FTT decision: Tax treatment of goodwill on partnership incorporation

In an important decision, the First-tier Tribunal (FTT) dismissed Armour Veterinary Group Ltd's appeal against discovery assessments related to claiming tax relief on the amortisation of goodwill under the Corporation Tax Act 2009 (CTA 2009). This required the Tribunal to explore whether a partnership had previously existed prior to 2002. This decision underscores the stringent criteria applied to the tax treatment of goodwill when professional partnerships transition into incorporated entities and demonstrates the Tribunal’s approach to determining whether individuals are acting together in partnership and who owns goodwill in a partnership context. The case also found in HMRC’s favour that discovery assessments were validly issued but this is not covered further in this summary.

The FTT’s decision found in favour of HMRC that the taxpayer did not have the right to claim tax relief under the intangible fixed asset regime in Part 8 CTA 2009 on the amortisation of goodwill. It clarifies that goodwill acquired or created under certain conditions post 1 April 2002 does not qualify for tax relief unless it meets specific criteria outlined in the legislation.

The Tribunal held that one of the shareholders in the Appellant company was carrying on a trade in partnership prior to 1 April 2002 which led to the conclusion the goodwill was created prior to 1 April 2002. It also distinguished between the acquisition of goodwill and the acquisition of an interest in a partnership.

In addition, there was an interesting analysis of the potential impact of the ownership of goodwill within a Scottish partnership.

The decision primarily impacts professional partnership firms such as legal practices and consultancy firms planning to incorporate (or those that have recently transitioned from a partnership to a limited company structure), as well as those acquiring additional businesses. These firms should be particularly cautious about how they handle the transfer and treatment of goodwill.

Evidence and documentation were at the heart of the Tribunal’s findings, including external valuations in the case of a transfer of goodwill. Whilst the case considered the authority of a partnership agreement and the day to day running of the partnership, fundamentally it highlighted the complexity of the intangibles regime.

Whilst the case provides a useful summary of the way in which the FTT will determine the point at which an individual becomes a partner in a partnership, for firms within the scope of this ruling the primary impact will be on their tax treatment of goodwill. The decision may necessitate a review and possible restructuring of how goodwill is accounted for during the transition from a partnership to a corporate entity. This could involve re-evaluating the valuation methods and the timing of goodwill recognition.

Please speak to the authors or your usual KPMG in the UK contact if you have any questions on this decision or how it may impact your own business. 

For further information please contact:

• Richard Green
  
• Paul Harden