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Peter Vaines of Squire Sanders comments on HMRC's approach to the valuation of goodwill, and warns that a taxpayer's recent successful claim for costs against HMRC may actually hinder, rather than help.

Goodwill Valuation

For some time, HMRC have taken the view that any goodwill attributable to the personal skills of a proprietor of a business cannot be transferred - for example to a company on incorporation. They say that a company cannot carry on a profession and therefore it is impossible to transfer a business involving a professional activity to a company. This may come as a surprise to a number of professional firms of chartered accountants who have transferred their professional activities to companies. HMRC may well say that a company cannot cut your hair, or cook your food - but I do not see why not. A company can present a TV programme or drill for oil, so why can it not cut my hair or perform an eye operation.

If goodwill exists, it is an asset which can be bought and sold and it should not matter whether the goodwill derives from the skills of one person, or of a larger workforce. Arguments will no doubt continue on this theme but I was interested to read about a recent Employment Tribunal case supporting the view that a medical practitioner did have goodwill which could be bought and sold. This is highly relevant because HMRC are particularly exercised at the moment about the goodwill of medical practitioners.

There are numerous arguments going on with HMRC about the valuation of goodwill and it is understood that a special team has been set up by HMRC to consider the position. It seems that their consideration may have come to an end. HMRC have issued a notice recognising that the sub-division of goodwill into categories such as inherent goodwill, adherent goodwill and free goodwill is not helpful particularly in the context of trade related properties. They have now published a detailed note setting out their view of the matter. ( Goodwill on Trade Related Properties ) Crucially, HMRC now accept that if a business is sold as a going concern the sale may include some element of goodwill. One might wonder why this had ever been doubted – but there you are.

The note prepared by HMRC sets out their views about how goodwill should be valued where a business is carried on from a freehold or a leasehold property - although their views will no doubt be the subject of vigorous debate in due course.

HMRC acknowledge that their review of this matter has caused a considerable backlog of cases but they confirm that this backlog will now be addressed – and of course this will be on the basis of the views set out in their note. I think this is going to run and run.

In addition to the details of HMRC's latest stance on goodwill and trade related properties, they have also published a Guidance Note on the valuation of assets generally – pretty much all the things which are valued by SAV including land and property, goodwill, quoted and unquoted shares, chattels, livestock, works of art and some other items. It is only 12 pages long and therefore does not contain a full exposition of their views but it is very helpful nevertheless, even though there are (naturally) a number of points which might not have universal support.

Claiming for Costs

The case of Roden v HMRC TC2911 sounds good but I fear it may have a sting in its tail. The taxpayer won his case before the First Tier Tribunal and sought costs against HMRC.

In general, no costs are awarded at the First Tier Tribunal unless the case is designated as complex – but even then the taxpayer can opt out of the costs regime. However, the Tribunal has power to award costs if one of the parties has acted unreasonably in bringing, defending or conducting the proceedings.

The Appellants argued that HMRC should not have defended the appeal because their arguments were unsustainable. They therefore acted unreasonably and should pay costs.

The Tribunal said that if HMRC knew that their argument had no reasonable prospect of success they would be acting unreasonably. In this case, taking into account HMRC's resources, they ought to have known that their arguments had no reasonable prospect of success so they were ordered to pay the taxpayers costs.

The Tribunal said that although there is nothing wrong in principle in taking novel points of law unsupported by authority, in this case HMRC acted unreasonably in defending the appeal based on a novel point of law which they ought to have known had no reasonable prospect of success.

Whilst rejoicing in the success of the taxpayer, I fear this may prove not be such a great result after all. When I think of all those penalty cases (which dominate the case reports) some of which are completely hopeless, there must be a real risk that they will be affected by this case. Nobody goes to the Tribunal to appeal against a penalty of a few pounds without a real sense of grievance and to be lumbered with costs as well would simply add to the feeling of injustice.

Although it must be a good thing for hopeless cases to be discouraged by the risk of costs, there is also the serious risk of this principle being extended to discourage those who do have a reasonable case – or at least believe in their arguments - but still lose. The weight of costs would of course bear much more heavily on the unrepresented citizen who seeks redress before the courts, than it would on HMRC.