The Commissioners for HMRC v Neil Pickles & Anor.

For the purposes of Corporation Tax Act 2010, section 1020, “market value” applies to both the benefit received by a member and the new consideration given. It does not import the statutory open-market definition used elsewhere in the tax legislation.

The value is assessed from the perspective of a member with the attributes and knowledge of the actual member, but remains grounded in objective considerations. A contractually enforceable and genuine promise by a company to pay a stated sum is received when the right arises and must be valued at that time. Later events, including a later revaluation of transferred assets or the amount ultimately paid, cannot be used retrospectively to discount it.

The Commissioners for HMRC v Neil Pickles & Anor. concerned the incorporation of the taxpayers’ potato-processing partnership. Their company agreed to acquire the business goodwill for £1,199,043, credited to the directors’ loan account and payable in cash or as a debt payable on demand.

HMRC issued closure notices treating the excess over the goodwill’s value as a deemed distribution under section 1020 of the Corporation Tax Act 2010. The First-tier Tribunal found that the goodwill was worth £270,200 and assessed a distribution only by reference to sums actually drawn. HMRC appealed; the taxpayers cross-appealed, contending that the benefit of the debt should be limited by the company’s net assets.

The central issue was the proper meaning and application of “market value” in section 1020.

1. HMRC’s appeal was allowed and the taxpayers’ cross-appeals were dismissed. The First-tier Tribunal materially erred in law. Its decision was set aside and remade.

2. Under section 1020(1)(b), the goodwill transferred by the members to the company was the new consideration. Section 1115(1)(a) defined that expression as consideration not provided out of the company’s assets. The statute therefore already required the value of the transferred goodwill to be taken into account; it was unnecessary to introduce that result by a separate purposive qualification.

3. The relevant benefit was the taxpayers’ contractually enforceable right to £1,199,043. They received it when that right crystallised on or around 1 May 2011, not when later payments were made. Valuation at later drawdown dates improperly used hindsight and fragmented a single benefit.

4. Section 1020(3) applied in every case within section 1020(1), including where the benefit was a monetary promise. However, its reference to market value did not incorporate the “open market” definition used in other parts of the tax legislation. On a purposive construction, the value was that attributed to the benefit by a company member sharing the taxpayers’ attributes and knowledge, subject to objective constraints.

5. The promise was genuine, objectively documented, payable on demand, and intended to be honoured. Its value was therefore its face value, £1,199,043. It could not be discounted by reference to the company’s immediately realisable net assets or a later revaluation of goodwill. The total deemed distributions were £928,843, and the income-tax closure notices were increased accordingly.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal was allowed and the taxpayers’ cross-appeals were dismissed. The First-tier Tribunal’s decision was set aside and remade.

• First-tier Tribunal (Tax Chamber): In an original decision dated 22 April 2020, later supplemented on 12 August 2020 following a review, it valued goodwill at £270,200 and treated £501,663 of cash actually received as a distribution under section 1020 of the Corporation Tax Act 2010.