HM Revenue and Customs are reportedly adopting a hard line on those seeking to minimise their liability to pay Stamp Duty Land Tax upon the acquisition of land as part of a business purchase.

The Finance Act 2002 provided that “no stamp duty is chargeable on an instrument for the sale, transfer or other disposition of goodwill.” Thus it became common for purchasers to ascribe an unduly large proportion of the total purchase price for a business to goodwill and chattels rather than the land being sold with the business. By so doing, they could avoid paying stamp duty on the true value of the land, and sometimes bring the declared value of the land beneath a stamp duty threshold so that a lower rate of stamp duty became payable on the declared value.

Following the introduction of the new Stamp Duty Land Tax regime, HMRC have issued clear guidance that “The exclusion of goodwill from the charge to stamp duty by FA02/S116 does not apply to stamp duty land tax.”

In practice HMRC are contending here that, where there is the sale of a business including land, the consideration apportioned not only to the land but also to goodwill is taxable for SDLT purposes.

However, this position is not supported by guidance provided elsewhere by both HMRC and the Valuation Office, and the current emphasis appears to be on identifying those transactions where the stated apportionment of the total purchase price between the land and the goodwill is not realistic.

What to do when buying a business?

Anyone entering into a business purchase which includes the purchase of land should ensure that they take proper valuation advice not only on the total value of the business but also on the correct apportionment of that value between the component parts of the business. A written record of this advice should be kept and any seller should also be satisfied that the apportionment is realistic and justifiable.

If an enquiry is then made by HMRC, the buyer can point to its valuation advice to show that he or she has acted in good conscience and without the intention to avoid tax liability. Thus the risk of fines or prosecution can be eliminated notwithstanding the confused guidance being issued by HMRC.

Philip Rowland, Adams & Remers, November 2007