As Ireland and the UK have similar tax regimes, it is always important for practitioners to be aware of any developments in the neighbouring jurisdiction. Two recent tax tribunal cases in the UK are helpful in shedding light on the often contentious issue of transfer of goodwill: Richard Villar v HMRC1 in 2018 and Leeds Cricket Football & Athletic Company Ltd v HMRC2 in 2019.

The first case involved the transfer of a business whose value derived from the goodwill attaching to the skill and reputation of the principal surgeon. This case represents an important development in this area of the law because, as Wood notes, HMRC “have long considered that this type of arrangement does not work because goodwill attaching to an individual is not capable of transfer.”3 However, the Villar case seemingly accepts personal goodwill may be capable of transfer (in this particular case the name of the practice had value, though it derived from the principal).

The second case involves the sale of a cricket stadium and three operations. It raised questions in relation to what constitutes a valid business for transfer, and if goodwill attached to the business or was it only a disposal of land with attached income streams.

These cases are a welcome development as many businesses often wish to transfer their business to a new company, selling goodwill to the company in return for a capital sum.

Richard Villar v HMRC

In the Villar case, the First-Tier tribunal (FTT) held that the sale of the business of an orthopaedic surgeon was a disposal of capital and not merely of a right to income.

The Villar case involved a renowned orthopaedic surgeon specialising in hip arthroscopic procedures selling his trading practice but continuing to work for the purchaser (Spire Healthcare Diagnostics Limited). He made a claim for Entrepreneurs’ Relief pursuant to UK law. Ireland has a very similar relief albeit at more modest thresholds.

Practically all of the proceeds received by Mr. Villar were attributed to his own reputation and goodwill and therefore HMRC argued that it could not be sold and that Mr. Villar had merely changed the way in which he operated. As such, any proceeds should be treated as income under their anti-avoidance provisions.

The decision in this case is in contrast with HMRC’s long understood view that goodwill attaching to an individual cannot be sold.

The facts in Villar:

The principal, Richard Villar, was an orthopaedic surgeon trading under the name ‘Richard Villar Practice’ and sought to sell his practice with the view to eventual retirement. He knew of colleagues in other jurisdictions who sold their practices.

Mr. Villar believed he had a business capable of being sold, on the basis that his business had extensive patient records, a system for following up and maintaining ongoing relationships (which was unusual in this field) and other members of the team, both administrative and medical staff. Though the agreement did not directly involve the transfer of employees, as Mr. Villars wife was the only direct employee, a number of staff did move with the practice.

Mr. Villar sold his medical practice for £1,000,000, which included disposal of his right to earn any income from the practice, the transfer of all intellectual property including the database of former patients, website domain name and the business name, goodwill and the right to trade exclusively under the name Richard Villar.

Mr. Villar also entered into a consultancy agreement with the buyer to continue offering his services via a Personal Service Company (PSC).

The consultancy agreement did not impose an express obligation to work for the buyer however it did include a restrictive covenant preventing Mr. Villar from being able to work for any other practice in the UK. If Mr. Villar was to work for the company it was agreed that he would receive 75% of his previous fee to reflect that he did not handle the administration – as Mr. Villar was not to be involved anymore in the management and decision making of the practice. He was not obliged to work for the company and he did want to be in a position to take up other opportunities abroad. Practically all of the proceeds of the sale were attributable to goodwill.

HMRC’s position

HMRC challenged the nature of the £1,000,000 payment mainly from two perspectives:

• Firstly, HMRC felt that the payment represented payment for services and therefore should be subject to Income Tax in the hands of Mr. Villar, the seller; and
• Secondly, HMRC said, if the payment was capital, it should be treated as income under anti-avoidance provisions in the UK which says that even if the payment was capital in nature, the provisions of Chapter 4 apply so that it is nonetheless taxed as income.

Both arguments relied on the assertion that the disposal did not constitute the sale of a business.

HMRCs first argument was that the arrangement was merely a change in the way in which Mr. Villar carried on his occupation and so any proceeds should be treated as income in nature.

They argued that the payment was effectively an advanced payment for services, rather than the sale and acquisition of a business because practically all of the proceeds related to goodwill with only a nominal £4 attributed to other assets.

HMRC believed that the goodwill was personal to Mr. Villar and could not be transferred to the buyer and pointed to the fact that Mr. Villar continued to provide his services and also agreed to do this on an exclusive basis.

They maintained that essentially the business is the Appellant, Mr. Villar and that he has exploited an attribute of his professional expertise i.e. of himself.4

They maintained that Mr. Villar did not seek to sell the name of Richard Villar, it was his own name, the agreement was essentially to allow the buyer to use “the right to use the ‘Richard Villar’ name in connection with the Business” (and this was the definition of goodwill in the agreement).5

HMRC’s second argument was the anti-avoidance argument – the relevant anti-avoidance legislation said that a capital payment could be taxed as income if the payment was both to exploit a person’s earning capacity and to avoid or reduce income tax.6

The UKs anti-avoidance provisions apply where:

• An individual carries on an occupation wholly or partly in the UK;
• Transactions or arrangements are made to exploit the individual’s earning capacity in the occupation by putting another person in a position to enjoy all or part of the income; and
• A capital amount is obtained by the individual7

In essence, these provisions seek to prevent individuals from selling their businesses for a lump sum which is subject to Capital Gains Tax whilst they continue to operate.

Mr. Villars defence

Mr. Villars Counsel made a number of arguments in their attempt to assert that the payment he received was consideration for selling his business and was not merely a sale or exploitation of services.

They argued that Mr. Villar ran his practice under what was then a unique business model within the UK private medical sphere, in which patients would come to the practice, of which the Appellant was the figurehead, rather than to a specific named practitioner. This made the practice a business, in contrast to the way consultant surgeons usually worked.

Firstly, they pointed out that there was a professional valuation of the business and the sale was to an unconnected party on an arm’s-length basis.

Counsel argued that the reputation of the practice was attributable to Mr. Villars Practice and not specifically him, especially as other consultants also treated patients in his practice.

Counsel argued that Mr. Villar had given up his right to earn any income from the practice, had agreed to no longer take a management or decision-making role and had also transferred his Intellectual Property including the database of former patients, website domain name and the business name, all of which belonged to Mr. Villar, in return for the sum of £1 million.

Counsel also pointed out that the buyer could not require Mr. Villar to work for the practice.

Counsel pointed out that the sale of the business was a once-off transaction, with a single lump sum payment and a restriction on Mr. Villar from working in another UK practice, thus allowing the buyer to protect its capital investment.

Counsel also pointed out that Mr. Villar transferred the risk of operating the business to the purchaser.

In respect of HMRCs anti-avoidance arguments, Mr. Villars Counsel said that this arrangement was a genuine transfer of the business, and that the main objective was not to seek a tax advantage, or exploit the earning capacity of Mr. Villar.

The FTT decision

The Tribunal Judge, Rachel Mainwaring-Taylor, was of the opinion that the key dispute in this case was whether the arrangement entered into amounted to the sale of a business.

The FTT felt it was largely a question of fact as to whether Mr. Villar sold his business.

The FTT noted that the greater part of the value of the business was attributed to goodwill, but goodwill was not all that was being sold. The FTT noted that the additional value is the goodwill of the business, which is also capable of being sold.8

The FTT noted that much of the goodwill was connected with the name ‘Richard Villar’ and the fact that Mr. Villar continued to be known by this name did not prevent him from having parted with the goodwill.

The FTT were not convinced with HMRC’s argument that the true nature of the arrangement was a joint exploitation of Mr. Villars earning capacity as a surgeon between him and the buyer, and said “For this to be merely a sharing of goodwill or a changing of the way the Appellant practised his profession, the Appellant would have had to intend to continue to practise that profession with Spire. As a matter of fact, we find that he did not.”9

In relation to the Chapter 4 argument, the FTT felt the arrangement was not made to exploit the earning capacity of an individual in an occupation, Mr. Villar had made arrangements to sell his business and there was no fixed intention or obligation for Mr. Villar to continue to work as an orthopaedic surgeon.

The FTT said even if this test was met, the next question, “would be whether “one of the main objects of the…arrangements [was] the avoidance or reduction of liability to income tax”.”10

The FTT were not persuaded by this argument and accepted that Mr. Villar had sought tax advice on the sale of his business, and the agreement was entered into early in order to utilise Entrepreneurs Relief, but this “does not demonstrate an intention or desire to avoid or reduce income tax. We see no evidence that the parties entered into the arrangements in order to avoid or reduce income tax – or that income tax was a matter they considered at all. Indeed, insofar as he continued to work as a surgeon after the sale of his business, it appears that the Appellant was remunerated and accounted for income tax on his earnings.”11

More goodwill from UK Tax Tribunal!

The second recent decision from the UK that attention is drawn to is; Leeds Cricket Football & Athletic Company Ltd v HMRC12 where the FTT considered the identification and treatment of goodwill on the sale of a cricket ground known as Headingley Cricket Stadium.

Facts in LCFA

The company, The Leeds Cricket Football & Athletic Company Limited (LCFA), owned the stadium and leased it to Yorkshire County Cricket Club (YCCC). In addition, LCFA carried on three distinct (but cross reliant) operations at the Property: hospitality, catering and advertising.

In 2005 LCFA sold the freehold of Headingley Stadium, together with its business operations carried out at Headingley to YCCC.

The issue was: Did the sale involve a disposal of a business with attached goodwill or was there only a disposal of land with attached income streams?

The company argued that the sale was a sale of a business with attached goodwill, while HMRC argued that the sale was simply a sale of the land, together with a number of attached income streams.

The arguments and decision

1.Was a business transferred?

The FTT followed the Ramsay13 decision that the concept of business should be given a broad meaning and that it was a business if it was a serious undertaking earnestly pursued and conducted in accordance with recognised business principles.14

The FTT felt that these operations “Cricket Business” clearly amounted to business(es) and they pointed to the fact that cricket was in fact played at grounds other than the Property and the “income streams” continued.

“Just because an “income stream” is ancillary to the ownership of an interest in the land and would not exist without the land does not necessarily mean that a business was not being conducted from which the “income stream” was derived.”15. The example of a hotelier was given.

FTT rejected the argument that because LCFA operated catering before and after the sale (via licence), that no catering business was transferred, it rejected the argument that the granting of a licence cannot amount to a business, and thus no business was transferred.16

The FTT also rejected HMRCs argument that because Headingley Hospitality Limited (“HHL”) was engaged by the LCFA to sell hospitality packages then it was HHL, and not LCFA that was engaged in the hospitality businesses. It also felt that the decision to subcontract parts of the hospitality operation did not mean the LCFA was not engaged in that business, – “If anything it shows a proper business-like approach to outsourcing to bring about efficiencies.”17

And although not explicitly argued by HMRC, the FTT addressed the question about assets transferring and said they rejected the potential argument that a business cannot be transferred unless all of the assets of the business are transferred. They pointed to Widgery J in Kenmir v Frizzell and Others – [1968] 1 All ER 414 held, who held: “In deciding whether a transaction amounted to the transfer of a business, regard must be had to its substance rather than its form, and consideration must be given to the whole of the circumstances, weighing the factors which point in one direction against those which point in another. In the end, the vital consideration is whether the effect of the transaction was to put the transferee in possession of a going concern, the activities of which he could carry on without interruption….”18

2. Was there goodwill transferred?

The FTT quoted Lord MacNaghtens dicta from IRC v Muller & Co’s Margarine Ltd [1901] AC 217, who described goodwill as, “… It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed.

The goodwill of a business is one whole, and in a case like this it must be dealt with as such. For my part, I think that if there is one attribute common to all cases of good will it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again.”19

In relation to goodwill, the FTT felt that the business had goodwill that had been generated over the years by hard work and effort and also pointed to the fact that it had an “established client base and reputation garnered over the years through a professional sales, marketing and delivery operation which would distinguish it from a similar, but newly established operation.”20

They rejected the argument of distinguishing between inherent (or site) goodwill and adherent (or free) goodwill as they felt goodwill exists or it does not and it would be an artificial exercise lacking useful purpose and also the cricket business could be bought by another entity and carried out another location.21

The FTT also looked into the contracts which clearly defined ‘business’ and mentioned goodwill, in addition a deed of assignment of goodwill was entered into.

The FTT felt that the Cricket Business, with goodwill attached, was transferred in 2005 and it was not merely a transfer of land with income streams.22

Conclusion

Goodwill per the forgoing can clearly exist in a professional practice. As commentators note, HMRC’s share and assets valuation (SAV) have argued for a long time, “that the skillset of professionals such as doctors, surgeons and dentists remains their own personal asset and cannot be sold.”23 This case challenges that long held view and aligns now more with the views of accountants and advisers, as well as the professionals themselves who believe that they can have businesses capable of being sold on for a capital sum.

As Vaine comments, HMRC would be in for a surprise if they saw the reaction of a real seller who had been told they are being offered nothing for goodwill by a prospective buyer.24 Goodwill is often always given a value in a sale in reality and clearly the courts in the UK at least are starting to shift their views on whether this can be transferred.

It remains to be seen if the Irish Revenue Commissioners will take account of the cases discussed above, when considering the question of professional/personal goodwill. In any event, Irish and UK Accounting and Tax Practitioners should be aware of these cases and the arguments therein.

Mark Lonergan is Tax Director with CollinsGarcía

Email: mark.lonergan@collinsgarcia.ie

1Richard Villar v HMRC [2019] UKFTT 0117 (TC)

2Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 0568(TC)

3Andy Wood, “Transfer of Goodwill: Richard Villar v HMRC” (9-Apr-2019), https://www.etctax.co.uk/transfer-of-goodwill-richard-villar-v-hmrc/

4Richard Villar v HMRC [2019] UKFTT 0117 (TC), Para 43

5Ibid., Para 43

6Income Tax Act 2007 s773(2) (referred to as “Chapter 4”) per Sale of surgical practice is capital (22 March 2019) https://www.rossmartin.co.uk/sme-tax-news/3950-sale-of-surgical-practice-is-capital

7Andy Wood, “Transfer of Goodwill: Richard Villar v HMRC” (9-Apr-2019), https://www.etctax.co.uk/transfer-of-goodwill-richard-villar-v-hmrc/

8Richard Villar v HMRC [2019] UKFTT 0117 (TC), Para 98

9Ibid., Para 99

10Ibid., Para 103

11Ibid.

12Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 0568(TC)

13Ramsay v HMRC [2013] UKUT 226 (TCC), Para 6

14Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 0568(TC), Para 5

15Ibid., Para 17

16Ibid., Para 27

17Ibid., Para 28

18Ibid., Para 30

19Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 0568(TC), Para 6

20Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 0568(TC), Para 20

21Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 0568(TC), Para 21, and 22

22Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 0568(TC), Para 32

23Income Tax Act 2007 s773(2) (referred to as “Chapter 4”) per Sale of surgical practice is capital (22 March 2019) https://www.rossmartin.co.uk/sme-tax-news/3950-sale-of-surgical-practice-is-capital (accessed 04-10-2019)

24Peter Vaines, “Sale of goodwill”, (29 September 2019), https://www.taxjournal.com/articles/sale-of-goodwill (accessed 04-Oct-2019)