Goodwill on incorporation

Goodwill on incorporation

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I have a sole trader client in the construction Industry. He was running a small business of refurbishment for last 20 year and now incorporating into a limited company. His current and capital accounts in the sole proprietor business are in deficit. Two Questions

1 If the business is transferred into the limited company as going concern, then the capital and current accounts will be transferred into director loan account making a debit balance. I guess to overcome this we need to value the business and create goodwill. An valuation based on a multiple of 3 -5 for average of last 3 years of profits is not enough to cover up debit balance and if I use average turnover for last three year it will be more then £500k. Therefore, I am not sure how to value the goodwill.

2 If I value the business by increasing the multiple for the average profits of the last three year to cover-up the deficit, and HMRC refuses to accept the valuation what other choices will I have as the last thing I want is Section 419 tax.

Let me know about your thoughts.
Many thanks

Asim Malik

Replies (4)

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By User deleted
27th May 2009 14:02

Erm...
Not sure the question even demanded any guidance on the deduction of goodwill amortisation. In any event this is a connected transaction so you'll get nowt.

@ Martin Foley - you have reminded me that my overall thought was that the OP appears out of their depth.

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By User deleted
27th May 2009 12:51

HMRC
have as far as I know clarified the legislation and it is expected to apply retrospectively - their view is that if the business carried on in any way prior to the commencement of the new intangibles regime (1 April 2002) then the goodwill is deemed to have been created pre 1 April 2002 and no deduction is available for tax purposes.

Previously there was mixed guidance depending where you looked - many had worked on the premise that if it is NEW goodwill ie justifiably created post 1 April 2002 then you are eligible for a tax deuction - however this looks incorrect as HMRC say that the rules have not changed and that they merely clarify the legislation

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By martinfoley07
27th May 2009 10:47

good heavens.........
......are my thoughts, Asim.
Hamish gives some pointers ; you need think through what on earth the legal and commercial transactions should be.

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By User deleted
27th May 2009 09:43

Puzzled
Why would you transfer the overdrawn capital & current accounts? Why not draft a sale agreement dealing with just goodwill and assets (probably just tangible fixed assets and stock).

You might have a job persuading HMRC that the goodwill is not personal goodwill attached to the sole trader.

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