SMITH AND CORBETT V HMRC TC/2021/00047

This was a successful appeal by the taxpayers involving the transfer of goodwill by two IFAs to an LLP. HMRC had assessed the taxpayers to income tax on what HMRC said had been a distribution to them by their IFA company when the goodwill in question was credited to their capital accounts in the LLP. Patrick Cannon represented the taxpayers and successfully argued that despite the taxpayers operating through their IFA company, the goodwill was owned personally by the taxpayers, so there had been no distribution to tax.

The decision is notable in rejecting HMRC’s oft quoted argument in such cases that goodwill cannot be owned independently of the business to which it relates based on IRC v Muller & Co Margerine Ltd [1901] AC 217. The FTT preferred the analysis of Lord Nicholls in Kirby v Thorn EMI plc [1987] BTC 462, which, in effect, recognised that goodwill could be separately held from the business to which it relates. The FTT also distinguished the decision in HMRC v Smith & Williamson Corporate Services Ltd and Smiley [2015] UKUT 666, where the payment in question was not actually for goodwill. The decision is also a reminder about the primacy of GAAP-compliant accounts and section 46 CTA 2009, which has variously been described as encapsulating “the golden rule” when taxing a company, as recently confirmed by the Supreme Court in HMRC v NCL Investments Limited and another [2022] UKSC 9.

You can read the full decision here