Claiming goodwill

Claiming goodwill

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Hope someone can help.

Had a shock today and learnt that my business could of claimed "Goodwill" when I went limited. I was a sole trader for around 20 years.

I went limited in 2004, is there any way at all I can claim this money back?

Replies (16)

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By User deleted
18th Jan 2013 20:47

No

.

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By jack-jones
18th Jan 2013 21:04

from who

was this information obtained!?

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By exceem
19th Jan 2013 09:14

I have just changed accountants and they asked this question. They were shocked to find out that I never claimed goodwill

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By User deleted
19th Jan 2013 09:57

And I am shocked ....

... that they think that you could.

But please clarify exactly what it is they think you could have claimed. It could be that when you incorporated, you never recognised the goodwill of the business, which could have been credited to your loan account in the company and then available for you to draw out tax-free. But, if goodwill was recognised and your new accountant is suggesting that the company could have claimed relief for the amortisation of the goodwill, time to think about another change of accountant.

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By exceem
19th Jan 2013 10:01

Hi BKD

You are exactly right we never recognised the goodwill of the business nor advised by our previous accountant that we get it.

I have done some research and it says you can only go back 4 years..

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By UK Tax
19th Jan 2013 11:24

History

If goodwill wasn't recognised, then as a matter of historical fact it wasn't recognised.  There's no going back 4 years or any other longer or shorter period for that matter. 

 

Goodwill, if any exists, needs to considered BEFORE incorporation, valued BEFORE incorporation and that value recognised in documentation transferring the business and in both old and new accounts.  Such documentation will need to be drawn up at the point of incorporation and not many weeks / months / years later.

 

Whether there was any goodwill which could have been recognised is a separate question, and will depend on many factors.  But principally it means earning sustainable profits in excess of what it costs to pay someone to manage the business.  So, a sole trader with £30K profit annually hasn't got a business with goodwill on the face of it.  £100K annual and you have a case for saying there's extra or super profit over and above a management wage.

 

 

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Replying to Harrison88:
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By User deleted
19th Jan 2013 12:54

Agree with most ...

UK Tax wrote:

If goodwill wasn't recognised, then as a matter of historical fact it wasn't recognised.  There's no going back 4 years or any other longer or shorter period for that matter. 

 

Goodwill, if any exists, needs to considered BEFORE incorporation, valued BEFORE incorporation and that value recognised in documentation transferring the business and in both old and new accounts.  Such documentation will need to be drawn up at the point of incorporation and not many weeks / months / years later.

 

Whether there was any goodwill which could have been recognised is a separate question, and will depend on many factors.  But principally it means earning sustainable profits in excess of what it costs to pay someone to manage the business.  So, a sole trader with £30K profit annually hasn't got a business with goodwill on the face of it.  £100K annual and you have a case for saying there's extra or super profit over and above a management wage.

... but a very naive, simplistic and one dimensional view of goodwill. There are those who would be happy to pay £100k to obtain a sustainable income stream of £30k. There are those who may pay £250k for it as they see the potential. Enlightened thinking would value goodwill based on the projection for the next three years, not on what is dead and buried over the past 3! Any successful acquisition will concentrate on what is likely to happen, not was has already occurred.

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Teignmouth
By Paul Scholes
19th Jan 2013 12:08

Lost cause

As BKD has indicated there are many factors involved in deciding whether business goodwill exists, its value and how it can be treated.

His comment casting doubt over a suggestion that the Ltd company could claim tax relief on the goodwill purchased is based on the fact that this is prohibited if the self employed business started pre April 2002, which yours clearly did.  

So you would have been left to recognise your sale of the goodwill to the Ltd company, maybe pay personal capital gains tax on a chunk of it, but then be able to draw the value of the goodwill from the company (once it had money in the bank) tax free.

You are right, you can not go back more than 4 years to correct tax returns but, again as mentioned by BKD, there's also a practical problem.  Say I'd sold my business to someone 8 years ago then, last week, realised I'd sold it cheap, I'd not get much of a response from the purchaser if I now went back and asked for more.

If, after the shock, you are still not happy, I'd certainly contact your last accountant and ask them why they didn't suggest you recognise Goodwill.  It may well be they had a good reason, for example, is your goodwill tied to you more than it is the business, it's only the latter that can be recognised.  There was a question on here a few months back where a surgeon had incorporated and recognised huge goodwill but was now being challenged by HMRC because there's no way he could have sold his personal goodwill to a company, then walked away.

 

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By User deleted
19th Jan 2013 12:48

Thanks, Paul, but ...

... I can't accept credit for someone else's advice :)

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By UK Tax
19th Jan 2013 13:27

OGA

I never said to look at historic profits at all.  I actually said it was about "sustainable" profits.  And yes i do know that that means looking at the future and re-stating etc etc. 

As I also said, profits are not the sole issue - if you re-read carefully it says will depend on many factors. 

I also said that £30K as a sole trader didn't have goodwill "on the face of it", indicating that you need to look beyond the bare numbers. 

As far as the OP is concerned, sadly the boat sailed many years ago, and the comments about value were no more than a pointer by way of a general setting of expectations. 

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By MBK
21st Jan 2013 13:13

And you can't go back four years anyway

That is only available if there has been an error. Failure to make a claim that you could have made is not an error.

So you could only go back to any year for which it is possible to make an amended return. Broadly any year end less than two years ago.

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By exceem
21st Jan 2013 19:54

thanks for all your help everyone

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By ringi
24th Jan 2013 11:14

What if your LTD had not made a profit?

I believe there is also another issue, if good will is sold to the ltd when your went limited,  you then have a capital gain that you will have to pay income tax on if it is over the capital gain tax limit.  Putting a value on good will also has a cost you have to pay at the time to your accountant.

You are doing this so you can then get tax relief on a profit that your ltd may make one day.

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By I'msorryIhaven'taclue
24th Jan 2013 12:23

Failure to Offer Advice

On the subject of failure to proffer any advice at all as tantamount to negligence, I had a client mention to me one November that he was thinking of incorporating his successful sole trader consultancy. The next time I heard from him was the following May, a few months after he had gone through with that incorporation.

A year later he too ran into a chest-beating new accountant just as the OP has done, and subsequently demanded to know why I had not dispensed Goodwill advice during our November telephone conversation. My defences were threefold:

(i) You were offered a consultation on the matter, but were too tight to pay for any advice;

(ii) You went ahead and incorporated without telling me; and

(iii) the goodwill was personal.

Fortunately the Revenue agreed wholeheartedly with the last of those three.

But it goes to illustrate the dangers of dealing with clients who will angle for free advice, and perhaps expect pro-activity to the point of nannying. Whilst I quite agree that there are recent precedents out there for failure to give good advice amounting to negligence, they are rather unfair as they do rather allow clients who don't want to pay for advice the scope to have their cake and eat it.

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Teignmouth
By Paul Scholes
24th Jan 2013 12:15

ringi & I'msorry...

@ringi - just being precise, you pay cgt on the gain not income tax.  This however is almost always at 10% so it's always been worth it for my clients, considering the benefits they then get in the Ltd Company.

You are absolutely right though, it's pointless advising someone to incorporate and pay you the fees for a valuation of goodwill, if the company isn't going to make a profit.  I also shy away from advising a client to incorporate if I doubt they can handle the admin & legalities involved in running a Ltd Company.

@i'msorry...bit of a tangent from the topic?  I tailor the bookkeeping to the client's abilities and so a few of my Ltd companies still keep spreadsheets in a way that complies with the need to keep track of income & expenses and the asets/liabilities.  These days however FreeAgent & Xero are the best solutions I've found to keep the client's records up to date & accurate.

With regard to regs, I'm more inclined to point them at HMRC's views, as it's them that will police it.

 

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Replying to kjevans:
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By I'msorryIhaven'taclue
24th Jan 2013 12:41

Erratum

Paul Scholes wrote:

@i'msorry...bit of a tangent from the topic?  I tailor the bookkeeping to the client's abilities and so a few of my Ltd companies still keep spreadsheets in a way that complies with the need to keep track of income & expenses and the asets/liabilities.  These days however FreeAgent & Xero are the best solutions I've found to keep the client's records up to date & accurate.

 

Thanks Paul, I posted the wrong piece to the wrong thread, hence it being off-topic. But thank you anyway for your reply - good link too.

I'd been looking at Wave Accounting, a free USA / UK double entry cloud offering, and can't stop chuckling that over Christmas they removed from the free version the ability to total columns and print reports. I guess that's what you get for nothing.

https://support.waveapps.com/entries/22846057-how-am-i-supposed-to-do-my...

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