So the Autumn Statement came and went and everyone is talking about the shot in the arm that the Stamp Duty changes will give to the housing market and how cleverly the Chancellor has helped first time buyers!
All well and good but at this time of year perhaps others might have looked for a bit of seasonable cheer from Mr. Osborne? Well it’s traditional surely to offer something up to the business community especially in a pre-election period such as this.
Clearly this chancellor had other things on his mind. Specifically tax avoidance and the perception that there are still some out there who have not yet got the message, ( So bullishly put about by the Public Accounts Committee in general and its leader Margaret Hodge in particular), that tax planning is simply not “fair”! Mrs Hodge even got an award from Taxation magazine earlier this year, presumably for expounding just this viewpoint!
Tucked away among the press releases and technical documents on the HMRC website summarising the Autumn Statement proposals was an announcement that capital gains tax Entrepreneurs Relief was to be restricted on transfers of goodwill to a “related business”. This is HMRC speak for incorporations.
For many years it has been technically possible to “sell” the goodwill of your own business to a company that you own and benefit from the availability of capital gains tax reliefs against any capital gain arising. This first became popular during the 1998 to 2008 Taper Relief years and continued during the Entrepreneurs Relief period thereafter. The most obvious technique has been to sell the goodwill of your business to the limited company and use the Entrepreneurs Relief thereby paying 10% capital gains tax but almost inevitably establishing a significant balance on a Director’s Loan account with the company thus creating a sum which could be withdrawn from the company , (after corporation tax on the profits), free from income tax. This has been viewed as an attractive proposition by many.
However HMRC has recently been attacking this technique, especially where it can argue that the goodwill which was sold to the company is, in its opinion, significantly related to the value of a “trade- related” property, There are apparently quite a few cases now under compliance check and detailed review with HMRC where businesses have sold goodwill to their own companies from businesses where HMRC is arguing that in fact the bulk of the goodwill value being claimed is actually inherent in the value of the property used by the business and is not therefore “free” goodwill at all. As such it cannot be said to be anything other than part of the value of the property thus creating an additional SDLT liability for the HMC to collect and also reducing significantly the amount of post incorporation amortisation available to the company.
Some are currently arguing that this is a most curious and technically incorrect contention for the HMRC to pursue although others do accept that here there is some basis in its argument. Whatever the true position in law, (and this will almost certainly have to be the subject of a Tribunal case in the not too distance future), HRMC has clearly got heartily fed up of having to run these arguments and has decided with immediate effect to alter the Entrepreneurs Legislation so that in future this sale of good will technique will no longer be possible. Anyone planning to utilise this strategy is therefore going to have to hurriedly review their plans.
Contributed by Russell Cockburn, Tax trainer for Quorum Training