Incorporation

Options
K H
K H Registered Posts: 81 Regular contributor ⭐
i am just in the process of incorporating a sole trader and looking to 'sell' his goodwill to the company.
does anyone have an idea of a rule of thumb to calculate his goodwill without getting a professional valuation and at a figure acceptable to HMRC.
He has a quite profitable Landscaping/gardening business and employs 6 people.
any ideas gratefully appreciated.

thanks

Comments

  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
    Options
    If he employs 6 people then I expect the value of his business to be reasonably high. I would want to get a professional valuation and agree the goodwill figure with HMRC. Goodwill is hard to value and there are so many 'rules of thumb'.

    If he commenced sole trade after 2002 then he can claim the goodwill amortisation against CT as well as having that DLA to drawdown on so there's potentially a lot of tax savings here, though remember CGT on the sale of the goodwill.

    If the numbers here are quite big, then it's worth him paying for a professional lookover.
  • groundy
    groundy Registered Posts: 495 Dedicated contributor 🦉
    Options
    I would value goodwill at £10,600 or thereabouts!
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
    Options
    groundy wrote: »
    I would value goodwill at £10,600 or thereabouts!

    Can you get away with that though? It's a "nice" figure (just as 4x annual allowance used to be in the days of taper relief, god now I feel old!) but in practice would HMRC agree with it?
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
    Options
    I would call HMRC to agree - I've had to do this a couple of times and they've told me to use 4 x annual turnover.

    Agree with Monsoon if we're talking big numbers have a professional lookover.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
    Options
    HMRC said 4x turnover? That's nuts!

    Surely that depends on the industry?!

    e.g. I have a client whose t/o £500k, profit £50k. So they have to pay CGT on goodwill of £2m?! And get that as a tax writedown doodah in the new company? I can't see them agreeing to that.

    This is why you can't rely on HMRC's advice :D But, if it's favourable and they will put it in writing....!!!! :-D

    What is the industry KH? What turnover and net profit are we talking about?
  • K H
    K H Registered Posts: 81 Regular contributor ⭐
    Options
    Thanks for all your input/ideas, as i said previouslY his business id landscaping/gardening and he has mostly repeat business.
    turnover approx £300k profits approx £30k - £50k.
    Monsoon you stated about write off but he started before 2002 and i thought this was only available if the goodwill hadn't been paid for, but it is my intention to draw off the DLA.
    I appreciate your input.
    thanks
  • groundy
    groundy Registered Posts: 495 Dedicated contributor 🦉
    Options
    I have never contacted HMRC with regards to a goodwill valuation. Glad I haven't after this thread if goodwill is 4*turnover I may think about selling up!
  • lorraine
    lorraine Registered Posts: 404 Dedicated contributor 🦉
    Options
    Yeah, I would be tempted to sell up too!.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
    Options
    K H wrote: »
    Thanks for all your input/ideas, as i said previouslY his business id landscaping/gardening and he has mostly repeat business.
    turnover approx £300k profits approx £30k - £50k.
    Monsoon you stated about write off but he started before 2002 and i thought this was only available if the goodwill hadn't been paid for, but it is my intention to draw off the DLA.
    I appreciate your input.
    thanks

    If the goodwill was generated before 2002, you still Dr Goodwill and Cr DLA in the new Ltd Co. The DLA is still there to draw off, but there is no tax relief on the amortisation of the goodwill (whereas there is if gw created after 2002).
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
    Options
    I know, I was astounded! I've only had to do it on two occassions and both times I was told to use 4 x turnover and they were different industries but similar £. And definitely get them to put it in writing ;)
Privacy Policy