Date of incorporation determined by facts and intention

In 2 Green Smile Limited & Dr Ameeka Patel v HMRC [2023] TC08677, the First Tier Tribunal (FTT) held that the date incorporation of dental practice was the date on which its owners had decided that it commenced, the fact that agreements to transfer land and buildings and NHS contracts were legally completed later did not disturb that date. 

• Ameeka Patel and Rajiv Ruwala carried on the business of a dental practice as a partnership, undertaking both NHS and private dentistry.
• In 2014, the partners decided to Incorporate the business. A company was set up, Green Smile Limited, and steps put in place to start the process of transfer.
• In a Board Meeting on 30 November 2014, the partners made an oral agreement to transfer the business, with effect from 1 December 2014. Board Minutes were taken, acting as contemporaneous evidence.
• The main assets transferred were the business premises, the NHS and private patent contracts together with the Goodwill within the practice.
• The company accounts were drawn up for the year ended 30 November 2015.
• On 1 February 2015, the practice's staff were given P45s and told that they were to be employed by the company instead, which had taken over the business as of 1 December 2014.
• On 9 October 2015, the company registered with the Care Quality Commission (CQC) and on 23 October 2015, the NHS contracts were novated from the partnership to the company.
• The company claimed full deductions for amortisation of the goodwill in its Corporation Tax returns. The rules surrounding the claiming of Goodwill amortisation changed over the period, as follows:
  • Up to and including 2 December 2014, amortisation can be claimed on purchased goodwill.
  • Between 3 December and 7 July 2015, amortisation on purchased goodwill can only be claimed in part.
  • From 8 July 2015, no amortisation is allowed for purchased goodwill.
• HMRC opened enquiries into the Corporation Tax returns for 2015, 2016 and 2017.
• Their assertion was that the business was not transferred on the earlier date as:
  • The goodwill was not transferred until the novation of the NHS contracts on 23 October 2015.
  • The premises were not transferred as there was only an oral agreement and the transfer of land must be in writing.
• Closure Notices were issued and assessments were raised disallowing the amortised goodwill and also assessing the partners on the business income instead of the company up until the later date. 
• The company and the partners appealed to the FTT.

The FTT concluded that all matters could be settled by determining the date of transfer of the goodwill and, therefore, the business.

• It was found that the oral agreement was an indivisible agreement to transfer all of the assets of the partnership. As such it was unenforceable, as any agreement including the transfer of land must be in writing. As such, the business was not transferred on 30 November 2014.
• Whilst the NHS goodwill and the NHS contract were inextricably linked, the two were separate assets and the goodwill was capable of transfer without the novation of the contracts.
• Whilst the oral agreement was not capable of transferring the goodwill, there was a de facto transfer and the case law shows that this is enough even in the absence of a legally binding agreement.
• Case law also supports the fact that an intention to transfer that later becomes a reality can in itself effect a de facto transfer.
• The appellants provided substantial evidence of intention to transfer and also in practice too.

The FTT held that although the oral agreement did not effectively transfer the business, it did move to the company on 1 December by way of a de facto transfer, even though legal formalities were completed at a later date. The company was entitled to a deduction for the amortisation of the goodwill and the partners were not assessable on the income earned between 1 December 2014 and 22 October 2015. The appeals were allowed.

Comment 

The effect of the decision is that the goodwill of the practice is separate from its component parts. This is not normally something that HMRC would normally agree with. It remains to be seen whether the decision which has been made based on the specific facts can be appealed on a point of law. It might not be worth the cost of an appeal.

Useful guides on this topic

Incorporating an existing business
How to transfer an existing sole trader's business by incorporation into a company.

Incorporation of partnership: step-by-step
This guide explains step-by-step how to incorporate a partnership. 

Goodwill & incorporation: Tax issues
What are the tax issues in respect of intangible property (IP) assets, such as goodwill, on incorporation? What tax reliefs apply if you buy and sell goodwill and IP? What are the valuation and clearance procedures?

Valuation: Goodwill
What valuation methods are suitable for valuing a business? What are the issues with goodwill and other intangibles? What does HMRC suggest? What do the courts think?

Goodwill and the intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently? 

External link

2 Green Smile Limited & Dr Ameeka Patel v HMRC [2023] TC08677