UK tax tribunal dismisses appeal against goodwill degrouping charge

A recent decision by the First-tier Tribunal (Tax Chamber) (FTT) shows how important it is for businesses to consider the tax implications of handling intangible assets at an early stage, as well as shedding light on how the FTT might approach such situations.

In Currys Retail Limited v HMRC [2025] UKFTT 762 (TC), the FTT held that a degrouping charge applied to goodwill, although the taxpayer had sought to prevent this from happening by attempting to assign the goodwill before departing the group. 

Background

Under section179(3) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), a degrouping charge can arise where, at the point at which a company leaves a chargeable gains group, it has ownership of an asset which was acquired as a result of an intra-group transfer made in the previous six years.

For tax purposes, the company leaving the group is considered to have disposed of and reacquired the asset at its market value at the time of the original transfer. This can cause particular difficulties for a company exiting a group if the value of the asset has fallen during the course of its ownership.

In this case, Currys Retail Limited (CRL) acquired the businesses and assets of four group companies through intra-group transfers between 2004 and 2007. The value of the goodwill attached to these businesses at that time was approximately £108m.

However, by the time CRL was leaving the group in 2008, the value of the goodwill had fallen to around £50m. As it had been fewer than six years since CRL made these acquisitions, it would be liable to a degrouping charge based on the original market value.

To prevent this, prior to leaving the group CRL transferred a right to carry on the businesses and associated goodwill to Best Buy UK CP Limited (BBUK). Under this arrangement CRL would operate and manage the businesses on BBUK's behalf for a management charge. Although CRL and BBUK were not connected at this stage, they were shortly due to enter into a joint venture.

CRL considered that no degrouping charge would arise following this arrangement and filed its return on this basis. However, HMRC concluded that a degrouping charge arose on £108m of goodwill upon the formation of the joint venture between CRL and BBUK and determined a corporation tax liability of approximately £30m.

FTT decision

The FTT considered that the initial point to determine was whether CRL held the goodwill at the time of its departure from the group. It rejected CRL's view that this could be determined by simply reviewing the documents entered into by the parties and instead applied the purposive approach to interpreting legislative provisions set out in the Ramsay line of cases and as embodied in Rossendale (whether the facts, viewed realistically, fell within the relevant legislative provision). In doing so, the FTT agreed with HMRC that section 179(3) TCGA 1992 should be construed purposively to determine whether that provision was designed to apply to this transaction when viewed realistically, adding that the documents alone were not determinative.

On this basis the FTT carried out a review of the documents. It found that they did not contain any provisions for the transfer of the businesses. Nor did they contain any provisions for the transfer of assets other than goodwill or the assumption of liabilities, or for the transfer of employees. It was CRL, and not BBUK, which had control of the strategy and operation of the businesses and which was exposed to the corresponding risks and rewards. The FTT contrasted these with the documents relating to the acquisitions made by CRL between 2004 to 2007 which referenced the transfer of the businesses as a going concern.

The FTT reflected on the fact that although the parties were not part of the same group at the time the documents were entered into, they had already committed to forming a joint venture. As such it was wrong to view this transaction as an entirely arm's length arrangement.

Notably, the FTT added that there was nothing inappropriate about a transaction which was designed to avoid a degrouping charge and that if CRL had disposed of the businesses and associated goodwill before it left the group, then the fact that the disposal had been motivated by the desire to avoid the degrouping charge would not have prevented CRL from avoiding it. However, it found that CRL wished to hold onto the businesses and the goodwill at the same time as avoiding the degrouping charge.

The FTT found that when the facts were viewed realistically, the businesses were not transferred under the agreements and that after the agreements CRL carried on running the businesses as the principal.

Osborne Clarke comment

This decision highlights the increasing comfort with which the FTT is willing to apply a purposive approach to legislative provisions following Ramsay and Rossendale and view the facts realistically, rather than rely on the mechanics of transactional documentation when carrying out its fact finding function. Given the amount of tax at stake and the approach adopted by the FTT, it may be that the FTT's application of Rossendale forms part of an application to appeal to the Upper Tribunal.

Interestingly, the FTT's decision notes that there was nothing inappropriate about a transaction which was designed to avoid a degrouping charge, provided the relevant assets were effectively disposed of prior to leaving the chargeable gains group. This highlights the importance of early engagement when seeking to understand the potential tax consequences associated with intangible assets and goodwill in particular. It is therefore necessary to fully understand the individual facts and surrounding circumstances at the point at which a transaction is entered into, as this may be probed by HMRC in the future.

HMRC's latest figures for large businesses state that the tax under consideration in respect of the intangible asset regime currently stands close to £3.5billion and at around £64m for mid-sized businesses. It is therefore expected that this will be an area HMRC continue to scrutinise.

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