HMRC wins ‘goodwill payments' tax battle against Smith & Williamson
HMRC appeal against investment management group Smith & Williamson over treatment of ‘goodwill payments' upheld
AN argument between Smith & Williamson and HMRC over the treatment of ‘goodwill payments’ has been won by the taxman.
HM Revenue & Customs has had its appeal against investment management group Smith & Williamson upheld by an upper-tier tax tribunal, in a dispute over goodwill payments that the firm made to a number of its employees.
In the latest hearing, the tax authority claimed that a “goodwill payment” made by Smith & Williamson Investment Management Services (SWIM) to a portfolio manager and some of his staff was liable to income tax and NICs.
HMRC argued that Patrick Smiley, a portfolio manager who has been working for Smith & Williamson since 2006, and other members of his team, agreed to hand their client relationships to SWIM in exchange for the goodwill payment.
The agreement is believed to have been formulated by Smith & Williamson Corporate Services (SWCS), another company within the Smith & Williamson group.
The upper-tier tribunal outlined that the goodwill payments “were part of a strategy to increase the funds under management of SWIM”.
The issue is whether Smiley’s share of the payment was an emolument from his employment. In November 2006 a letter addressed to Mr Smiley from SWIM stated that he was to receive a share of the payment, a letter which judge Mr Justice Warren labelled as “the 2006 Contract”.
HMRC argued that if Smiley wasn’t given the goodwill payment under the terms of his employment contract “then the payment was made pursuant to non-trade and non-employment services provided under the 2006 contract”.
However Smiley contested that the payment should have been treated under the capital gains tax regime.
The original ruling was that Smiley’s employment contract and the 2006 contract were completely separate, with the negotiations for his goodwill payment conducted independently.
However, Justice Warren allowed HMRC’s appeal to stand, stating that the client connections failed to provide a separate source of income – in that the payments were in reference to services rendered by an employee.