Goodwill on Incorporation

Goodwill on Incorporation

Didn't find your answer?

Hi there

Just had a new client who is currently operating as a self-employed sales rep for a company and is doing very well.  He is very clued up on tax and shied away from setting up a company due to IR35, however he recently approached me as he has picked up 2 further clients he will be representing and would like to mitigate his tax as much  possible.

My question was in relation to goodwill.  As the business has only been going for a year or so and really, the goodwill is attached to him as the sales rep, no GW could be recognised on incorporation?

Replies (7)

Please login or register to join the discussion.

avatar
By User deleted
16th Jul 2015 13:21

From a tax perspective what you're proposing is a non-starter by virtue of the FA 2015 amendment.

Thanks (1)
avatar
By BMary83
16th Jul 2015 14:02

Hi taxguru

 

Thanksfr your reply but could be provide more detail?  It is no longer possible to recognise GW on incorporation of a sole trader as he is a related party to the newly formed company?

Thanks (0)
avatar
By Maslins
16th Jul 2015 14:26

There's basically no longer any tax benefit in attributing a figure to goodwill...so even if you could justify a figure, not worth it.  Independently of that, sounds like they're a salesperson, so any goodwill would be "personal", so not recognisable.

Thanks (1)
Accountants Northampton
By Shamrock
17th Jul 2015 07:38

Just to be clear
Isn't there a small benefit still available regarding good will on incorporation, surely sole traders can put £11k through and use up there capital gains allowance for the year?

Thanks (1)
Replying to EllaB:
Portia profile image
By Portia Nina Levin
17th Jul 2015 10:41

Dangerous

Shamrock wrote:

Isn't there a small benefit still available regarding good will on incorporation, surely sole traders can put £11k through and use up there capital gains allowance for the year?

Whilst relief for amortisation of goodwill has now been entirely removed (see Gideon's Summer Fun Budget), the intangibles regime remains. Let me remind you what CTA 2009, section 845(1) says:

"The basic rule is that a transfer of an intangible asset– (a) from a company to a related party, or (b) to a company from a related party,is treated for all purposes of the Taxes Acts as being at market value (as respects both the company and the related party)..." 

TCGA 1992, section 17 and 18 make not dissimilar provision

So if you sell the goodwill to the company for £11K the way is open for HMRC to argue that it was actually worth more than that and tax it as such.

The ability to extract an additional £11K from the company tax-free is not worth that risk, unless you are damned sure that the goodwill is worth no more and no less than £11K

The problem can be avoided altogether by retaining ownership of the goodwill (although HMRC will say that you cannot do that), or by ensuring that section 162 applies.

Thanks (1)
By Satwaki Chanda
17th Jul 2015 09:49

Why do you want to incorporate? Why use up your CGT allowance?

Perhaps your client should be asking himself these questions.

Why incorporate - apart from the tax, as well. Would it be simpler to operate as a company? Would there be more paperwork involved (e.g. sending various yearly returns to Companies House).

As taxguru points out, the company can't claim relief for the goodwill anymore.

You can still incorporate a business and claim CGT relief by being issued with shares. The CGT just gets rolled over into the shares and the tax charge only gets triggered when the shares are sold. No need to use your CGT allowance unnecessarily - but how much CGT would be at stake anyway? What would the value of "one year's worth" of goodwill be?

Thanks (0)
Accountants Northampton
By Shamrock
17th Jul 2015 11:58

Thanks Portia

But wouldn't it be the case that if HMRC challenged it you would be able to claim incorporation relief on the the increased value for the goodwill in their assessment.

I can't see how there is a risk with doing this.

Thanks (0)