Mark McLaughlin looks at factors to consider in determining whether goodwill exists in a business.
A business generally comprises various assets, one of which is often goodwill. However, a new business will not normally have goodwill; the goodwill of a business is broadly the advantage of the reputation and connection with customers that the business possesses. A new business will not usually have a ‘name’ or reputation as such.
Goodwill is not necessarily reflected in the accounts of a business, even if goodwill exists. The business may have built up its goodwill from scratch over time. HM Revenue and Customs (HMRC) confirms (in its Capital Gains manual at CG68010): ‘The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist’.
However, in some cases HMRC may contend that there is little or no goodwill in the business.
Personal goodwill
For example, if the goodwill is attributable to the personal skills of the proprietor (e.g. a chef or mobile hairdresser), HMRC’s view is that such ‘personal’ goodwill is not transferable on a sale of the business.
Thus if (say) a business with personal goodwill is sold to a company upon incorporation of the business (with the proceeds being left outstanding as a loan owed to the proprietor, which is repaid by the company as funds allow), there is a danger that the value of the goodwill transferred will be lower than anticipated because of the personal goodwill element, which HMRC considers cannot be transferred to the company.
Goodwill…or something else?
There may be circumstances where HMRC argues there is no goodwill in the business whatsoever. This might happen if an asset such as land or buildings generates one or more income streams; HMRC could contend that the income streams do not represent goodwill.
For example, in The Leeds Cricket Company Football & Athletic Company Limited v Revenue and Customs [2019] UKFTT 559 (TC), the appellant (‘the company’) contracted with Yorkshire County Cricket Club for the sale and purchase of freehold property at Headingley cricket stadium. Prior to the sale, the company carried on a cricket business comprising hospitality (i.e. finding clients and organising/attending meetings), advertising (i.e. selling advertising packages for boards at the ground), and catering (i.e. 19 full-time staff were employed to provide meals and refreshments to stadium visitors on cricket days).
The issue was whether the sale involved: (a) a disposal of a business with attached goodwill; or (b) only a disposal of land with attached income streams. The First-tier Tribunal found that distinguishing between certain goodwill types (i.e. inherent (or ‘site’) goodwill and adherent (or ‘free’) goodwill) was an ‘artificial exercise’. The tribunal concluded that the cricket business (with attached goodwill) was transferred together with the property. The transfer was not merely a transfer of land with attached income streams. The appellant’s appeal was allowed.
Practical tip
For a helpful summary of points to consider when seeking to establish whether goodwill exists, see Balloon Promotions and Others v Wilson (Inspector of Taxes) and another [2006] SpC 524, at paras 159-169. Even if goodwill contains a personal (non-transferable) element, there may also be elements of non-personal goodwill. Specialist advice should be sought, if appropriate.
