In a recent case, 2 Green Smile Ltd v HMRC, the First-tier Tribunal (FTT) ruled in favour of the taxpayers. FTT found that a de facto transfer of a business had occurred at the time when the parties had a settled intention to transfer the business. Even though there was no written contract at that time.
The case involved Ameeka Patel and Rajiv Ruwala, who owned a dental practice in partnership. They established a company, 2 Green Smile Ltd, to succeed the business. There was an oral agreement between the partnership and the company for the transfer of the business, including goodwill and premises.
The company began trading on 1 December 2014. The partnership transferred the NHS contract to the company in October 2015.
However, HMRC disputed the company's claim for an amortisation debit based on the market value of the goodwill. HMRC were arguing that the goodwill was not acquired until the NHS contract was novated to the company. Occurring in October 2015.
The FTT noted that there are no legal formalities required to transfer goodwill. They accepted that it can be transferred by an oral agreement.
However, the FTT determined that, as there was no written contract for the transfer of the business premises on or before 1 December 2014, the goodwill could not have been acquired by the company on or before that date.
This was because the Law of Property (Miscellaneous Provisions) Act 1989 provides that any contract or agreement purporting to dispose of an interest in land which is not in writing is unenforceable, and the oral agreement was an entire indivisible agreement to transfer all of the assets of the partnership to the company such that the transfer of the goodwill was not severable from the transfer of the premises.
However, the FTT concluded that a de facto transfer of the goodwill had taken place on 1 December 2014, as there was a settled intention by the partners and the company to transfer the whole of the business to the company on and from that date, and the partners considered that there had been an effective transfer of the business on or before that date.
The FTT also held that the NHS goodwill, as well as the goodwill associated with the private practice of the partnership, was capable of effective legal and equitable transfer independently of any transfer or novation of the benefit of the NHS contract.
Therefore, all income generated from the dental business after 1 December 2014 belonged beneficially to the company, and it was entitled to amortise the goodwill as claimed in its tax returns.
This decision clarifies that goodwill is capable of transfer by way of an oral agreement, subject to the exception in the 1989 Act, and it will be helpful to taxpayers in situations where documentary evidence relating to the transfer of goodwill is limited.
It also highlights the possibility of a de facto transfer of a business. Meaning that the date of transfer may be earlier than the date referred to in any formal documents.
Taxpayers will need to be aware of this fact. Along with the tax consequences that may arise as a result of any such de facto transfer.
In conclusion, this case provides useful guidance to taxpayers. But also, their advisers on the transfer of goodwill and the tax implications of de facto transfers of businesses. It also underscores the importance of keeping detailed records of business transactions and seeking professional advice when necessary.
