Under Section 71(3) of the Solicitors Act 1974 , where a trustee, executor or administrator is...
The First-tier Tribunal (FTT) has ruled that a company could not deduct the amortisation of goodwill acquired on incorporation for Corporation Tax purposes, rejecting the argument that the goodwill had been newly created after April 2002. The decision provides important guidance for partnerships and professional firms considering incorporation and the tax treatment of goodwill.
Background to the Case
The company had been incorporated in 2013 by members of an established insurance broking partnership. On incorporation, it acquired the partnership’s trade and assets, including goodwill valued at £1.32 million.
The partnership’s business had evolved over time. It had previously offered life insurance, mortgage and investment advice through independent financial advisers (IFAs), alongside personal and business insurance. In 2006, most IFAs left and the partnership sold its IFA business. Around the same time, it relocated from high-street premises to a business park and began focusing more heavily on thatched home insurance and rural commercial insurance, including selling products to other brokers on a wholesale basis.
Following incorporation, the company claimed amortisation deductions for the goodwill. HM Revenue & Customs (HMRC) opened enquiries into the company’s Corporation Tax returns and issued assessments and closure notices totalling more than £107,000, disallowing the deductions.
The Company’s Argument
The company argued that the goodwill it acquired fell within Part 8 of the Corporation Tax Act 2009, meaning amortisation should be deductible. As the acquisition was from a related party, this depended on the goodwill having been created on or after 1 April 2002.
It contended that the business acquired in 2013 was fundamentally different from the partnership business before April 2002. According to the company, a dramatic transformation had occurred in 2006 when:
- the IFA business was sold;
- the business moved away from being a high-street retail broker; and
- wholesale broking became a core activity.
These changes, it said, amounted to the termination of the old business and the creation of a new one, with new goodwill.
HMRC’s Position
HMRC maintained that the changes reflected the natural evolution of the same business, rather than its termination. The partnership had continued to sell insurance products, retained its branding and customer relationships, and built on existing goodwill rather than creating new goodwill from scratch.
FTT Decision
The FTT agreed with HMRC and dismissed the appeal.
It found that:
- the IFA business had been winding down for some time and ended due to the retirement of the last IFA;
- the relocation was prompted by the landlord giving notice, and moving to a business park did not indicate a new business; and
- the move into wholesale broking was consistent with the exploration of new markets, which is a common feature of business development.
Taken together, these changes were “a long way short” of constituting a termination of the business. The goodwill acquired on incorporation therefore pre-dated April 2002 and amortisation was not deductible.
Q&A: Goodwill and Incorporation
What is goodwill for tax purposes?
Goodwill represents the value of a business’s reputation, customer relationships and brand, over and above its tangible assets.
When is goodwill amortisation deductible?
For related-party acquisitions, amortisation is generally deductible only if the goodwill was created on or after 1 April 2002.
Does changing how a business operates create new goodwill?
Not necessarily. Courts and tribunals will consider whether changes amount to a genuine termination of the old business or simply its natural evolution.
Why is incorporation risky from a tax perspective?
Transferring goodwill on incorporation can trigger complex tax issues, particularly where the business has a long trading history.
What is the key lesson from this case?
Businesses should not assume that changes in focus or structure create new goodwill. Careful tax planning and advice are essential before incorporation.