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If your business involves a partnership that is incorporated, or you’re thinking of moving from a partnership to a company structure, the way goodwill is treated for tax purposes matters a lot. A recent tribunal decision involving Armour Veterinary Group Ltd highlights how easily valuable tax reliefs can be lost — and what you need to watch out for.
Background to the Case
Armour Veterinary Group Ltd (AVGL) was incorporated on 27 January 2014 as a veterinary practice company, with two directors holding 50% of the shares each. Soon after incorporation, AVGL acquired the business previously run by the two directors’ partnership under the name Armoury Veterinary Centre.
That underlying business had a long history: it began as a sole trader practice in 1978, with one partner joining in 1997 and later becoming sole proprietor before forming a new partnership with the second director in 2008. In 2012, the partnership acquired a neighbouring practice and recorded goodwill of £165,805. In the company’s initial accounts, goodwill was valued at approximately £1.875 million.
AVGL claimed amortisation relief on the goodwill under the corporate intangibles regime (Part 8 of the Corporation Tax Act 2009). HMRC challenged the claim, issuing discovery assessments, contending that the goodwill either did not qualify or was created before the relevant date for relief. The tribunal dismissed the appeal.
Key Legal Issues at Play
What Goodwill Qualifies?
At the heart of the dispute was whether the goodwill in question falls within the “intangible fixed assets regime” — i.e., whether it qualifies for tax relief by way of amortisation. The relevant regime applies only to certain “goodwill” assets that meet specific conditions.
A critical condition: related-party goodwill must have been created or acquired on or after 1 April 2002 to qualify. If the goodwill was created earlier, the relief is not available. The case turned on establishing when the goodwill was created and who owned it.
Ownership and Creation of Goodwill in a Partnership Context
Another question was: in a partnership situation, who owns the goodwill? Is it the individual partners, or the partnership itself? This matters because relief depends on whether the goodwill was “created” by a related party and when it was created.
In the case of AVGL, the tribunal found that parts of the goodwill pre-dated 1 April 2002 and that the underlying partnership had been in business prior to that date. For example, the original sole trader practice existed before April 2002, and one of the partners had been involved in the business during that period. As a result, the tribunal held that key elements of the claimed goodwill did not qualify for relief.
Importance of the Partnership Agreement and Evidence
The decision emphasised the importance of contemporaneous documentation and clarity of structure. There was no clear partnership agreement covering key periods, conflicting evidence about when one partner became an equity partner, and limited valuation documentation. The lack of formal evidential support weakened the claim for relief.
The default position under the Partnership Act 1890 applies if you do not have a written partnership agreement that modifies it. That means rights and obligations, including who owns goodwill, may be governed by standard rules rather than customised ones. The tribunal held that, unless the partners explicitly opted out or defined otherwise, they were subject to the default legal rules.
What the Tribunal Decided
- The tribunal held that, for the “2005 goodwill” (i.e., when one partner succeeded the sole trader), it was deemed to have been created before 1 April 2002 and thus fell outside the relief regime.
- For the “2008 goodwill” (when the second partner joined), there was no evidence of goodwill introduced by the new partner, so no relief was granted.
- For the “2012 goodwill” (the acquisition of a neighbouring practice), although in principle it might have qualified, there was insufficient evidence to establish that it satisfied all the conditions of the regime, so relief was denied.
- The question of Scottish partnerships (the legal personality of Scottish partnerships) was addressed, and the tribunal held that the outcome would have been the same regardless of the legal form.
- Because of these findings, the company could not claim amortisation relief for any of the goodwill as claimed.
What This Means for You
If you run a partnership, or have incorporated one, or are transferring business from a partnership to a company, here are the key takeaways:
- The date when goodwill was created matters enormously. Goodwill created or built up in a business prior to 1 April 2002 (for related-party transfers) may not qualify for relief.
- You must be clear on who owns the goodwill: the partnership or the individual partners? Without clarity or agreement, you may face issues.
- Having a written partnership agreement is vital. It should cover how goodwill is treated upon retirement, incorporation, or a change in structure.
- When you claim relief for goodwill, you need robust evidence: formal valuations, clear agreements, and a documented chain of ownership. Weak or contradictory evidence can result in relief being denied.
- If you are acquiring a business or integrating a partnership into a company, pay particular attention to the business’s history, including the timing of any changes, and whether the circumstances align with the applicable relief regime.
- Even long-standing practices can face challenges when the structure and documentation are unclear or poorly maintained.
The Armour Veterinary Group case underscores that tax reliefs for goodwill in partnerships and their incorporation are delicate and fact-sensitive. It is not enough to transcribe a goodwill figure into the company’s accounts and assume that relief will follow. The timing, ownership, structure and documentation each make a difference.
At Tax Accountant, we can help you review your partnership structure, draft or update your partnership agreement, assess whether goodwill transfers meet the conditions for relief, and prepare the evidence needed to support your position. If you’re planning incorporation or have already made the move, it’s wise to assess whether your goodwill treatment will withstand scrutiny.
What is goodwill in a business, and why does it matter for tax?
Goodwill represents the intangible value of a business — things like reputation, client base, brand strength, and relationships that generate future income. When a business is sold or transferred to a company, goodwill is often one of the most valuable assets. For tax purposes, it matters because companies can sometimes claim amortisation relief under the corporate intangibles regime, reducing taxable profits. However, eligibility depends on when and how the goodwill was created.
What is the corporate intangibles regime?
The corporate intangibles regime governs how companies account for and obtain tax relief on intangible assets such as goodwill, trademarks, and intellectual property. Introduced on 1 April 2002, it allows companies to claim amortisation or write-downs against taxable profits — but not all goodwill qualifies, especially if it was created before the regime began or transferred between related parties.
Why was goodwill relief denied in the Armour Veterinary Group case?
In Armour Veterinary Group Ltd v HMRC, the company sought tax relief for goodwill following the incorporation of a long-standing veterinary practice. The tribunal found that parts of the goodwill had been created before 1 April 2002, making it ineligible under the rules.
Other elements were denied because there was insufficient evidence to prove the goodwill was newly created or acquired at arm’s length. The lack of clear partnership agreements and valuations also weakened the company’s position.
How does the date of creation affect goodwill relief?
The timing of goodwill creation is crucial. If goodwill was created before 1 April 2002, and later transferred to a company from a related party, it is not eligible for relief under the corporate intangibles regime. Only goodwill created or acquired on or after that date can qualify, provided it meets other criteria such as proper ownership and valuation.
Who owns the goodwill in a partnership — the individuals or the partnership itself?
This depends on the structure and agreement. In most cases, goodwill belongs to the partnership as a whole, not to individual partners. However, if the partnership agreement specifies otherwise, it can define ownership differently.
Without a written agreement, the default rules of the Partnership Act 1890 apply, often leading to confusion or disputes when partners retire or when the business is incorporated.
What happens if a partnership has no written partnership agreement?
If there’s no written partnership agreement, the Partnership Act 1890 automatically applies. This means the partners share profits, losses, and property equally, and goodwill typically belongs to the partnership as a whole. However, relying on default rules can cause serious problems, as they may not reflect the partners’ actual intentions or protect against future disputes.
Does it make a difference if the partnership is based in Scotland?
Yes, Scottish partnerships are recognised as separate legal entities — unlike partnerships in England and Wales. However, in the Armour Veterinary Group case, which involved a Scottish partnership, the tribunal found that this distinction did not change the outcome.
The key issue remained whether the goodwill was created and, if so, whether it was related-party goodwill under UK corporate tax law.
Can a partner buy goodwill from another partner?
Generally, a partner cannot buy goodwill from another partner unless there’s a clear agreement separating that goodwill from the partnership’s property. Goodwill is typically considered a partnership asset, and one partner cannot sell what the partnership collectively owns unless all partners agree to the sale.
Formal agreements and proper valuations are essential to make such transfers valid and tax-efficient.
What can partnerships do to protect their goodwill position before incorporating?
Partnerships should:
- Have a written partnership agreement that defines who owns goodwill and how it’s valued in the event of changes or incorporation.
- Maintain accurate records and valuations whenever goodwill changes, such as when a partner joins or retires.
- Seek specialist tax and legal advice before transferring assets into a company.
- These steps ensure that the goodwill treatment is transparent and withstands HMRC scrutiny.