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Capital Allowances on Acquired Goodwill

Hi all!

Need to tap those juicy knowledge-filled brains of yours again if I may?

I am aware of the CTA 2009 and the 'trading' intangibles rules for allowable deductions of amortisation / 4% WDA election.

My question is are such deductions allowable for acquired goodwill? If so, assuming a 20 year allowable UEL, it would be most beneficial not to make the 4% WDA (unless UEL > 25 years). For example, on the purchase of a company with a FV of £90,000 for £100,000 resulting in £10,000 goodwill, an allowable tax deduction of £500 would arise.

If the deductions are allowable, could you please post some links for evidence (HMRC / CTA / other). I searched through the CTA 2009 but navigating through that is harder than Chinese algebra.

Many thanks in advance,

Coeus.

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By blok
13th Sep 2011 12:43

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I think you may have confiused the question by stating "capital allowances".

The company can write off the goodwill and claim the ammortisation as a deduction against its profits.

I would ignore the 4% allowance and claim the deduction based on evalutaion principles of how long the asset is expected to last.  Like most other things, no two are the same and this apploes to goodwill.

Generally we have been writing off over a 5 to 10 year period dependant on the type of business.

You need to read the whole part in CTA 2009 to get the bigger picture and whilst its not great reading thats just the way it is.

 

Alternatively HMRC manual CIRD is where to look.  Start here http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD10000.htm

and you should find what you need.

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By Coeus
13th Sep 2011 13:31

Hi Marion and Block.

Hi Marion and Blok.

 

Thanks for your replies.

 

I have started reviewing CIRD an getting a better grasp. Specifically CIRD10116 gives and example which was in line with my understanding.

 

However in this example it is one company purchasing another. Am I correct in understanding:

 i ) If the purchasing company were an individual, no amortisation of goodwill in allowable in that companies CT comp in respect of it's own goodwill?

 

ii) If i) is not correct, it is also incorrect that the purchasing individual is allowed a deduction from their trading income?

 

Cheers all,

Coeus.

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By blok
13th Sep 2011 13:49

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 ) If the purchasing company were an individual, no amortisation of goodwill in allowable in that companies CT comp in respect of it's own goodwill?

I am not sure what you mean. The purchasing company can not be an individual, a company is a company not an individual.,  Also, the rules are there for companies to get a CT deduction.  There are no similar rules for an unincorporated purchaser. 

You can't get a deduction for self generated goodwill.

Is that what you mean?

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By Coeus
13th Sep 2011 13:59

Yeah I'm happy with the unincorporated trader not getting an deduction.

 

However in my original example, an individual bought a company becoming the sole shareholder and director of ABC Ltd say.

 

In this example where there was £10,000 goodwill purchased i.e. the excess of the cash payment made by the individual over the FV of the assets of the company. On a 20% straight line rate of amortisation, £500 will be amortised in the company accounts.

 

In ABC Ltd's CT computation is this £500 allowable as a deduction from trading income?

 

Does the same hold true on goodwill formed on incorporation?

 

Thanks again for your input, this was keeping me up last nite :(

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By blok
13th Sep 2011 15:50

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I am now more confused. 

Did the individual buy shares?  or Did a ABC buy anything?

It sounds like you are describing an individual purchasing shares for £100k when the underlying value of the assets was £90k.

If this is the case there are no entries at all in the company accounts or tax returns.

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Clarification

Just to be sure - I had assumed (maybe incorrectly) that you meant a limited company had purchased a business (trade) from a third party (individual or company) with a sum that included a payment for Goodwill. In these circumstances  a company might be able to claim amortisation etc etc

However, if the purchase by either an individual or company was for shares this is just a capital cost.

Please clarify

Marion

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By Coeus
13th Sep 2011 21:36

Yeah I confused myself - not to worry it all makes sense now!

 

Thank you both for your help.

 

Till the next time :)

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