goodwill in its accounts. MPHL retained the risks and rewards of the business, and no derecognition of goodwill was required at any subsequent stage.

The MPP business had originally been operated by a partnership comprising MM and EM, together with BHL and BCSL. BHL provided administrative services and BCSL supplied staff. In December 2007, MPHL was incorporated and entered into a Transfer Agreement with MM and EM to acquire the business and its assets, including goodwill valued at £173 million.

Following this acquisition, MPHL acquired MPL, which entered into a new partnership, MCP, initially with SM and subsequently with BHL and BCSL. MPHL’s accounts recognised goodwill and amortised it over time, resulting in tax deductions and claims for group relief. MPHL retained ownership of the business assets and MCP was a vehicle for managing the business, not for transferring economic benefits away from MPHL.

The Appellants rely on UK GAAP, including FRS 5, FRS 6, FRS 10 and FRS 11, as well as advisory sources such as IFRS 3 and FRED 36. These standards support the recognition of goodwill where a business is acquired, even if the acquirer subsequently operates the business differently. Under FRS 6, a business combination occurs when one entity obtains control over the net assets and operations of another. Control, as defined in FRS 5, involves the ability to obtain future economic benefits and restrict others’ access to those benefits. MPHL obtained such control through the Transfer Agreement and retained it throughout the relevant periods.

MPHL retained the risks and rewards of the business, both in terms of capital and income. MPHL owned the business assets and was entitled to the proceeds of any sale. Clause 9 of the MCP Deed of Partnership expressly stated that goodwill belonged to MPHL, and this clause should be given effect. MPHL could revoke the arrangement with MPL at any time and did so after 15 months. The partnership was structured so that, after BHL and BCSL received their costs and mark-up, MPHL received the residual profits. MPL acted as agent for MPHL, and the board minutes of 31 December 2007 confirmed that MPL was instructed to manage the business on MPHL’s behalf.

HMRC’s alternative argument that goodwill should have been derecognised following the formation of MCP is rejected. The arrangements did not transfer all significant rights or risks away from MPHL and therefore did not meet the criteria for derecognition under FRS 5. Even if derecognition were required, it would have been reversed when MPHL resumed direct control. HMRC’s current position is inconsistent as it had previously accepted that MPHL acquired a business for the purposes of s162 TCGA 1992, allowing rollover relief on the transfer, That position lacks credibility, particularly given the extensive enquiries conducted over many years.

In conclusion, MPHL acquired a business and was entitled to recognise goodwill in its accounts. The arrangements with MPL and MCP did not deprive MPHL of the risks and rewards of the business. The goodwill clause should be given effect, and no derecognition was required. The appeal should be allowed.

Mr Jones KC and Mr Winter, on behalf of HMRC, submitted that MPHL’s accounts were not prepared in accordance with UK GAAP, and goodwill should not have been recognised. The central issue is whether MPHL acquired a business within the meaning of GAAP. HMRC’s primary position was that MPHL did not acquire a business for accounting purposes and should not have recognised purchased goodwill. In the alternative, even if goodwill was properly recognised initially, subsequent events required its derecognition, either in full or in part.

If MPHL did not acquire a business, the appeals must be dismissed. If a business was acquired, the value of goodwill should have been £51.936 million rather than £173 million, and the associated tax deductions and group relief should be reduced accordingly.

HMRC relied on UK GAAP, particularly FRSSE and FRS 5. Under FRSSE, purchased goodwill may only be recognised where a business is acquired and accounted for as an acquisition. FRS 6 defines a business combination as the bringing together of separate entities into one economic entity, requiring control over both the net assets and the operations of the business.

HMRC accepts that MPHL may have acquired control over the net assets of MPP, including the freehold properties. However, MPHL did not acquire control over the operations of the business, which were instead conducted by MCP. MCP, through its partners, managed staffing, administration, customer contracts and marketing, and assumed the risks and rewards of the business.

HMRC rely upon the accounting principle of “substance over form”. Although the Transfer Agreement and Corporate minutes suggest that MPHL acquired the business and delegated its operation to MPL, the substance of the arrangements shows that MCP was the true operator of the business. MCP, through its partners, controlled staffing, administration, customer contracts and marketing. Profit-sharing arrangements were determined by SM (as managing partner of MCP) and BHL and BCSL provided essential services

MPHL did not have control over the economic benefits of the business. The profits were allocated within MCP and MPHL’s accounts did not record turnover from the care home business. Instead, MPHL received dividends from MPL, which in turn received profit shares from MCP. This structure demonstrates that MPHL did not control the operations or benefit directly from the business.

The approach of the Appellants’ expert, PC, who relies on IFRS 3 to define “business.” is not accepted. UK GAAP does not permit reliance on IFRS 3 in this context and FRSSE and FRS 5 provide sufficient guidance. PC’s reliance on IFRS 3 is misplaced and that his conclusions are inconsistent with the substance of the transactions.

PC’s assertion that MPHL retained the risks and rewards of the business is not accepted. The MCP Partnership Deed shows that profit allocation and control rested with MCP and its Managing Partner. The goodwill clause in the MCP Deed of Partnership, which states that goodwill is owned by MPHL, is legally ineffective as the goodwill cannot be separated from the business and must follow the entity that operates it. A distinction can be made between “legal goodwill” and “accounting goodwill”. Legal goodwill, under case law, is inseparable from the business and cannot be assigned independently. Goodwill follows the business and cannot be retained by an entity that does not operate the business, see IRC v Muller & Co’s Margarine Ltd [1901] AC 217 (“Muller”) and Tin Tin Yat Pao v Tin Tin [2000] IP & T 1109 (“TTYP”).

Even if the MCP Deed purports to assign goodwill to MPHL, this is ineffective because MPHL did not operate the business. The goodwill belonged to MCP, and MPHL had no basis on which to recognise purchased goodwill in its accounts.

In the alternative, even if MPHL initially acquired the business and recognised goodwill, subsequent events required its derecognition. Under FRS 5, goodwill must be derecognised if all significant rights or exposure to risks are transferred. The delegation of operations to MPL and the formation of MCP constituted such a transfer.

HMRC’s expert, EA, explained that if MPHL transferred control of the operations to MPL or MCP, then goodwill should have been partially or fully derecognised. MPHL failed to do so, and the continued recognition and amortisation of goodwill was not in accordance with GAAP.

In conclusion, MPHL did not acquire a business for accounting purposes and should not have recognised purchased goodwill. The substance of the arrangements shows that MCP operated the business and assumed the risks and rewards. MPHL’s role was that of a holding company, and its accounts did not reflect direct involvement in the business operations.

Alternatively, if goodwill was properly recognised, subsequent events required its derecognition. In either case, the tax deductions claimed by MPHL and the group relief claimed by MPL were not allowable.

The JS set out the areas of agreement and disagreement. A copy of the JS is attached to this decision. The JS confirmed the following relevant areas of agreement:

The Appellants’ expert adopted a markedly different analytical approach from that of HMRC’s expert. Rather than commencing with the applicable UK accounting standards, specifically FRSSE and FRS, PC sought to interpret the concept of a “business” by reference to international accounting standards, namely IFRS 3 and FRED 36, which proposed the implementation of IFRS 3 into UK GAAP.

PC’s rationale for this approach was that the FRSSE, while applicable to the Appellants’ financial statements, permits reference to “other accounting standards and UITF abstracts” in respect of transactions not specifically addressed within the FRSSE. He interpreted this provision as authorising recourse to international accounting standards, including IFRS 3. However, he accepted in cross-examination that the FRSSE defines “other accounting standards” as UK issued Statements of Standard Accounting Practice and Financial Reporting Standards, and “UITF abstracts” as pronouncements of the UK’s Urgent Issues Task Force. Accordingly, we agree with HMRC that the FRSSE does not, on its face, justify reliance upon international accounting standards such as IFRS 3.

Further, PC acknowledged that IFRS 3 and FRED 36 were not in force at the relevant time and that FRS 6 remained the applicable standard until its supersession in 2015. PC accepted that, where a conflict arises between a FRED and an extant standard, the latter must prevail. Specifically, he agreed that if the application of a definition from FRED 36 yields a different result from that under FRS 6, the outcome prescribed by FRS 6 must be followed.

PC also conceded that both IFRS 3 and FRED 36 expressly exclude from their scope combinations involving entities under common control, such as the transaction between MPP and MPHL. He nonetheless maintained that the absence of a definition of “business” within FRSSE and FRS 6 necessitated reference to IFRS 3 and FRED 36, which define a business as “an integrated set of activities and assets capable of being conducted and managed for the purpose of providing a return.”

However, we observe that the applicable UK standard, FRS 6, does not require a definition of “business” per se, but rather defines a “business combination” as the acquisition of control over the net assets and operations of another entity. The term “business” is not used in the operative definition, and we accept HMRC’s submission that the need to import a definition from IFRS 3 or FRED 36 does not arise. PC’s reliance on the “Basis for Conclusions” accompanying IFRS 3 and FRED 36 was also scrutinised in cross-examination. He accepted that this material is explicitly stated not to form part of the standard itself. Moreover, he acknowledged that international accounting standards are advisory rather than mandatory sources of GAAP, and that mandatory sources, such as FRSSE, FRS 5 and FRS 6, take precedence where they address the relevant issue.

In conclusion, PC’s justification for relying upon IFRS 3 and FRED 36 rather than FRSSE and FRS 5 and 6 was predicated on a perceived lacuna in the UK standards regarding the definition of “business”. However, we agree with HMRC’s expert that the applicable UK accounting standards do provide a sufficient framework for determining whether a business combination has occurred, and that PC’s reliance on international standards was neither required nor supported by the hierarchy of GAAP sources applicable to the Appellants’ financial reporting obligations.

An “acquisition” is defined in FRS 6 as “A business combination that is not a merger”. It was agreed by the parties and their respective experts that the issue of a merger did not arise on the facts of this appeal.

HMRC submitted that in order to determine whether MPHL acquired a business and there was a “business combination” under FRS 6 it is necessary to consider whether as a result of the Transactions, MPHL “obtain[ed] control over the net assets and operations of MPP”. We agree with HMRC and did not understand it to be disputed that this is the nub of the dispute: the essential question is whether MPHL “obtain[ed] control over the net assets and operations of MPP”. Again, it was not disputed that MPHL needed to satisfy both elements: control over the net assets of MPP and control over the operations of MPP. PC confirmed in cross-examination that it was the operations of MPP that were to be tested as opposed to operations in the abstract [Day2/38/19-24 and 43/2-14] and accepted that this was the key question. [Day2/20/5-12].

HMRC submitted that the starting point is to consider the various statements of what GAAP considers “control” in this context. We agree. The Appellants relied upon the same statements and it is useful to set out the various GAAP statements on “control” in this context.

FRS 5.8 defines control of another entity as:

“the ability to direct the financial and operating policies of that entity with a view to gaining economic benefit from its activities”

FRS 5.54 states:

“control is the means by which the entity ensures that the benefits accrue to itself and not to others. Control can be distinguished from management (i.e. the ability to direct the use of an item that generates the benefits) and, although the two often go together, this need not be so”

FRS 5.56 states:

“the entity that has access to the benefits will usually also be the one to suffer or gain if these benefits turn out to be different from those expected. Hence, evidence of whether an entity has access to benefits (and hence has an asset) is given by whether it has the risks inherent in those benefits”

The Accounting Standards Board’s Statement of Principles for financial reporting (SOP) at 2.3 states:

“… the reporting entity is held to account for all the things it can control – and it gives the reporting entity a determinable boundary – because activities are either within its control or outside its control”.

SOP 2.6 states:

“Direct control is used to determine the boundary of the reporting entity that prepares single entity financial statements. Those financial statements will therefore deal with the gains, losses, assets and liabilities directly controlled or borne by the entity but no other gains, losses, assets or liabilities.”

SOP 2.7 states:

“It may be that, although an entity can influence another entity, it does not control it. Such entities do not comprise a single reporting entity.”

SOP 2.8 states:

“Control has two aspects: the ability to deploy the economic resources involved and the ability to benefit (or to suffer) from their deployment. To have control, an entity must have both these abilities.”

We have proceeded first to first whether MPHL acquired control over the net assets.

EA at paragraph 6.33 of her first report stated:

It was accepted by HMRC in their skeleton argument at paragraph 41 that “The “control over net assets” of MPP element of the “business combination” definition therefore appears met in favour of MPHL. However, this is subject to a substance-over-form view.” HMRC did not challenge either MM or JA in cross-examination that the Transfer Agreement was not executed as written nor that their witness statements did not contain all the necessary facts surrounding the transfer of assets. We have proceeded to consider “substance over form” below.

As stated at paragraph 145 above, HMRC submitted that GAAP requires that the Transactions must be accounted for based on their substance rather than their legal form. The Appellants agreed that the Transactions must be assessed in accordance with their commercial substance rather than their legal form. PC’s view was that MPHL acquired a functioning care home business and retained the risks and rewards associated with that business, notwithstanding the subsequent formation of the MCP and the involvement of other entities as partners.

Both parties relied upon FRSSE 2.2 and FRS 5.14:

Both parties’ experts were agreed on this point. PC stated in his Second Report at 4.17.2:

“4.17.2

To conclude on the required accounting, it is therefore necessary to analyse the arrangements as a whole to determine which party has access to the risks and rewards. It is only by following this process that it is possible to decide which steps in a series of transactions are relevant to determining whether assets or liabilities may be recognised.”

EA agreed in the expert Joint Statement at page 13 under the heading of “Who assumed the risks and rewards of operating the business?” that:

“it is necessary to analyse the arrangements as a whole to determine which party has access to the risks and rewards (EA1 paragraphs 6.23 and 6.45).”

FRS 5.14 states that “A group or series of transactions that achieves or is designed to achieve an overall commercial effect should be viewed as a whole”. HMRC submitted that, as identified by EA, most of the main transactions happened over the course of only five days and, in reality, nothing on the ground changed. The purpose of the series of transactions was to move the business from MPP (the former partnership) via MPHL to MCP (the new partnership). That is the substance of the transactions. We agree. The Appellants did not dispute that the transactions were all pre-ordained and were the result of much discussion with Haslers. The purpose of the transactions is set out in the discussion paper dated 27 March 2007 at paragraphs 33 to 36. MM and JA both accepted in cross-examination that the purpose of the transactions was to move the business from MPP to MCP (MM at Day1/19/19-20/3, Day1/23/23-24/2 and JA at Day1/106/14-17). That objective was achieved; the care home business moved from being carried on by MPP to being carried on by MCP. The application of that principle is considered below.

Both parties relied on FRS 5.14, which provides that “in determining the substance of a transaction, all its aspects and implications should be identified and greater weight given to those more likely to have a commercial effect in practice.” Mr Sykes submitted that the Tribunal should give effect to the commercial intention behind the arrangements, which, he argued, was that MPHL would continue to benefit from the income and capital value of the business, including the goodwill. He relied upon the MCP Deed of Partnership and the Transfer Agreement, as well as the evidence of MM and JA, to support the proposition that the arrangements were designed to preserve MPHL’s economic interest in the business. In particular, he emphasised that Clause 9 of the MCP Deed of Partnership expressly provided that the goodwill was to be owned solely by MPHL, and that this clause should be construed purposively and in accordance with commercial common sense.

HMRC submitted that FRS 5.14 undermines, rather than supports, the Appellants’ case. EA emphasised that FRS 5.14 requires an objective assessment of the commercial effect of the arrangements, not a retrospective reconstruction of the parties’ intentions. HMRC argued that the commercial substance of the arrangements, when viewed as a whole, was that control over the business operations and economic benefits passed to MCP and its Managing Partner, SM. They pointed to the MCP Deed of Partnership, which vested control over profit allocation and operational decisions in SM and to the financial statements of MCP, which recorded all turnover and operating expenses. HMRC submitted that these features demonstrated that the commercial effect of the arrangements was to transfer the business to MCP, notwithstanding any contrary declarations in the legal documentation.

We accept HMRC’s submission that FRS 5.14 requires the Tribunal to assess the commercial substance of the arrangements, giving greater weight to those aspects that are more likely to have a practical effect. The evidence demonstrates that the formation of MCP and the delegation of operational control to SM were not incidental or theoretical features, but central to the functioning of the business following the transfer. The MCP Deed of Partnership expressly provided that the partners would carry on the business of a care home for their mutual benefit, and that SM, as Managing Partner, would have the final say on profit allocation. The financial statements of MCP recorded all turnover and expenses, while MPHL’s accounts recorded no trading income and described its role as that of a holding company. These features are consistent with the conclusion that the commercial effect of the arrangements was to transfer the business to MCP.

While the Appellants placed weight on Clause 9 of the MCP Deed of Partnership, which purported to reserve the goodwill to MPHL, we have found that this clause referred to legal goodwill and did not confer control over the economic benefits of the business for accounting purposes. As we conclude below, legal declarations of ownership cannot override the objective assessment of control required under GAAP. The Tribunal must assess who had the ability to direct the financial and operating policies of the business with a view to obtaining economic benefits. On the evidence, that power rested with MCP and its Managing Partner, SM. Accordingly, the application of FRS 5.14 supports the conclusion that MPHL did not acquire or retain control over the business and was not entitled to recognise goodwill in its accounts.

It was common ground between the experts that the two key areas for analysis in order to determine whether MPHL acquired control of the business are: (i) who assumed the risks and rewards of operating the business and (ii) did the operations pass to MCP? As identified by HMRC, these are connected questions because the analysis of risks and rewards affects whom GAAP views as controlling the business operations. We have first considered whether the operations passed to MCP.

The Appellants rely upon the MCP Deed of Partnership in support of the submission that “MCP was a partnership to manage, rather than to own, the business assets of MPHL”. FRS 5.54 states that control is to be “distinguished from management (i.e. the ability to direct the use of an item that generates the benefits) and, although the two often go together, this need not be so.” We do not agree with the Appellants’ submission and prefer HMRC’s submissions for the following reasons.

Under the heading of “Background” in the MCP Deed of Partnership at (A) is stated: “The Partners [MPL] and [SM] operate a care home business under the name Milton Care”. At (B) it is stated: “The Partners wish to record the terms of their Partnership in this Deed.”

“Business” is defined as the “business of Milton Park or such other business as may be carried on by the Partnership from time to time”. “Corporate Partner” is defined as a “Partner who is a body corporate and who is not directly or indirectly involved in the management of the Partnership and for the avoidance of doubt, MPL is a Corporate Partner”. “Managing Partner” is defined as “means [SM]”. Clause 2 headed “Basis of Agreement” states at clause 2.1 “The Partners shall during this Agreement carry on the business of a care home for their mutual benefit as provided in this Agreement.” No reference is made anywhere in the MCP Deed of Partnership that it is for the benefit of anyone other than the Partners. MM was taken during cross-examination to clause 2.1 of the MCP Deed of Partnership and confirmed that MCP was carrying on the business of the care home [Day1/43/19-20]:

“Q. Well, I think there is a distinction that is sometimes drawn between these two things. If you look at the partnership agreement, going back to clause 2.1 that we looked at, 6082 is the page: “The partners are to carry on the business of a care home for their mutual benefit as provided in this agreement.” So they aren’t acting as managers, they are carrying on the business of the care home, aren’t they?

A. They are.”

MM confirmed in respect of the case home business that it was operated by MCP [Day1/84/25-85/2]:

“Q. That business, the care home business is run by MCP?

A. It’s operated by MCP, yes.”

The same point was put to PC in cross-examination which he accepted [Day3/33/25-34/7]:

“Q. Yes? So we have that in the bundle at 6079. So it is dated 1 January 2008, it is between MPL and Sean McInerney. Then it recites on the next page that the partners operate a care home business trading under the name Milton Care. I would note that it doesn’t say there they are acting as managers for somebody else. The partnership is said to operate a care home business.

A. Yes. It is a bold factual statement. Yes.”

and [Day3/34/11-24]:

“Q. Under the recital the partners wish to record the terms of the partnership in this deed. Then if we look at clause 2.1, which is on page 6082: "The partners shall, during this agreement, carry on the business of a care home for their mutual benefit as provided in this agreement." So, again, it does not say that they are managing a care home for the benefit of somebody else. They are carrying on the business of a care home for their mutual benefit. Again, that suggests, doesn't it, that the partnership is operating the care home business not for somebody else, but for the partners. Would you agree with that?

A. Yes.”

It was not suggested by any of the Appellants’ witnesses in oral evidence or in the Appellants’ submissions that the MCP Deed of Partnership did not reflect what the parties had agreed. No suggestion of “sham” is made by HMRC.

In our judgment, the conclusion that MCP was operating the business is reflected in the accounts of MCP, which recorded all of the turnover from the care home business and related operating expenses. The Partners’ Certificate in the 31 March 2008 accounts was signed by MPL, BCSL and SM and confirmed that “We approve the accounts set out on pages 2 to 6 disclosing a profit of £2,542,132 and confirm that we have made available all relevant records and information for their preparation.” The Accountants’ Report confirmed that:

“In accordance with the engagement letter dated 28 January 2009 we have compiled the financial information of Milton Care Partnership which comprises the Trading and profit and loss account, the Balance sheet and the related Notes from the accounting records and information and explanations you have given to us.

…

You have approved the financial information for the period ended 31 March 2008 and have acknowledged your responsibility for it, for the appropriateness of the accounting basis and for providing all information and explanations necessary for its compilation.

We have not verified the accuracy or completeness of the accounting records or information and explanations you have given to us and we do not, therefore, express any opinion on the financial information.”

MM accepted in cross-examination that MCP’s accounts gave a true and fair view and that he had signed the accounts [Day1/95/17-96/8]:

“Q. … That’s turnover from running the care home, isn’t it?

A. I don’t ... I don't recognise this. I didn’t get that heavily involved to read all the notes, to be honest with you.

Q. I think you’d signed the accounts --

A. Yes, I certainly did.

Q. -- on 5227.

A. Yes, I signed lots of things. I’m relying on Haslers. We talked about global figures of profits and said the overall performance of the various partnerships, and they presented this level of accounts. This is beyond my skill set. So I don't read all the notes.

Q. Were you satisfied that these accounts gave a true and fair view?

A. Yes, I would have trusted them to give a true and fair view, exactly.”

The MCP accounts for the period ended 31 March 2008 record turnover and costs of sale. When the cost of sales under “Notes to the Accounts” is examined, it is clear that costs relate to the costs of running a care home and not the costs attributable to MCP being a manager of a care home. The accounts do not record MCP being remunerated with a management fee, salary, commission or remuneration that one would expect to see if MCP were acting as a manager of the care home.

EA, in the JS, highlighted as significant the fact that MCP’s financial accounts recorded the turnover generated by the care home business, rather than MPHL’s accounts doing so. In accordance with SOP 2.6, this accounting treatment indicates that MCP, and not MPHL, was the entity exercising control over the economic outcomes of the business – namely its profits, losses, assets and liabilities. AE in the JS at page 16 under the heading of “Did the operations pass to MCP?” attached weight to the fact that the business turnover was reported by MCP rather than MPHL:

“Dr Alford does not agree with Mr Chidgey’s view that the reasons she quoted to support the transfer of commercial substance to MCP are only concerned with the management and day to day running of the business.

She notes that:

(a)

All turnover arising from the business was reported by MCP rather than MPHL. This implies that MCP was the entity able to control the gains, losses, assets and liabilities of the business (SoP 2.6, EA1 paragraph 5.97);

(b)

MPHL’s instruction to MPL also gave full autonomy to MPL with regards to the conduct of the business.

(c)

MPL subsequently formed MCP with Sean McInerney to conduct the business with Sean McInerney having the final decision on profit sharing arrangements.”

PC variously stated in cross-examination ([Day3/105/25] – [Day3/109/4]) that MCP’s accounts were not necessarily inconsistent with the notion that MPHL had control over the care home business, but it is difficult to see how that could be so when looking at the substance of the matter: MPHL simply recognised no part of the turnover or costs of a business which, on the Appellants’ case, it is supposed to wholly own and control. That does not accord with the terms of SOP 2.6 that “Those financial statements will therefore deal with the gains, losses, assets and liabilities directly controlled or borne by the entity but no other gains, losses, assets or liabilities” nor present a true or fair view. When asked if he agreed that the way in which the accounts were drawn up suggested that MCP had control of the business he responded:

“No … Because I know what happens around it. So it could, but it doesn’t necessarily indicate that, because the important thing is where the profit goes, not the fact of who accounts for the turnover.” [Day3/106/15-24].

When asked how the MCP accounts showed a true and fair view when they showed its profits and losses as being the profits and losses of a business that he said it did not control he answered:

“Well, they show the profit and loss accounts of the limited business which they were instructed to carry on, which was to look after the day-to-day operations of the Milton Care Hospital, within the bounds of the way that the partnership was set up.” [Day3/108/14-22]

In our judgment, the opinion expressed by PC is difficult to reconcile with the substance of the arrangements. MPHL did not record any of the income or expenditure associated with the care home business, despite the Appellants’ assertions that it both owned and had control of the business. We consider that this omission from the accounts is inconsistent with the requirements of SOP 2.6 and undermines the notion that MPHL presented a true and fair view of its financial position.

HMRC submitted that it was relevant that the trademarks used in operating the business were registered to BHL and it was BHL’s address that featured on marketing material. Likewise, all end-customer agreements and invoices carried the address and trademarks of BHL, not of MPHL, and provided payments should be made to BHL’s bank account [SOAFI/33/d-f]; and it was BHL, not MPHL, which was the registered person under the Care Standards Act 2000 and was thus the recipient of a statutory notice and reports. We do not consider that the fact that BHL held the trademarks, all end-customer agreements etc. and was the registered person to be determinative when considering whether MCP operated or managed a care home. It is clear from JM’s witness statement and from MM’s evidence that the CQC did not have any objection to BHL being the registered person for the purposes of the Care Standards Act 2000. Similarly, we accept MM’s evidence at paragraph 73 of his first witness statement dated 29 November 2021 which stated:

“I did not and still do not see any problems that the same brand was being used by all businesses in common ownership and this seems typical with lots of groups that I can think of that are similarly organised like Virgin, the Priory, and Bupa for example.”

What we do consider to be determinative is that BHL along with BCSL were admitted to the MCP as partners. It was MCP, through its managing partner, SM, which had control over the staff and administrative services supplied by BHL and BCSL. The Statement of Agreed Facts records that it was agreed that MCP controlled the staff, see paragraph 65 above under the heading “the Operation of Milton Park Hospital”.

Mr Sykes submitted that MPL acted as agent for MPHL. No assets were transferred to MPL and it acted on bare instructions to manage the business on a day-to-day basis. Reliance is placed on the minutes of a MPL Board meeting dated 31 December 2007 which stated at paragraph 2:

“… the purpose of the meeting was to consider and if deemed fit, to approve an arrangement with Milton Park Holdings Limited, the Company’s parent company (“MPHL”), whereby, on behalf of MPHL, the Company will conduct the day to day management and execution of a care home business recently acquired by MPHL.” [emphasis added]

That, it is submitted, makes the agency relationship clear and that clear language is consistent with JA’s evidence that MPL’s role could be terminated at will: “It would have been understood at the time that the role could be terminated at will. There would have been no reason to give MPL any greater right.” That view is reinforced by the decision to dispense with MPL being implemented by short minutes at the MPHL Board Meeting on 31 March 2009. The minutes stated that “the purpose of the meeting was to consider and if deemed appropriate, arrange for the Company to assume the role within the business of MCP previously undertaken by MPL.” The fact that turnover was recorded in MPL’s accounts rather than MPHL’s does not alter the position, the rightness or wrongness of the accounting adopted in this point does not form part of the appeal.

PC considered that MPL was an undisclosed agent of MPHL as recorded under “4 Issue: Goodwill – continuing recognition” on page 20 of the JS at Appendix 2:

“MPL was either an undisclosed agent of MPHL in which case MPHL should have accounted for the profit share for the period up until it revoked the instruction (and MPL accounted for commission if any) (See PC1 5.4.9);”

PC’s First Report at 5.4.9 stated:

“5.4.9

It is arguable that, given the inability of MPL to control the benefits coming from the business assets, it was in fact acting as a management agent for MPHL and it should not have accounted for the share of profits from the business. Application note G of FRS 5 although dealing with revenue requires that if an agent is acting on behalf of a principal, any amounts received or receivable from a customer which are payable to a principal should not be included in the agent’s turnover. On this view the share of the profits should have been accounted for directly by MPHL rather than in MPL.”

We note that the minutes of MPHL Board Meeting on 31 December 2007 (at paragraph 49 above) make no reference to MPL being appointed as or acting as agent of MPHL. We would have expected such an appointment to be recorded by MPHL.

We were referred by HMRC to Bowstead & Reynolds on Agency 23 edn. at 1-001 which states:

“(1)

Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his legal relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to the manifestation.”

HMRC submitted that here there is no such express or implied manifestation of assent to that effect and as there is no written agency agreement in evidence one needs to consider if such an agreement can be gleaned from the facts. HMRC relied upon the following facts as all pointing away from there being such an agency agreement:

We agree with HMRC’s submissions. There are no documents recording any proposed remuneration or commission for MPL for acting as purported agent of MPHL and nor do the accounts record any such commission payments being made to MPL. No explanation or reason has been advanced as to the purported benefit that MPHL would derive from MPL acting as its agent. The Minutes of the MPL Board Meeting dated 31 December 2007 record at paragraph 4 (paragraph 50 above) that “it is agreed that MPL shall have full autonomy with regard to the conduct of the Business”. In the absence of any limit on MPL’s purported authority as agent, MPHL is bound by any legal rights or obligations that MPL entered into or created with third parties, a position that is clearly at odds with MPHL retaining control over the operations.

In respect of point (4) above, PC stated in the JS at page 20:

“MPL was either an undisclosed agent of MPHL in which case MPHL should have accounted for the profit share for the period up until it revoked the instruction (and MPL accounted for commission if any) (See PC1 5.4.9)”.

At 5.4.9 of PC’s first report he stated:

“It is arguable that, given the inability of MPL to control the benefits coming from the business assets, it was in fact acting as a management agent for MPHL and it should not have accounted for the share of profits from the business. Application note G of FRS 5 although dealing with revenue requires that if an agent is acting on behalf of a principal, any amounts received or receivable from a customer which are payable to a principal should not be included in the agent’s turnover. On this view the share of the profits should have been accounted for directly by MPHL rather than in MPL.”

In our judgment, PC’s view of the accounting treatment that should have been adopted by MPHL if MPL were its agent supports HMRC’s submission that the facts point away from there being an agency agreement.

In respect of point (5) above, HMRC’s submission accords with the evidence given by MM. MM was asked in cross-examination what he meant by “using MPL as an agent or the like?” and answered in terms of a subsidiary rather than an agent (Day1/49/7-17):

“A. This, again, goes back to what I was talking about earlier, my concerns about the information that was going to end up in the public domain. As I recall, speaking to Haslers, they came up with the solution if we put a limited company as a subsidiary and then they can take profits which can be then passed up to MPHL, it would overcome this level of information problem that I had, being in the public domain.

Q. Right. You refer to it being a subsidiary of, I infer, a subsidiary of MPHL. Is that --

A.

It was owned by MPHL. Yes.”

That understanding was similarly confirmed by JA in her oral evidence, (Day1/116/13-18).

Even if MPL were acting as an agent, that would not establish that MPHL had control over the business for GAAP purposes. As FRS 5.8 makes clear, control requires the ability to direct the financial and operating policies of the entity with a view to obtaining economic benefits. The evidence does not support the conclusion that MPHL had such control. Accordingly, we reject the Appellants’ submission that MPL acted as MPHL’s agent in a manner that preserved MPHL’s control over the business.

For all the reasons set out above, we find that the operations of MPL passed to MCP.

The Appellants’ position is that the substance of the transactions did not deprive MPHL of the risks and rewards of the business which it acquired. In the JS, beginning on page 13 under the heading of “Who assumed the risks and rewards of operating the business?”, PC stated:

“MPHL acquired control over access to the principal risks and rewards of the business through the Transfer of Partnership Assets & Liabilities agreement. The fact that MPHL then set up a structure (MCP) to operate the business did not mean it had not acquired the rights to the principal benefits in the first place. These rights were to the proceeds of any future sale of the business and the profits arising from it.

The access to the future sale proceeds was tightly controlled via the various admission deeds to admit new partners to MCP, who were required to withdraw in the event of a sale and the profit sharing was controlled in such a way that MPHL had access to at least 90% of the residual profits. It was MPHL who had the access to the greatest benefits and was therefore most at risk of losing them should the business be a failure. For example, in the event of a severe economic downturn then it would ultimately be MPHL which would suffer. Its profits from the business and any prospective sales proceeds would be reduced and its property assets would ultimately bear any losses.

Based on Mr Chidgey’s analysis in his first report of the way the partnership operated (see PC1 Section 5.3) he concluded that from a commercial perspective the purpose of MCP appeared to be to secure economic inputs for the care home business and that it did not appear to be a vehicle to transfer the economic benefits, namely the benefits from an eventual sale and the residual profits, which rested with MPHL. Rather, it was a means of remunerating the various partners for their inputs to the business. For example, Sean McInerny was remunerated at the rate of £5,000 a year.

It was MPHL which had control over the principal benefits and exposure to the principal risks and accordingly was entitled to recognise the goodwill arising from the acquisition of the business.”

EA’s stated view of who assumed the risks and reward of operating the business was:

“… it is necessary to analyse the arrangements as a whole to determine which party has access to the risks and rewards. [She] agrees that the access to the future profits is a key factor in determining whether MPHL acquired control over the risks and rewards of the business. The admission deeds and profit-sharing clauses in the MCP partnership agreement show that:

(a)

Sean McInerney was the Managing Partner and the only Non-Corporate Partner listed in the MCP Partnership Deed. As Managing Partner, he determined the profit shares to be allocated to the partners.

(b)

The MCP Corporate Partners, MPL, BCSL and BHL, had no voting rights under the Partnership deed.

(c)

MPL was given full autonomy with regard to the conduct of the care home business.

(d)

MPHL was not a Corporate Partner in MCP at the time of the acquisition, so only appeared to have indirect control over any risks and rewards via its shareholding in MPL.

[EA] agrees that MPHL would bear any losses on the property assets as these were retained by the company (EA1 paragraph 6.33(a)). [She] does not believe that this factor determines who assumed the risks and rewards of operating the business as the properties had previously been owned by [MM] and [EM when the previous partnership, MPP, was operating the business.

[Her] view is that these factors suggest that MPHL did not assume the risks and rewards of operating the business operations discussed in the next section.”

We have proceeded to consider the various factors identified by the experts in the JS to determine if MPHL retained the risks and rewards of the business.

The Appellants relied on FRS 5.25, which provides that, in assessing whether an entity retains “significant” benefits or risks, the analysis must focus on those that are “likely to occur in practice” rather than on all theoretical possibilities. Mr Sykes submitted that MPHL retained significant benefits and risks in relation to the care home business, including the right to receive the proceeds of any future sale of the business, the ability to terminate the arrangements with MPL, and the ownership of the real property from which the business was operated. He argued that these rights, when viewed in context, were commercially meaningful and likely to have practical effect. In particular, he contended that the arrangements were structured to ensure that MPHL would retain the economic benefits of the business, and that the retention of goodwill in Clause 9 of the MCP Deed of Partnership was evidence of such intention. PC, in his expert evidence, supported this view, stating that MPHL bore the principal risks of failure and retained access to the principal benefits, including the residual profits and sale proceeds.

HMRC submitted that the Appellants’ reliance on FRS 5.25 was misplaced. AE emphasised that the relevant inquiry is not whether MPHL retained any rights in theory, but whether those rights were significant in practice. She noted that the rights relied upon by the Appellants were either contingent, incapable of practical enforcement, or subject to the discretion of others – most notably the Managing Partner of MCP. HMRC further submitted that the ability to terminate the arrangements or to withdraw the use of the real property did not amount to control over the business or its economic benefits. Rather, such rights, even if exercisable, would not enable MPHL to direct the financial and operating policies of the business with a view to obtaining economic benefits, as required by FRS 5.8. Accordingly, HMRC contended that MPHL did not retain significant benefits or risks within the meaning of FRS 5.25.

We accept HMRC’s submission that the rights retained by MPHL were not “significant” in the sense required by FRS 5.25. That provision requires the Tribunal to assess the significance of benefits and risks by reference to those “likely to occur in practice”, not by reference to all possible or contingent outcomes. On the evidence before us, the rights relied upon by the Appellants, such as the ability to terminate the arrangements with MPL, the ownership of the real property and the purported entitlement to goodwill, were either contingent, subject to the discretion of others or incapable of practical enforcement. For example, the ability to terminate MPL’s role did not confer on MPHL the ability to direct the financial and operating policies of MCP, which was the entity carrying on the business. Similarly, the ownership of the real property, while relevant to the operation of the care home, did not translate into control over the business itself, as the property was not a partnership asset and could be replaced or substituted.

Moreover, the MCP Deed of Partnership vested control over profit allocation and access to sale proceeds in the Managing Partner, SM, and not in MPHL. The evidence of MM and JA confirmed that SM had autonomy in determining profit shares, and that any informal family understanding was not documented and did not override the legal structure. The Tribunal is required to assess the substance of the arrangements, and we find that the economic benefits of the business were controlled by MCP, not MPHL. Accordingly, we conclude that MPHL did not retain significant benefits or risks in relation to the business following the formation of MCP, and that FRS 5.25 does not support the recognition or continued recognition of goodwill in MPHL’s accounts.

FRS 5.3 defines “control in the context of an asset” as “the ability to obtain future economic benefits relating to an asset and to restrict the access of others to those benefits”. PC’s stated view in the JS is that MPHL “acquired control over access to the principal risks and rewards of the business”, which he considers to be “the proceeds of any future sale of the business”. HMRC submitted that by reason of the terms and effects of the transactions entered into, neither the proceeds of any future sale nor the profits arising from the business were, in fact, within MPHL’s control. We agree with HMRC.

The MCP Deed of Partnership recorded that SM was the Managing Partner and that it was the Managing Partner that had control over the entitlement to share in any surplus on the sale of the business. Clause 14.2.3 of the MCP Deed of Partnership made the following provision:

“paying any surplus rateably to the Partners in the same proportions in which they shared profits immediately prior to dissolution”.

Clause 8.2 of the MCP Deed of Partnership stated:

“The profit share of each Partner shall be reviewed by the Managing Partner at the end of each Accounting Period and in the absence of agreement between the Partners, the final decision shall be made by the Managing Partner.”

As made clear by the MCP Deed of Partnership, the power to determine the profit shares and access to any proceeds of a future sale of the business lay solely with SM as Managing Partner not MPHL. MM accepted in cross-examination that following the execution of the MCP Deed of Partnership, SM had control over the profits and proceeds of the business and that was consistent with the minutes of the MCP meetings where profit allocation was discussed and directed by SM [Day1/46/23-47/4].

Reliance was placed upon the minutes of the MCP meeting dated 11 January 2010 by the Appellants for the period ended March 2009 which recorded:

“The profit allocation was discussed. After discussion and direction from M McInerney, it was agreed that the profit be allocated as follows:”

The Appellants submitted that in respect of all the profit share meetings of the MCP, MM is present representing MPL, then MPHL as well as BCSL and BHL, and the resolutions are agreed by all those present and not simply by SM. We do not accept that the minutes confirm that MM was exercising decision making power. We agree with HMRC’s submission that the minutes confirm that it was MCP that was making the decisions and it was a partnership decision with MM present in his capacity as representative of the other partners. In respect of the minutes dated 11 January 2010, this is the only instance in which it is recorded that the profit shares were agreed “after discussion and direction from M McInerney”. Whilst none of the witnesses were able to explain why this particular minute differed from the five other examples, we are satisfied that it is clear from the MCP Deed of Partnership that it was SM as Managing Partner who had the sole power to determine the profit allocation and, even if directed otherwise by MM, he was not required to give effect to that direction.

MM’s second witness statement stated at paragraph 3:

“As regards the allocation of profits generally, nothing would have been done if I had not been in agreement and indeed the basis for profit allocation was clear and had been discussed upfront before the partnership was formed. I together with my wife had built up the business but with Eunice I was the shareholder and director of MPHL, the holder of the goodwill and assets of the business. I don’t think it would have ever come to any disagreement but it seemed to me clear that MPHL was the entity with the assets and could withdraw from the Milton Care Partnership if it chose to and was also the entity holding the premises and the other business assets acquired from the Milton Park Partnership which meant that it was the key entity. I also was the director of BHL and BCSL. So the partnership was not something which stood any possibility of depriving MPHL of the profit share which it was expecting.”

It was suggested by MM in the course of his evidence that there may have existed what was described as “a sort of informal family understanding” regarding the allocation of profits. This phrase was expressly acknowledged by MM during cross-examination as an apt characterisation of the arrangement. However, MM further accepted that this purported understanding was not documented in any form and was based solely on his personal recollection of events that had occurred nearly two decades prior. The existence of the “informal family understanding” was put to JA and she confirmed that she was unaware of the existence of any such document.

Notwithstanding the suggestion of an informal arrangement, MM accepted that, pursuant to the terms of the MCP Deed of Partnership, SM retained the ultimate authority in determining profit allocation. Moreover, any such informal understanding, even if it existed, was acknowledged by MM to be no more than a preliminary framework; the specific details of profit distribution were, in his own words, “left completely open” and subject to determination on an annual basis. He further conceded that “the final decision about allocation can only be made on a year-on-year basis.”

HMRC submitted that the evidence establishes the MCP Deed of Partnership was drafted pursuant to MM’s instructions and was subject to careful review. Accordingly, both objectively and subjectively, the Deed must be regarded as embodying the parties’ intended arrangements, particularly in circumstances where an informal understanding is unclear and not evidenced. We agree with HMRC’s submission and find that there is no evidence of any informal family understanding.

HMRC submitted that even if MM did exert control via an informal family understanding, that would not vest control in MPHL: MM’s ability is not MPHL’s ability and simply asserting that he was acting on the latter’s behalf does not make it so. Rather, MM would have been exercising control personally as the owner of the whole corporate structure (MPHL, BHL, and BCSL – the shares of all of which he owned, together with his wife) who could pull all the strings of the various entities. He accepted in cross-examination that this was the control he had.

Whilst the Appellants placed some reliance on what was described as an “informal family understanding” regarding the allocation of profits or control of the business, such subjective expectations cannot displace the objective legal and accounting analysis required under GAAP. The applicable accounting standards, including FRS 5 and FRSSE, require an assessment of the substance of the arrangements as evidenced by the legal documentation and the actual conduct of the parties. The existence or absence of control must be determined by reference to the ability to direct financial and operating policies with a view to obtaining economic benefits, not by reference to informal or undocumented understandings. Even if Mr McInerney personally believed that MPHL would retain the economic benefits of the business, that belief cannot override the legal structure established by the MCP Deed of Partnership or the accounting treatment that follows from it.

In the JS (at page 14) PC attributed the profits in question to MPHL on the basis that “the profit sharing was controlled in such a way that MPHL had access to at least 90% of the residual profits”. This view was derived from an analysis of how, in practice, the Managing Partner of MCP exercised the power to allocate profits. This, HMRC submitted, overlooks a fundamental consideration, as highlighted by EA in the JS (also at page 14), namely that for the purposes of GAAP, the critical issue is not how profits were in fact distributed, but rather where the authority to control the economic benefits of the business resided.

Under cross-examination, PC accepted that the actual allocation of profits was not determinative for GAAP purposes. He acknowledged that the relevant question is who possesses the power to determine the distribution of future economic benefits arising from the business. As previously accepted by MM and PC above, the evidence clearly established that the authority to decide how the profits generated by the care home business were to be allocated among the partners of MCP rested solely with the Managing Partner, SM. Accordingly, we find that control over the profits arising from the business did not lie with MPHL, but rather with SM, acting in his role as Managing Partner of MCP and in accordance with the MCP Deed of Partnership.

The Appellants submitted that it was inherently improbable that MPHL would have entered into the arrangements in question without a prior agreement as to the allocation of profits, particularly given that a sale of the business was contemplated from the outset. While we accept that the transactions were carefully structured and that a sale was ultimately intended, this submission does not assist the Appellants. The relevant question for the purposes of GAAP is not whether the parties subjectively intended that MPHL would benefit from the business, but whether MPHL in fact obtained and retained control over the operations and economic benefits of the business, as defined in FRS 5.8. As we have found, the legal structure established by the MCP Deed of Partnership vested control over profit allocation and the business operations in the Managing Partner of MCP, not in MPHL. The absence of a formal agreement securing MPHL’s entitlement to profits or sale proceeds reinforces, rather than undermines, the conclusion that MPHL did not retain control. The suggestion that the parties would not have proceeded without such an agreement is speculative and cannot override the objective legal and accounting analysis required under GAAP.

The Appellants’ expert’s position was that as “the access to the future sale proceeds was tightly controlled via the various admission deeds to admit new partners to MCP, who were required to withdraw in the event of a sale” [JS/14], MPHL retained access to the risks and reward of the business. HMRC submitted that whilst it was correct that access to future sale proceeds was tightly controlled the key point was the location of that control: under the terms of the MCP Deed of Partnership, the partners’ entitlement to share in any surplus on a sale of the business was determined by reference to their profit-sharing proportions immediately prior to dissolution – see Clause 14.2. Clause 14 of the MCP Deed of Partnership is headed “Dissolution” and relevantly provides as follows:

As we stated at 194 above, Clause 8.2 of the MCP Deed of Partnership provided that it was SM as Managing Partner who had power to determine the profit share of each Partner:

Furthermore, as stated above, it was accepted by MM and PC that it was SM and not MPHL that controlled access to any proceeds of a future sale of the business.

At pages 14-15 of the JS, PC stated:

“… in the event of a severe economic downturn then it would ultimately be MPHL which would suffer. Its profits from the business and any prospective sales proceeds would be reduced and its property assets would ultimately bear any losses.”

PC’s expert view was that as MPHL held the fixed assets of the Milton Park business it was the property assets held by MPHL that would ultimately bear any losses”; this supported his view that MPHL assumed the risks and rewards of the business. It was not disputed that MPHL owned the real property from which the business was carried on. HMRC’s expert submitted that whilst MPHL owned the real property from which the business was carried on it did not follow (at least following the events at the end of 2007 and the formation of MCP) that the real property constituted assets of the business. HMRC relied upon the distinction accepted in the Appellants’ skeleton at paragraph [43] which stated that:

“There is no requirement for property used by a partnership to become partnership property and indeed no suggestion in the evidence (or by HMRC) that the assets acquired became partnership property. Lord Lindley in Lindley on Partnerships stated: ‘…it by no means follows that property used by all the partners for partnership purposes is partnership property. For example, the house and land in and upon which the partnership business is carried on often belongs to one of the partners only, either subject to a lease to the firm, or without any lease at all.’ This has been quoted with approval in a number of cases as reported in Lindley & Banks at 18-51”

That distinction was not resiled from by Mr Sykes and we accept it is a correct statement of the legal position regarding assets used by a partnership. That being so, PC correctly accepted in cross-examination that in the event of any losses being incurred it would be the partners that would bear any losses and not the property assets held by MPHL. Accordingly, we find that the fact that MPHL held the fixed assets of the business does not support PC’s view that MPHL assumed the risks and rewards of the business.

The Appellants relied upon the provision in the Clause 9 of the MCP Deed of Partnership which provided under the heading of “Goodwill” that “The goodwill of the Partnership shall be owned solely by MPHL.” The BCSL Deed of Admission to the MPP dated 1 April 2005 amended Clause 9 of the MCP Deed of Partnership as follows:

The BHL Deed of Admission to the MPP dated 1 January 2005 amended Clause 9 of the MCP Deed of Partnership in identical terms.

This, Mr Sykes submitted, confirmed that on the sale of the business, any amount referable to goodwill would belong to MPHL. This was MPHL retaining control of the rewards of the business. PC, in his first report, relied upon Clause 9 in support of this view that MPHL had retained a principal benefit of the partnership. Mr Sykes did not accept HMRC’s position that Clause 9 is ineffective as it was making provision for legal goodwill rather than the GAAP concept of “purchased goodwill” and the ownership of the legal goodwill moved to MCP and remained there notwithstanding any contractual provision to the contrary. Clause 9 is intended to confer on MPHL the proceeds from a sale attributable to goodwill and the Tribunal should apply that construction. Furthermore, Clause 9 is required to be construed in the context is which it was written and a common sense approach applied, per Lindley and Banks on Partnerships (21^st Edition) at 10-17: “the need for a commonsense approach when attempting to identify what the document would mean to a reasonable man.”

Lindley and Banks at 10-100 provided further guidance:

“Goodwill and domain names

The agreement should establish whether or not goodwill is a partnership asset: although there is something akin to a presumption that it belongs to the firm, this will not always be the case. [Footnote 302] Thus, in Hopton v Miller [2010] EWHC 2232 (Ch) the goodwill built up was held to be a partnership asset, even though there was no agreement and it was not shown in the partnership accounts. If the goodwill is to be retained by a particular partner or partners, it should be decided whether any increase in its value will also belong to those partners or to the firm and, if the latter, how the firm’s entitlement is to be ascertained and realised on a dissolution.”

This, it was submitted, puts the position beyond doubt and MPHL would receive the proceeds allocable to goodwill. Footnote 302 stated: “See Miles v Clarke [1953] 1 W.L.R. 537; Stekel v Ellice [1973] 1 W.L.R. 191; Bhayani v Taylor BracewellLLP [2016] EWHC 3360 (IPEC); cf. Castledine v RSM Bentley Jennison [2011] EWHC 2363 (Ch); see also infra, para.10-419, et seq., and paras 18-27, 18-28, 18-56, et seq.” The Appellants relied upon the cases in the footnote in support of its submissions which should be preferred to those relied upon by HMRC which are irrelevant and drawn from very different contexts and are dealing with legal goodwill.

However, it was (and we say correctly) accepted by Mr Sykes during oral submissions that the reference to goodwill in Clause 9 could only be a reference to legal goodwill and not accounting goodwill. He stated “In that event, the deed is clear that the proceeds attributable to goodwill belong to MPHL. Of course, we’re talking about accounting goodwill and whether that should be recognised, and this is talking about legal goodwill.”

It was therefore common ground that what was referred to as “goodwill” in Clauses 9 and 14 of the MCP Deed of Partnership is legal goodwill. Mr Sykes submitted that the declaration of goodwill was intended to have commercial effect and meaning in context; what the clause is intended to do is ensure there is no dispute that the proceeds attributable to goodwill go on MPHL. Mr Sykes submitted that when faced with a choice between a construction that renders a clause void or ineffective and one which does not a Court should choose the latter, per Chitty on Contracts (35^th Edition) at 16-091. which, under the heading of “Saving the document” states that when faced with two possible meanings, one which is void, in effect, or meaningless and the other one which would validate the instrument, then the former is to be preferred. We do not agree with the Appellants’ submissions and agree with HMRC’s submissions for the following reasons.

HMRC submitted that MPHL did not bear the risks and rewards of the business via the legal goodwill. Furthermore, even if MPHL did have access to the sale proceeds from or by reference to legal goodwill, the Appellants would need to have adduced evidence that the legal goodwill had monetary worth otherwise access to that element of sale proceeds derived from legal goodwill would be immaterial. The Appellants have not adduced any such evidence and no valuation of legal goodwill has been agreed. Therefore, one is left with speculation as to the worth or value of legal goodwill. We accept that there is no evidence before us as to the value, if any, of the legal goodwill of the business.

Mr Winter took us through the various cases relied upon by the parties in respect of goodwill. He pointed to the “unifying thread” running through the case law on legal goodwill: legal goodwill is inseparable from the business out of which it arises. That position is summarised in Halsbury’s Laws of England Volume 80 at paragraph 809 titled “How far goodwill is a separate entity”:

“Goodwill is not a thing which can be separated and dealt with apart from the business out of which it arises”.

We note that Clause 9.1 of the MCP Deed of Partnership states that “The goodwill of the Partnership shall be owned solely by MPHL.” “Partnership” is defined in the MCP Deed of Partnership as “the partnership currently subsisting between the Partners including any partnership which is a successor to that partnership under whatever name”. In our judgment, the reference to the goodwill of the partnership can only be a reference to legal goodwill relating to the business carried on in common by the partners of the MCP In accordance with the case law considered below, the legal goodwill relating to the MCP business belonged to MCP and not MPHL despite any provision to the contrary.

We agree with Mr Winter’s submission that the case law on legal goodwill confirms that legal goodwill is inseparable from the business out of which it arises.

In Wedderburn v Wedderburn (No 4) (1856) 52 ER 1039, The Master of the Rolls (Sir John Romilly) considered the question of the entitlement of a deceased partner’s estate in respect of goodwill of the partnership where the partnership deed provided that the executor of the deceased’s estate would remain a partner for up to a year following his death and would then then cease to be a partner. The Master of the Rolls stated in terms at [104]-[105] that the goodwill of a partnership is partnership property, it cannot belong to anyone outside the partnership, it is inseparable from the business, and once the partner died he was not entitled to profits from goodwill as it belonged to partnership and he had left the partnership through death.

Muller concerned the sale of a manufacturing business and the question of whether, for stamp duty purposes, the legal goodwill was “property locally situate out of the United Kingdom”. In the course of analysing the issue, the House of Lords made relevant comments about the nature of legal goodwill and emphasised that legal goodwill had no existence independent of the business to which it attached:

“The goodwill of a business is one whole … goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business.” (Lord MacNaghten at page 224)

“And this business, locally situate out of the United Kingdom, has a goodwill attached to it. It is difficult to separate them – certainly out of the business the goodwill springs, and its value depends entirely upon the local existence of the premises and the manufactory, and the existence and action of more or less local customers.” (Lord James at page 228)

“Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value.” (Lord Lindley at page 235)

Star Industrial Co Ltd v Yap Kwee Kor (t/a New Star Industrial Co) [1976] FSR 256 (“Star Industrial”) was a Privy Council case on appeal from the Singapore Court of Appeal concerning passing-off in respect of toothbrushes. Privy Council decisions are not binding on courts in England and Wales, but they are considered highly persuasive. As confirmed by the Supreme Court in Willers v Joyce [2016] UKSC 44 in response to the question of the hierarchy between the Supreme Court (and previously, the House of Lords) and the Privy Council, Lord Neuberger stated the core principles that “High Court Judges are bound by decisions of the Court of Appeal and the Supreme Court, and … the Court of Appeal is bound by decisions of the Supreme Court” (at [5]). He went on to consider that “There is no doubt that a court should not, at least normally, follow a decision of the (Privy Council), if it is inconsistent with the decision of a court which is binding in accordance with the principles set out (above)” (at [16]).

Lord Diplock at page 269 in Star Industrial stated that goodwill is “incapable of subsisting by itself” and referred with approval to the decision in Muller:

“Goodwill, as the subject of proprietary rights, is incapable of subsisting by itself. It has no independent existence apart from the business to which it is attached. It is local in character and divisible; if the business is carried on in several countries a separate goodwill attaches to it in each. So when the business is abandoned in one country in which it has acquired a goodwill the goodwill in that country perishes with it although the business may continue to be carried on in other countries. (See: Inland Revenue Commissioners v. Muller & Co.'s Margarine Ltd. [1901] A.C. 217, per Lord Macnaghten at p. 224; per Lord Lindley at p. 235.)”

Geraghty v Minter [1979] HCA 42 is a decision of the High Court of Australia (equivalent to the UK Supreme Court) A decision of the High Court of Australia is not a binding precedent in the UK; instead, it may be of persuasive authority, meaning we may consider it, but are not required to follow it. The decision concerned a non-compete clause in a partnership agreement. There was a subsequent contract by which some of the partners bought out the interests in the partnership business of the other partners, but in that contract, the vendor partners who were selling their interest purported contractually to retain their own interests in the partnership’s goodwill. Chief Justice Barwick at [12] stated:

“12.

In any case, goodwill is not something which can be conveyed or held in gross: it is something which attaches to a business. It cannot be dealt with separately from the business with which it is associated: see, e.g. Inland Revenue Commissioners v. Muller & Co.’s Margarine Ltd. [1901] UKLawRpAC 20; (1901) AC 217, at p 224, per Lord Macnaghten: ‘For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business.’ Goodwill in itself is indivisible, though its value, when realized, may be shared in proportions. (at p181)”

Stephen J at [17] similarly relied upon Muller:

“Goodwill of a partnership business is an inseverable whole unless, of course, it consists in fact of a series of separate goodwills, each applicable to distinct areas in which the one business operates or to distinct business activities which the one business entity carries on. When sold, proceeds of goodwill may be divided up readily enough, but, because goodwill is ‘the benefit and advantage of the good name, reputation and connection of a business’ (Inland Revenue Commissioners v. Muller & Co.’s Margarine Ltd. [1901] UKLawRpAC 20; (1901) AC 217, at p 223 ), per Lord Macnaghten, it is inherently inseverable from the business to which it relates. It may cease to exist or may be purloined by one who falsely represents his own business as the original business, but it cannot be disposed of separately from the business which created it nor can it survive the cessation of that business. The reason is simple: since it reflects and is dependent upon the reputation of that business, to sever it from the business destroys it. (at p193)”

TTYP was a decision of the Hong Kong Court of Final Appeal (“HKCFA”) in which Sir Anthony Mason (former Chief Justice of Australia) delivered the judgment. Historically, UK case law and judicial principles were highly influential, especially in areas like common law, in the HKCFA. Prior to the imposition of the National Security Law in 2022, UK judges sat on the HKCFA. The TTYP decision predates the National Security Law by some 12 years and we accept it is of persuasive authority. TTYP concerned a dispute in relation to licences to publish a newspaper where the Respondent (licensee) sought to argue that at the relevant times the Appellant (licensor) had no legal goodwill in respect of the business of publishing the newspaper. At page 1114 Sir Anthony Mason cited what Lord Diplock said in Star Industrial at page 269 (at paragraph 227 above) and, having referred to Muller, stated at page 1114(j)-1115(b):

“It follows from the proposition that goodwill is a right of property associated with the business to which it is attached. That goodwill, being personal property, is assignable and may be bought and sold in connection with the business to which it is attached. Indeed, a transaction which is intended to assign a business as a whole necessarily passes the goodwill to the assignee because the goodwill is attached to the business (see Wood v Hall (1915) 33 RPC 16).

Fundamental to the law’s recognition that goodwill is transferable in connection with the continuing business to which it is attached is the notion that goodwill attaches to the business, not to its proprietor nor to the person who happens to carry it on. Once this is accepted, it necessarily follows that the owner of a business may license another person to conduct the business, in which event the goodwill of the business, attaching to the business, passes to the licensee, most certainly when there is an express assignment of goodwill. In principle, there is no difference between this case and the sale and transfer of a business to another followed by a re-sale and transfer back to the original owner.”

We accept Mr Winter’s submission that in TTYP, Sir Anthony Mason was applying the “inseparability principle” expounded in the case law to which he had referred.

Mr Winter submitted that none of the authorities cited by the Appellants have the same status as the authorities relied upon by HMRC, nor do they deal with the position at issue here where goodwill of a partnership is said to be owned by someone who is not a partner. We agree with Mr Winter. At the time of the transactions MPHL was not a partner of the MCP and we accept that the case law to which we have been referred does not support the Appellants’ submission that law allows goodwill of partnership to be owned by a non-partner.

In respect of the common sense approach urged upon us by Mr Sykes per Lindley and Banks on Partnerships (21^st Edition) at 10-17 we do not accept that it supports the submission that Clause 9.1 should be construed as conferring upon MPHL a right to sale proceeds attributable to legal goodwill. Clause 9.1 of the MCP Deed of Partnership provides that the goodwill of the partnership “shall be owned solely by MPHL”. HMRC challenged this submission on two grounds. Firstly, they argue that Clause 9.1 does not, on its proper construction, confer such a right. Rather, it states that “the goodwill of the partnership shall be owned solely by MPHL” which HMRC submits is a clear and straightforward declaration of ownership of the asset of legal goodwill, not a grant of entitlement to sale proceeds. While ownership of an asset may imply some entitlement, the clause itself is concerned with ownership, not with any specific entitlement to proceeds. In response to Mr Sykes’ submission that HMRC’s interpretation renders Clause 9.1 an abstract legal declaration devoid of commercial effect, HMRC maintains that the clause does have commercial significance: determining ownership of business assets is a fundamental commercial matter.

We agree that that on a natural and objective reading, Clause 9.1 does not confer any entitlement to sale proceeds. Ownership of an asset (here, legal goodwill) does not automatically equate to a right to proceeds from a future sale of that asset, particularly in the absence of express language to that effect. In our judgment, HMRC’s interpretation is consistent with the principles of contractual construction: the clause should be given its ordinary meaning unless there is a compelling reason to depart from it.

Secondly, HMRC submit that even if Clause 9.1 were construed as conferring a right to future sale proceeds attributable to legal goodwill, the nature of that right remains unclear. If a proprietary right is asserted there is no explanation as to how such a right arises under Clause 9.1, particularly given that MPHL is a volunteer and has provided no consideration. If the right is contractual, it is unclear why MPHL, rather than any other creditor with an uncertain claim, should be treated in preference to any other creditor. We agree with HMRC that even if Clause 9.1 were to be construed as conferring upon MPHL a right to sale proceeds there remains a critical ambiguity: is the right proprietary or contractual.

Accordingly, we do not accept that a commonsense reading of Clause 9.1 has the effect of conferring a right to any sale proceeds of the partnership’s legal goodwill.

Clause 14 of the MCP Deed of Partnership makes provision for the dissolution of the MCP:

Clause 14.2.1 addresses the dissolution of the MCP and the subsequent distribution of sale proceeds. Under this clause, MPHL would only receive an amount from the sale proceeds after the partnership has been dissolved and after all debts, liabilities and incidental expenses have been discharged. We agree with HMRC that clause 14.2.1 does not confer on MPHL any entitlement to sale proceeds attributable to legal goodwill. Moreover, clause 14.2.1, and indeed any provision in the MCP Deed of Partnership, may be amended by the Managing Partner, SM, such that any proceeds from legal goodwill could be redirected to another party. There is no provision in the Deed that would enable MPHL to prevent such an amendment or to secure its entitlement to those proceeds. In such circumstances, it cannot be said that MPHL has access to the sale proceeds. HMRC submitted that Clause 14.2.1 primarily concerns the application of sale proceeds to discharge the debts and liabilities of the partnership. The reference at the end of the clause to goodwill or its proceeds creates a debt obligation in favour of MPHL, which accrues on dissolution. The language of “accruing” is characteristic of a debt obligation. If MPHL already owned the proceeds of goodwill, there would be no need to specify that anything accrues to it.

In our view, the use of the “accrue” in Clause 14.2.1 is significant. A right or obligation that accrues is one that arises or comes into existence upon the occurrence of a specified event, in this case the dissolution of the partnership. It does not denote a present proprietary entitlement to the underlying asset or its proceeds. Rather, it signifies the creation of a contractual debt obligation, payable in the future and contingent upon the satisfaction of prior conditions, such as the discharge of the partnership’s debts and liabilities. If MPHL already had a proprietary interest in the proceeds of goodwill, there would be no need for the clause to provide that an amount “shall accrue” to it. The language used is therefore consistent with the creation of a debt obligation, placing MPHL in the position of a creditor rather than an owner of the proceeds.

Mr Winter advanced the bold submission that the four High Court authorities cited at footnote 302 to paragraph 10-100 of Lindley & Banks on Partnership were incorrectly decided. He contended that those cases failed to apply what he described as the “inseparability principle – which, in his submission, is not merely a principle but a rule of law – and that they should be treated as per incuriam for failing to consider the earlier decision in Wedderburn, which he said established that goodwill is necessarily a partnership asset.

We do not accept that submission. Paragraph 10-100 of Lindley & Banks expressly recognises that, while there is “something akin to a presumption” that goodwill belongs to the firm, “this will not always be the case”. That formulation reflects the position that the status of goodwill as a partnership asset is ultimately a question of construction, to be determined by reference to the terms of the partnership agreement and the surrounding factual matrix. The authorities cited in footnote 302 – Miles v Clarke, Stekel v Ellice, Bhayani v Taylor Bracewell LLP, and Castledine v RSM Bentley Jennison – are consistent with that approach. They do not purport to displace the general principle that goodwill is ordinarily a partnership asset but rather illustrate that this presumption may be rebutted in particular factual circumstances.

Moreover, paragraph 18.58 of Lindley & Banks (to which we were not taken but was in the Authorities Bundle) reinforces this interpretation. It acknowledges that while it is relatively rare for goodwill to be owned outside the firm, it is not conceptually or legally impossible:

“Despite the finding in Miles v Clarke, it will, in fact, be relatively rare to find goodwill owned by individual partners outside the firm. Thus, in Castledine v RSM Bentley Jennison, HHJ Cooke was constrained to observe that “the idea of goodwill being owned by a person who does not operate the business is not without its conceptual difficulties.” There the claimant was seeking to maintain that he retained a share of the goodwill of an accountancy practice notwithstanding his retirement. The argument was not upheld. Needless to say, there is nothing remarkable about goodwill being a partnership asset but held for the benefit of some but not all of the partners or in unequal shares.” [Footnotes omitted]

Accordingly, we do not consider that the cited cases were wrongly decided, nor that they are per incuriam. They remain good authority and are properly relied upon in support of the proposition advanced in paragraph 10-100.

However, on the facts of this appeal, paragraph 10-100 of Lindley & Banks does not assist the Appellants. That paragraph acknowledges that, while there is “something akin to a presumption” that goodwill belongs to the firm, “this will not always be the case”. The presumption is therefore rebuttable and contingent upon the terms of the partnership agreement and the surrounding factual context. In this case, clause 9.1 of the MCP Deed of Partnership does not expressly provide that MPHL is entitled to the proceeds of legal goodwill, nor does it confer a proprietary interest in that asset. Clause 14.2.1, which governs the distribution of sale proceeds on dissolution, is similarly silent as to any specific entitlement of MPHL to the proceeds of goodwill and is amendable at the discretion of the Managing Partner. These features of the agreement undermine any suggestion that the goodwill was intended to be treated as a separate asset owned by MPHL outside the firm. Accordingly, the factual matrix does not support a departure from the general presumption that goodwill is a partnership asset. Paragraph 10-100, properly understood, does not establish a rule that goodwill may be freely allocated to non-partners; rather, it recognises that the position depends on the construction of the relevant agreement. On that basis, Mr Sykes’ reliance on paragraph 10-100 is misplaced.

The Appellants submitted, in various passages of their skeleton argument (see, for example, paragraphs [79], [88], [102], [113] and [119]), that MPHL retained control over the care home business because it could “terminate the arrangements” or “withdraw” from them at will. The thrust of the submission was that, had MPHL been dissatisfied with its profit share or other aspects of the partnership, it could have unilaterally ended the arrangements and resumed control of the business. In closing submissions, Mr Sykes developed this argument further, contending that MPHL’s ability to terminate the arrangements effectively meant that it retained control over the business and its economic benefits.

We do not accept that submission. As stated above, in respect of Clauses 9.1 and 14.2.1 of the MCP Deed of Partnership, once the partnership was formed and the business was being carried on by MCP, control over the business rested with the partnership and, in particular, with its Managing Partner, SM. Clause 12.2 of the MCP Deed makes clear that the departure of a partner does not dissolve the partnership. Clause 16.2 requires any outgoing partner to surrender partnership property. As the Appellants themselves acknowledged at paragraph [41] of their skeleton, “the forfeiting of assets under clause 16 avoids the need for a dissolution”. Accordingly, even if MPHL or its subsidiary MPL were to withdraw from the partnership, the business could and would continue to be operated by the remaining partners. MPHL could not unilaterally reclaim control of the business.

Moreover, the Appellants’ suggestion that MPHL could terminate the arrangements by withdrawing the use of the real property is misconceived. While such a step might cause operational disruption, it would not amount to control of the business. The landlord of a property used by a business does not, by virtue of that fact alone, control the business or its economic outputs. Mr Chidgey accepted in cross-examination that “negative control”, the ability to shut down a business, is not sufficient to constitute control for accounting purposes. Control, in the relevant sense, requires the ability to direct the financial and operating policies of the entity with a view to obtaining the economic benefits of its activities. The Appellants have not demonstrated that MPHL had such a power.

To the extent that the Appellants now rely on the proposition that MM, by virtue of his ownership of MPHL and other entities, and his familial relationship with SM, was in de facto control of the business, that argument is inconsistent with the legal structure established by the MCP Deed of Partnership. That deed was prepared on MM instructions, reviewed by him, and signed by him. It is the legal instrument that governs the relationship between the parties. Control exercised by MM in his personal capacity, or through other entities, does not equate to control by MPHL.

Finally, HMRC’s reliance on the definition of “control” under FRS 5.8 is well founded. That standard defines control, in the context of an asset, as “the ability to obtain the future economic benefits relating to an asset and to restrict the access of others to those benefits”. On the evidence, MPHL did not have such control over the care home business. The economic benefits of the business were controlled by MCP, and specifically by its Managing Partner, in accordance with the terms of the MCP Deed. We therefore accept HMRC’s submission that MPHL did not control the business do not accept that the ability to “terminate” or “withdraw” from the arrangements conferred such control.

For the reasons set out above, we find that MPHL did not acquire control over the operations of the Milton Park care home business and did not retain the risks and rewards of that business following the formation of MCP. The substance of the arrangements, when viewed as a whole, demonstrates that control over the business resided with the partnership and, in particular, with its Managing Partner, SM. MPHL did not have the ability to direct the financial and operating policies of the business with a view to obtaining the economic benefits arising from its activities, as required by FRS 5.8. Accordingly, we conclude that MPHL did not acquire a business for the purposes of UK GAAP and was not entitled to recognise purchased goodwill in its accounts.

In light of this finding, it is unnecessary for us to consider HMRC’s alternative argument that, even if goodwill had been properly recognised initially, it should have been derecognised in whole or in part following the formation of MCP.

The appeals are therefore dismissed.

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.