Stamping On Goodwill - R S Nock, barrister looks at the changes made to stamp duty on goodwill in the 2000 Finance Act

R S Nock, barrister looks at the changes made to stamp duty on goodwill in the 2000 Finance Act.
Section 129 of, and Schedule 34 to, the Finance Act 2000 make two important changes in relation to certain types of intellectual property, namely:
any assignment or licence of or transfer of a licence of relevant intellectual property is exempt from stamp duty; and
the consideration attributable to the relevant intellectual property can be deducted from the purchase price in deciding whether any relevant threshold has been exceeded for the purposes of determining whether a certificate of value can be inserted in order to obtain the benefit of the lower rate of stamp duty.
This raises some interesting and difficult areas around the planning of business sale agreements and company reconstructions; namely:
the allocation of the price; and
the use of certificates of value in relation to various assets.
The important assets are:
goodwill;
know-how;
relevant intellectual property;
goods such as physical trading stock or work in progress; and
the benefit of long term agreements.
These items frequently overlap. For example, a sale of know-how may contain an exclusivity arrangement which may involve goodwill, and the manner in which the parties allocate the price between these items could have a significant impact on the ultimate stamp duty cost which, at the current rate of 4 per cent (including any element where value added tax is chargeable because transfer of a business as a going concern treatment is not available), can be extremely high after adding back the liabilities pursuant to section 57, Stamp Act 1891. When dealing with a business as a going concern, such as on a reconstruction, whenever possible debtors and creditors should be excluded, with appropriate adjustments of the price taking account of any deficit or surplus in the anticipated debtor/creditor position of the vendor, and collected by the purchaser as agent for the vendor.
Scope of the exemption
The first point to note, however, is that the Stamp Office takes a narrow view of exempt intellectual property. This is defined as being any patent, trade mark (apparently whether registered or unregistered), registered design, copyright or design right and certain plant breeders' rights. The exemption also extends to equivalent foreign rights. The Stamp Office has already indicated that items such as domain names are not within this exemption and there may be some interesting questions as to whether corporate brands are trade marks or otherwise eligible for the exemption.
Certificates of value
The Revenue Manual's confirmation that certificates of value have to be included in the instrument at execution and may only be added later if omitted by mistake, means planning is necessary ab initio.
There are three significant categories of asset in any business sale agreement as follows:
exempt from stamp duty and the price attributable to which can be excluded from the certificate of value. These are (i) relevant intellectual property and (ii) goods;
exempt from stamp duty but which have to be included in determining whether a certificate of value can be included. For present purposes the most significant of these is know-how (Butterworth v Handley Page 19 TC 328); and
both stampable and have to be included within the certificate of value, i.e., all other property including foreign property even where it is unlikely that stamp duty will become payable. The major items for present purposes are matters such as goodwill and the benefit of long term contracts such as an agreement to develop a computer system or network or to carry out an advertising campaign which may generate future copyright. Farmers occasionally enter into such agreements for the supply of all future crops from a particular field to a food processor or manufacturer.
There are many issues of classification around this area because of the absence of any statutory definitions. Certain points can, however, be noted.
Goods
In business sale agreements, where there are items of stock held or physical work in progress in the course of manufacture or raw materials are being sold, there is a question as to the price at which the assets should be sold, particularly in relation to the level of final profits and losses for corporation tax (but see sections 100 et seq, Taxes Act 1988). This is an important issue given that such items can be within the first of the three categories above.
There is no reason for stamp duty purposes why these items should be sold at cost (however that may be determined). It may be possible to include a market value figure which includes an element of the anticipated profit arising on the eventual sale of the assets. This raises a question of borderline in that insofar as the price is not attributable to the goods, it may fall into goodwill and therefore move from the total beneficial category of exclusion from stamp duty and exclusion from the certificate of value into a fully chargeable item.
However, it is not always easy to identify goods. This is now a key issue in relation to the sale of leasehold interests where there are fixtures which may attract a large allocation of the price for capital allowance purposes. Insofar as equipment is a fixture to a leasehold property, it is subject to stamp duty upon the contract for sale being an item not excluded from the charge in paragraph 7 of Schedule 13 to the Finance Act 1999.
As the charge of fixtures applies upon the contract, not upon the assignment of the lease, interest and late stamping penalties begin to accrue much earlier than many people believe. There is, therefore, a potential compliance trap. If the Stamp Office on presentation of the assignment of the lease requests a sight of the contract, it may be entitled to refuse to stamp the assignment and impose the duty upon the agreement with interest and penalties, particularly where the six-month period from the execution of the agreement has expired (see paragraph 8 of Schedule 13 to the Finance Act 1999). It remains to be seen how aggressive the Stamp Office will be in practice on this point once it has realised the potential for exacting penalties.
Not everything that is fixed to land is a fixture. The test for determining this is basic land law and turns upon two factors:
the degree of affixation and whether it is possible to remove the chattel without substantial damage to the physical premises; and
the purpose of the annexation: i.e. whether it is fixed simply for its better use as a chattel which may encompass industrial safety requirements and not with the intention of making it part of the land.
This latter test has become more relevant in the light of recent cases, which look more to the purpose of the affixation and whether it was simply to permit the chattel to be used as a chattel rather than with the intention of making it part of the structure. This means that, under the modern approach, many items of equipment that are attached to land simply for the purposes of industrial safety are not fixtures but retain their character as chattels with the consequent stamp duty advantages.
The manual suggests that the Stamp Office will regard the equipment as a chattel if it can be removed without damage to the fabric of the building, but experience indicates that in practice it may require convincing.
Know-how
Know-how is a strange item which is not regarded as property for the purposes of stamp duty and which, in consequence, escapes stamp duty upon any transfer. For these purposes, it should be noted that notwithstanding there has been an election to treat the know-how as a capital asset for the purposes of capital allowances (section 530, Taxes Act 1988) it retains its character of know-how for stamp duty and is not converted into goodwill by the capital allowances election. It remains non-stampable notwithstanding that election.
Goodwill
For stamp duty purposes goodwill is an ill-defined item and, as indicated above, where there are items of stock being held then, in one sense, part of the goodwill is the anticipated profit upon the sale of the goods. However, if this is attributable to the goods themselves and these are sold with a reflection of their current market value, i.e., including the anticipated profit, then this will fall out of charge to stamp duty, whereas if they are sold at cost with a higher goodwill figure there will be problems of stamp duty and the higher goodwill may tip the balance in relation to any potential certificate of value.
Long term supply agreements
Agreements such as those illustrated above also fall into the same category. The benefit of these may in some senses be regarded as part of the goodwill or future profitability of the business, or they may be regarded as assets having a significant value in their own right. Unfortunately, this does not necessarily provide a stamp duty advantage in many cases, since sale of the benefit of a contract is subject to stamp duty within paragraph 7. There may be issues as to whether the contract has sufficient foreign connection to rank as a foreign asset or as foreign goodwill which will be excluded from the charge under paragraph 7, although there will be a charge if there is any formal assignment of the benefit of the contract or covenant against future competition.
The main area where there may be some potential benefit in allocating a value to the benefit of such arrangement is for the lessor of goods on the sale of a leasing portfolio. An agreement for the sale of a leasing portfolio is usually structured in such a way that it is a contract for the sale of the goods with the benefit of the agreement. This is regarded as a sale of goods, and so not subject to stamp duty (Drages Ltd v Commissioners of Inland Revenue 46 TC 389). Unfortunately, in many cases, these contracts are followed by assignments of the benefit of the lease and the right to receive the rental which is a stampable conveyance.
Allocating the price
The question is, how much freedom do the parties have in making the allocation between these various assets? Decisions such as Saunders v Edwards [1987] 2 All ER 651 indicate a totally artificial and unjustifiable allocation of the price, and might be regarded as a fraud upon the Revenue with consequent penalties for all of those concerned which would include the parties' advisers involved in preparing the document (section 5, Stamp Act 1891).
Intellectual property and the other assets
Schedule 34 to the Finance Act 2000 takes a rather messy approach to the situation. Paragraph 2 thereof provides that where part of the property sold is intellectual property, then as between intellectual property and all other assets the price has to be allocated on a just and reasonable basis. (It will be interesting to see what are the Stamp Office's ideas of justice and reasonableness.) Paragraph 3 deals with the situation of a sale for a single consideration where part of the property is intellectual property and modifies section 58, Stamp Act 1891. Where there is such a sale and the property is conveyed by several instruments, then the consideration has to be apportioned between all of the assets on the just and reasonable basis.
Where there is no intellectual property, the basic terms of section 58 of the Stamp Act 1891 apply and the parties are free to allocate the price between the various assets as they think fit. According to Re Brown & Root McDermot [1996] STC 483 this does not require the parties to allocate by reference to market value. In that case, the global consideration for the assignment of intellectual property was allocated by reference to cost rather than embark upon a difficult attempt to arrive at a rather speculative market value for this type of asset. This was held to be a perfectly reasonable and proper approach. Therefore, as between goodwill, know-how and chattels, the parties are reasonably free to allocate upon whatever basis seems reasonable to them, such as allocating a profit element to the sale of trading stock, other taxes permitting.
There is an intriguing question on the relationship of paragraphs 2 and 3. It appears, however, that the just and reasonable basis for all assets where intellectual property is involved applies only where there is a global or single price, i.e. paragraph 3 applies. However, according to paragraph 2 where intellectual property is involved, the parties may at the contract stage split the price in accordance with paragraph 2 and having allocated on a just and reasonable basis to the intellectual property, they may then allocate the balance of the price in the contract as they think fit between the non-intellectual property assets. This suggests that it is best to avoid the use of global prices since this will offer greater flexibility (until next year's amendment of the current mess) in dealing with know-how and goods.
Some simplification
The new changes simplify certain aspects of planning in relation to certain types of business and highlight the possibilities for allocating the price, particularly in the area of trading stock and fixtures.
R S Nock is a member of chambers at 24 Old Buildings, Lincoln's Inn, London WC2A 3UP.

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