Identifying whether a disposal constitutes a ‘business’ may present a difficult task. Not only that, where a question crops up of how goodwill is valued, and which party to the transaction is the owner of the goodwill, this can often create more issues than not.
This was most certainly the case presented when HMRC decided to come up against Yorkshire Country Cricket Club, where surely a court case could have been avoided if the appellant taxpayer had simply introduced Geoff Boycott into the proceedings early!
We consider the First-tier Tribunal (“FTT”) decision in The Leeds Cricket Football & Athletic Company Limited v HMRC  UKFTT 0568 (TC), addressing these specific points.
In summary, this case involved a situation where there was a disposal which included a ‘business’ together with an associated piece of ‘land’ with its own separate income stream. On the face of it therefore, there seemed to be a situation where the disposal constituted one of, mainly, a lettings activity.
To recap, the disposal of a trading business, an intangible asset attached to a trading business such as goodwill, or an asset used in the taxpayer’s personal trade, does carry with it a number of favourable tax benefits such as the ability to claim Entrepreneur’s Relief, Holdover Relief and Rollover Relief.
With the reduction in the lifetime allowance for Entrepreneur’s Relief reducing from £10m to £1m, other relief’s such as Rollover Relief and Holdover Relief may well be of greater interest to taxpayers.
Such reliefs are simply not available where the position is such that the substance of the transaction represents an investment activity, such as the letting of land and/or property.
Very broadly, it is a generally accepted principle that where more than 20% of the value of the disposal is made up of non-trading activities, such favourable reliefs mentioned above will be lost to the taxpayer without a fight.From HMRCs perspective, where an assessment can be made such that the main substance of the disposal involves an investment activity over a trading activity, that will naturally create a much more favourable position for them.
Also relevant to this case was the matter of goodwill. As goodwill is not a physical asset, it must therefore ‘attach’ itself for tax purposes to a party within the transaction, be that an individual running a business, or the business itself. Which entity involved the goodwill is ‘attached’ to is open to challenge given that this can create a different result for tax purposes, depending on the facts. HMRC will clearly try to seek a position which results in the payment of the largest amount of tax possible.
The Facts of this case
In 2005, Yorkshire County Cricket Club (‘YCCC’) purchased the freehold to Headingly Cricket Ground (‘Headingly’) from The Leeds Cricket Football & Athletic Company Limited (‘LCFA’). Previously, YCCC leased the ground from LCFA, which it used as its main ground for staging cricket games.
Prior to the sale, despite the lease to YCCC, LCFA retained the right to carry on hospitality, catering, and advertising (‘the activity’) at the ground. Following the sale, YCCC granted a licence back to LCFA to continue the activity at the ground, in return for an annual fee.
HMRC contended that a substantial gain on an investment asset was realised on the transfer of the freehold from LCFA to YCCC due to the fact that, in their opinion, the freehold was sold with an attached income stream (the licence). HMRC further contended that, even if the transfer did amount to a transfer of a business, there was no goodwill attached and that any goodwill present remained with the transferor in any event.
In respect of Capital Gains Tax (“CGT”), the taxpayer contended that this charge should not arise due to the significant CGT advantages of Rollover Relief, which was claimed at the time.
The question referred to the FTT 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 FTT concluded that there was a business carried on by LCFA. This was supported by the fact that cricket was carried on at other similar grounds and ‘income streams’ continued within those.
Therefore, this transaction under scrutiny satisfied the test previously set out in Ramsay v HMRC  UKUT 226 (TCC), namely: –
“[there must be] a serious undertaking earnestly pursued with reasonable or recognisable continuity giving rise to a turnover and being conducted in accordance with recognised business principles”
The FTT further confirmed that it is not fatal to the question of whether a business exists in situations where an income stream may only be derived from a specific piece of land. Instead, the test is that set out in Ramsay again.
Further to this, the FTT also confirmed that the business did have goodwill and that this goodwill was included within the transfer of the business to YCCC. The FTT considered that the goodwill was generated during the operating of the business as a result of “hard work and effort”.
Specifically, the taxpayer has established a client base and reputation from its professional sales, marketing, and delivery operation, which therefore distinguished it from a similar, newly established business.
Despite the broad judicial application of the concept of a ‘business’ in this and previous cases, HMRC appear to try at least to maintain as restrictive an approach as possible, alongside also discounting goodwill, despite goodwill naturally forming part of most business transfers as going concerns.
Whilst concerning a sporting venue, the principles arising out of this case and others will also be of particular relevance to taxpayers who are ultimately involved, either in the past, present or future, in a situation where in the overall context of the disposal/acquisition of land/property, there is a separable business activity(ies), thus potentially affording the taxpayer favourable CGT relief.
Further, this case and others like it raises the question of which party to the transaction is the ultimate holder of the goodwill. This is potentially of relevance in the context of a professional taxpayer, such as a dentist, lawyer, or accountant, who has sold or is planning to sell their practice to a 3rd party.
HMRC have attempted on a number of occasions to argue that the value of the goodwill attributable to a professional practice, such as those listed above, is not attached to the business and is in fact attached to the taxpayer personally.
In such a case as this where the goodwill is often the most valuable asset within the business, for HMRC to argue that this does not form part of the business transferred by the taxpayer to the purchaser, this may result in a position where the value of the goodwill is not afforded favourable CGT treatment.
Other cases along these lines have involved taxpayers engaged in the following areas: –
- The farming industry where the taxpayer has now let out large parts of the farm. Many farmers have diversified and let out parts of their land but have held on to rights to carry out activities on the leased land
- Large country houses where parts of the premises are operated in the leisure and entertainment industry such as a wedding venue
- Landowners who operate a holiday park such as caravans or glamping, or a commercial activity such as wind farming on part of their land
- Franchisors purchasing back franchises from Franchisees where the Franchisee has built up a large proportion of the goodwill over the years.
This case and others highlight the inherent technical issues surrounding the tax treatment of goodwill and separation of business income streams in general, as well as HMRC’s pedantic and aggressive approach to assessing these issues.
When considering the disposal of a business, technical expertise is vital so as to not fall foul of an HMRC enquiry. Further, it is essential that any reliefs from tax are properly identified, explained and applied to the situation in hand, thereby ensuring that the right amount of tax is payable.
At ETC Tax we have an experienced and specialist team who have a wealth of experience in advising on business disposals. On the subject of goodwill, our Jerry Giles has recently written on the subject which may be viewed here. www.etctax.co.uk/ins-and-outs
If you or your client would like any assistance in relation to any of the issues raised above, then please get in touch.