Goodwill Amortisation on Incorporation Not Deductible

A company that was incorporated by members of an insurance broking partnership and acquired the partnership's business has failed to persuade the First-tier Tribunal (FTT) that amortisation of the goodwill it acquired was deductible for Corporation Tax purposes.

The partnership had formerly offered life insurance, mortgage and investment advice recommended by independent financial advisers (IFAs), as well as personal and business insurance. In 2006, most of its IFAs having left, it sold its IFA business. At around the same time the landlord of its high-street premises gave notice, and it moved to new premises on a business park in 2007. It began to focus more on thatched home insurance and rural commercial insurance products. It continued to sell directly to customers but also moved into selling via other brokers on a wholesale basis.

The company was incorporated in 2013 and acquired the trade and assets of the partnership, including the goodwill, which was valued at £1.32 million. It claimed amortisation deductions in respect of the goodwill. HM Revenue and Customs (HMRC) opened enquiries into the company's Corporation Tax returns and issued assessments and closure notices totalling more than £107,000, disallowing the deductions. The company appealed to the FTT on the ground that the goodwill had been created on or after 1 April 2002 and therefore fell within Part 8 of the Corporation Tax Act 2009. It was common ground that the acquisition was from a related party and so the goodwill had to have been created on or after 1 April 2002 for the amortisation to be deductible.

The company contended that the business it had acquired in 2013 was not the same business that had been carried on by the partnership before 1 April 2002. A fundamental change had occurred in 2006: at around that time it had disposed of the IFA business, ceased to be a high-street community broker and commenced wholesale rather than retail broking. Those changes were not gradual developments but a sudden and dramatic transformation in the nature, scale and structure of the business.

HMRC viewed the changes as part of the natural evolution of the same business. The company had continued to sell insurance products and retained the same branding and customer goodwill. The goodwill was not newly created in 2006 and did not qualify for relief.

The FTT was unpersuaded that the changes ought to be seen as a single overall change sufficient to give rise to a termination of the business. The IFA business had been winding down for some time and ceased because the final IFA working for it chose to retire. The relocation was the result of being given notice on the high-street premises: the choice of a business park rather than another high-street location did not suggest a termination of the business. The commencement of wholesale broking began with the recruitment of a new staff member, which was entirely consistent with the exploration of new markets that is the natural evolution of any business. Overall, the facts were a long way short of being a change amounting to a termination of the business. The appeal was dismissed.