Property sales and inherent goodwill

The FTT has considered the identification and treatment of goodwill on the sale of Headingley Cricket Ground: The Leeds Cricket Football & Athletic Company Ltd v HMRC [2019] UKFTT 568.

The Tribunal concluded that the sale involved a sale of a business with goodwill represented by the associated activities (such as catering, hospitality and advertising) carried out by the owners and transferred to the purchaser.

Of particular interest is the fact that the approach taken by the FTT in this case appears to cast doubt on HMRC’s view that inherent goodwill should simply be treated as an aspect of the valuation of the property rather than a separate asset.

Background

Until 2005, Headingley was owned by the appellant company, LCFA, and was leased to Yorkshire County Cricket Club (YCCC) for playing cricket. As well as leasing the pitch to YCCC, LCFA also carried out three distinct but related operations: providing hospitality, catering and advertising. In 2005, LCFA sold Headingley together with its business operations carried out at Headingley to YCCC.

LCFA argued that the correct tax treatment of the sale was to treat it as a sale of a business with attached goodwill (it appears that LCFA may also have sought to roll over any gain made under TCGA 1992 s.152). HMRC rejected this claim and argued that the sale was simply one of the land together with a number of attached income streams.

FTT decision

The FTT has robustly determined the case in favour of the taxpayer. Firstly, the FTT had no doubt that the hospitality, catering and advertising functions carried out by LCFA before the sale amounted (both individually and together) to a business. The FTT stated that HMRC’s argument that they were simply income streams not capable of existence without the land was "devoid of merit".

This was not simply a case of a passive income stream which did not require LCFA to do anything, it was a serious undertaking earnestly pursued with reasonable continuity and giving rise to turnover.

Moreover, the FTT rejected any suggestion that just because an 'income stream' is ancillary to the ownership of an interest in land and would not exist without the land does not necessarily mean that a business was not being carried on from which the 'income stream' was derived.

Secondly, the FTT concluded that the business carried on by LCFA had associated goodwill, which had been generated by years of hard work and effort. In addition, the FTT rejected the argument that it might be necessary to distinguish between inherent (or site) and adherent (or free) goodwill for these purposes.

Indeed, the FTT suggested that to do so would be unhelpful – “either goodwill exists or it does not”. Moreover, to the extent that HMRC argued that inherent goodwill should be subsumed into the value of the property, the FTT rejected that submission.

“Firstly… the splitting of goodwill into inherent and adherent goodwill is an artificial exercise lacking useful purpose. Secondly, the unchallenged evidence before us demonstrated that the Cricket Business could be purchased by another (possibly a competitor) and carried on at another location. We accept that the connection that the Cricket Business had was not with the land, per se, but with the staging of major cricketing spectacles there.”

Having concluded that LCFA had carried on a business which had goodwill, the FTT had little doubt that the sale to YCCC involved the sale of that business and the goodwill. In particular, it made no difference that YCCC had immediately licensed catering activities back to the LCFA.

Indeed, this showed that YCCC had an intention to ensure the business was carried on seamlessly. Equally, the fact that the hospitality functions had been outsourced by LCFA to a third party did not mean that that business was not carried out. Outsourcing showed a proper business like approach and granting a licence to a third party to carry out specific activities could amount to a business.

As such, the FTT upheld the taxpayer’s arguments that the transaction should correctly be taxed as the transfer of land and a business with associated goodwill.

Comment

The issue of the correct treatment of goodwill and whether inherent goodwill is simply part of the property value has been a contentious issue.

HMRC guidance has taken the position that the subdivision of goodwill into different categories is not especially helpful but that goodwill (such as inherent and adherent goodwill associated with a particular property) is not really goodwill at all “as they form part of the value of the property asset and are properly reflected within such”. This issue is especially relevant in relation to SDLT valuations.

The decision of the FTT appears to support those who argue that HMRC’s approach in this area is incorrect and, as such, it will be interesting to see if HMRC choose to appeal this decision or (perhaps more likely) simply argue that it is a decision on its own facts which does not impact their view on inherent goodwill.