Goodwill on incorporation

RAS

I am in the process of incorporating a sole trader business and considering whether there would be justification for the sole trader business to sell goodwill to the company. Most would probably be personal goodwill and not transferable, but would imagine that there would be some elements that could justify some value. Grateful if anyone could point me in the right direction, not sure if all goodwill valuations have to submitted to HMRC to be agreed by them??? Any advice welcome, thanks.

jamesm96

I don't believe there's a requirement to agree the valuation with HMRC, just as there's no requirement to gain their approval of the expenses you're claiming (it's a 'Self Assessment' regime).

That said, I would always want to check the valuation with them. Imagine putting a valuation through, claiming CAs on the amortisation, posting repayments of 'Capital Introduced' in the accounts... etc, only for HMRC to challenge the valuation on enquiry a year down the line and raise all sorts of penalties and interest for underpaid tax. (And, potentially, the Tax Credit Office asking for their tax credits back!)

Not good news in my view.

Here's the form: http://www.hmrc.gov.uk/forms/cg34.pdf

RAS

Mike

Many thanks for your reply. Any tips on how to value goodwill on incorporation?

jamesm96

RAS wrote: »

Mike

Many thanks for your reply. Any tips on how to value goodwill on incorporation?

Depends really. The scientific way is to take the profit for the year (or, more commonly, an average of profits over the last, say, three years) and multiply it by an appropriate PE ratio (you'll find these on the FT website). However, it's often the case that there isn't really an industry with a published PE ratio which is applicable, which does make it rather more difficult!

Then there are some industries where there's already a precedent for valuing a business... selling an Accounting practice, for example, is often valued at 1 x Gross Recurring Fees, regardless of profits!

Anyway, once you have your value of the business as a whole, strip out the value of any assets that are also being acquired as part of that value (such as debtors, machinery, WiP... etc) and the balance is Goodwill.

You'll run in to difficulty if HMRC don't believe that you actually could sell the business. For example, if the only reason that a business is successful is because John Smith runs it and he has lots of contacts and a good reputation, and perhaps he's the only person who's even in the company, then HMRC will call it all personal (inseparable) goodwill.