Whether a closure notice covered amortisation of goodwill or additionally its valuation

Fri 22 Dec 2017

The First tier Tribunal (FTT) has held that the description in an HMRC letter accompanying a closure notice, was specific enough to be conclusive on the amount of goodwill amortisation deductible, and did not permit a subsequent argument to be made that the valuation of the goodwill was incorrect. This case only considered the scope of the appeal, and not the substantive appeal.  There may therefore be a subsequent consideration of the issues around goodwill amortisation in this case.

Background

In February 2011 Towers Watson Ltd acquired the trade and assets of EMB Consultancy and recorded goodwill on acquisition of £51m, to be written down at 20% per annum. A full year’s amortisation was deducted in the accounts for the year to 30 June 2011.  HMRC enquired into the deduction, contending that GAAP compliant accounts would require amortisation to be apportioned to a charge of 5/12ths of a full year’s charge.  The letter accompanying the February 2016 closure notice stated that the accounts were not GAAP compliant and that the 5/12ths portion of depreciation deductible was £4.2m instead of £10.2m.

HMRC subsequently also sought to argue the initial valuation of goodwill was overstated by £41m, and that the mention of non-GAAP compliant accounts in the letter accompanying the closure notice permitted them to run this argument.

The FTT noted the Supreme Court comments on closure notices in the Tower McCashback case ([2011] UKSC 19):

1. The scope and subject matter of an appeal are defined by the conclusions stated in the closure notice and by the amendments required to give effect to those conclusions.
2. What matters are the conclusions set out in the closure notice, not the process of reasoning by which HMRC reached those conclusions.
3. The closure notice must be read in context in order properly to understand its meaning.
4. Subject always to the requirements of fairness and proper case management, HMRC can advance new arguments before the FTT to support the conclusions set out in the closure notice.”

Reference was also made to the arguments in respect of a closure notice in the FTT case of BNP Paribas ([2017] UKFTT 487 (TC)), where it was held HMRC were permitted to run a new argument not set out in the closure notice and accompanying letter. In that case, however, specific reference was made in the accompanying letter, to the fact that HMRC were not relying on the argument it set out in issuing the closure notice.

The FTT in the Tower Watson case held that, when taken with the preceding correspondence, the closure notice and letter only referred to the amount of goodwill amortisation. Thus the scope of appeal did not extend to consideration of whether the value of goodwill was determined in accordance with GAAP.

Implications

Where HMRC seek to run alternative arguments to those set out in their closure notice and any accompanying letter, the conclusions in the closure notice and accompanying letter should be examined to assess whether they can validly run these alternative arguments. To discuss any aspects of tax investigations, please get touch with a member of the Mazars Tax Investigations team.