Entrepreneurs’ Relief concerning an orthopaedic surgeon who sold his practice, but continued to work for the buyer, with HMRC claiming that no sale had occurred for tax purposes.
It is reasonable to expect an individual who sells their business to an independent third party to reduce their tax bill by claiming Entrepreneurs’ Relief.
Entrepreneurs’ Relief: Background
Villar was a consultant orthopaedic surgeon who had built up a successful business, the ‘Richard Villar Practice’. In March 2010, he entered into an agreement with Spire Healthcare to sell his business for £1m, a sum which was largely allocated to goodwill. The transaction completed in July 2011.
Under the terms of the sale agreement, Villar could continue to practice as a surgeon; however, in the UK he could only do so for Spire and would be remunerated at approximately 75% of his previous rate. Villar’s lecturing and other professional activities were unaffected by the agreement with Spire.
Not unreasonably, Villar claimed Entrepreneurs’ Relief on the sale in his 2009/10 tax return. HMRC opened an enquiry into that return, and also raised a discovery assessment in respect of the 2010/11 return.
Entrepreneurs’ Relief: Revenue or capital?
At the heart of the dispute was whether the £1m payment received by Villar under the sale and purchase agreement was revenue or capital. HMRC argued that it was revenue and should therefore be taxed as part of the general business profits.
Alternatively, if the payment was capital, HMRC considered it should be treated as income under anti-avoidance provisions which relate to the sale of income from personal occupations; which in my opinion is the classic, ‘you can’t have your cake and eat it’ scenario.
Entrepreneurs’ Relief: Taxman’s opinion
In HMRC’s view Villar didn’t have a business to sell, as there was no business separate to his profession and reputation. Villar was a self-employed surgeon both before and after the transaction with Spire, he had merely changed the way in which he carried out his business.
They argued that the arrangement with Spire sought to exploit his personal goodwill for their benefit but did not represent a business capable of sale. HMRC’s concerns over arrangements whereby an individual sells goodwill to a company (usually on incorporation) and claims entrepreneurs’ relief on the sale are well known, but Villar’s situation was very different.
Entrepreneurs’ Relief: Was there a business to sell?
The fact that Villar had a business to sell was borne out by the valuation attributed to the Richard Villar Practice by a firm of independent valuation specialists, and ultimately by the fact that a third party was willing to pay Villar £1m for it. The agreement with Spire encouraged Villar to work for them after the sale, but there was no guarantee that he would do so.
The tribunal found little difficulty in concluding that the agreement with Spire clearly showed that there was a business to sell and found in favour of Mr Villar.
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