UT-2023-000116; - [2025] UKUT 00164 (TCC)

The FTT summarised the issues before it at FTT [77]-[85] as follows:

“Corporation tax

77.

The tax legislation (examined in detail below) effectively permits a tax deduction to be taken by a company in respect of its amortisation of capital expenditure incurred on intangible fixed assets (including goodwill), to the extent that the expenditure and amortisation are reflected in the company’s UK GAAP-compliant accounts. There was some disagreement as to the precise consequences if the accounts were found not to be GAAP-compliant, explored in more detail … below. In outline, HMRC argued that relief would then be allowed based on what would have been GAAP-compliant accounts, whereas Nellsar’s argument was somewhat more nuanced.

78.

When Nellsar acquired the various nursing/care homes, in each case it acquired a number of different assets, including the freehold property, various fixtures and fittings, inventory and the goodwill of the business.

79.

UK GAAP required Nellsar to include the “identifiable assets” (i.e. those assets capable of being disposed of separately, without disposing of the business as a whole) in its balance sheet at “fair value”. Clearly the freehold property in each case was an “identifiable asset” for this purpose. Equally clearly, any goodwill (being “the difference between the fair value of the net identifiable assets acquired and the fair value of the purchase consideration”) was not.

80.

The goodwill in each case was therefore simply a balancing figure in accounting terms – what was left over of the purchase price after the “identifiable assets” had been allocated their appropriate “fair values”. The key component in the valuation of the goodwill figure in each case was therefore the freehold property: there was no dispute about the values allocated to the fixtures and fittings in each case, which were the only other “identifiable assets” involved in the purchase.

81.

The focus of this case was therefore the correct assessment of “fair value” for the freehold property in each case. Under UK GAAP [FRS 7.9], the general rule for attributing fair value to any tangible fixed asset on acquisition (such as the freehold properties) was that it should be “based on… market value, if assets similar in type and condition are bought and sold on an open market”; however, where this provision did not apply, it should be “based on… depreciated replacement cost, reflecting the acquired business’s normal buying process and the sources of supply and prices available to it.”

82.

The crucial issue in these appeals is therefore whether one can attribute a fair value to the freehold property as a single standalone asset; if so, how that is to be done, and the extent to which the carrying on of the business in the property should be taken into account when doing so.

83.

It is clearly possible for the freehold of a nursing/care home to be disposed of separately, without disposing of the associated business – which could simply be closed down, for example. Therefore, Nellsar’s argument runs, if one is to allocate market value to the freehold property alone, one must be able to identify an open market on which assets of that type (i.e. nursing/care home properties which are not being operated as such) are bought and sold. Since the vast majority of nursing/care home sales take place as part of a sale of the underlying business and not as sales of non-operational premises, there is not a sufficient market in the relevant assets to enable a market value to be derived. Therefore, it is said, GAAP requires Nellsar to fall back on the alternative accounting rule, which requires it to bring the property into its accounts at a fair value which is “based on depreciated replacement cost”; and that is precisely what it did.

84.

HMRC’s argument, in outline, is that where a freehold nursing/care home is valued for these purposes, the combined effect of the accounting rules and RICS valuation standards is that the property is capable of separate valuation but its value should be determined having regard to the inherent trading potential of the property itself and taking account of the business which is actually being operated from it; and that the effect of doing so is to characterise much or all of what might otherwise be considered as “goodwill” as simply part of the value of the property.

Stamp Duty Land Tax

85.

The legislation is different, and requires a “just and reasonable” apportionment of the total purchase price paid amongst the various assets acquired (including goodwill). Nellsar argued that as a matter of law it was to be afforded a “wide latitude” in making such apportionment, and its own apportionment (based on arm’s length negotiations) ought to be respected. HMRC argued that any apportionment needed to be based on the market values of the various assets concerned, which led inevitably back to an assessment of the market value of the property in each case being the crucial element of any apportionment.”