Hi
I written a comment last year (all background info is below).
Basically HMRC are not agreeing with the amount of goodwill that was purchased. Is there a way around this? I am not sure about the implications of just scrapping the company (if we can) as only dormant accounts have been filed for the first month.
Any info would be greatly appreciated.
Hi
My Client purchased a business (no land or buildings included) from an un-connected party, in Feb 2011 for £436,800 and split:
Goodwill £376,377
Stock £11,483
Plant & Machinery £48,940
The goodwill was generated over 28 years (£13,442) per year.
The first set of accounts were to 05/04/2011 - so no overlap profits.
He incorporated on in March 2012 but started trading on 01/04/2012 to co-inside with the tax year.
The purchase was financed through an interest free repayment loan over 12 years (so there is a large creditor still on the balance sheet.)
Question 1 - Goodwill
I am about to do the cessation accounts, do i add internally generated goodwill to the cessation accounts of £13,442 or just leave it at the purchased value of £376,377 (i read the 2002 CT relief for amortisation and it advised that relief on incorporation cannot be amortised however purchased goodwill can be amortised), or shall i create a separate intangible account one for purchased goodwill and one for acquired goodwill and just amortise the purchased goodwill after incorporation, also on the selling package which goodwill figure should i use? I would assume that it is £376,377+£13,442 as the business has been continuing for a further year!
Question 2 - Capital Allowances
A few of the assets have been scrapped prior to sale, i have made changes to the accounts however as the business is to be incorporated/ceased I am not sure how to action the main pool within the capital allowances section, do i allow the allowance (£6k worth) then finalise it with a balancing allowance, it may also be worth adding that one of the cars (worth £4K) will be not be transferred over to the ltd company therefore not all assets are to be transferred and rollover relief cannot be claimed. Can i still use incorporation relief?
Any help or advice would be greatly appreciated.
Replies (11)
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I think you are saying that client purchased goodwill at arm's length from an unconnected party for £376,377 and subsequently sold the same goodwill to his own company. Value at date of transfer to company needs to be agreed with HMRC because transferee and transferor are connected parties. HMRC have come up with £50,000. On the figures you quote that is on the high side and your client should bite their hand off.
£376,377 paid by your client looks ludicrously high. Did he take advice on whether that was a fair value?
Why would you want to scrap the company? If client doesn't want to trade through a company why did he form it and transfer his business to it?
If it was tax efficient when you thought you could get away with a £376,377 goodwill value, why is it not tax efficient if goodwill value is only £150,000?
Millstone
a £350k debt for a (allegedly) worth less than half that is a millstone I would not want around my neck. My first thought would be to review the transfer/purchase paperwork and try to wriggle out of it claiming misrepresentation by the seller.
As I see it HMRC are stating that between Feb 2011 and Mar 2012 the value of the business reduced by more than half.
It follows that what has happened is your client has incurred a Capital Loss as on incorporation he is deemed to transfer the value to the Company at Market Value (assuming Incorporation Relief disapplied).
Off the figures you state £150k is very generous. I would suggest settling at that amount.
However, if you want to justify a higher value then you need to review the reasons for the reduction in value between Feb 2011 and Mar 2012.. Loss of custom, Bankruptcy of custom? You'll need to be able to show they were temporary and that the initial valuation stacks up. Perhaps the Business has some IP that is valuable?
Sounds like damage limitation here
Firstly the methodology in increasing the goodwill valuation is fundamentally wrong. The length of time a business has existed is virtually irrelevant and goodwill does not increase just beacause another year of trading has been achieved.
This may answer the question as to "how on earth was the £376K arrived at?" If this is a proprietor run business the sustainable/projected profits at purchase would have had to be around £100K. Either the valuation is a mickey take or things have gone very wrong since the original purchase.
HMRC are correct to look at the valuation at the time the sole trader sold out to the Ltd company. It is a shame that the business was not bought by a Ltd on day one as this problem would not then have arisen. If the purchase had been by a Ltd company the full £376K would have been tax deductible with no argument. In addtion if it all goes wrong the original debt would be owed by the company and not personally by your client. Thus, the client could have bust the company and walked away. The original vendor would have been the main creditor so maybe no tears there.
It is important to take account that the goodwill is to be valued with the known facts as at March 2012 no hindsight allowed! If something has gone wrong that has caused such a fall in the value of the business, then you must identify when that event took place. So take a time travel back to March 2012. The accounts to Feb 2011 would have been done. Management figures to March 2012 and future projections would be available. What does the business look like? What would someone have paid at that point? Once again the question as to why the business was worth £376K 12 months earlier rears its ugly head. Compare and contrast! On the facts given HMRC's £150K valuation looks very generous indeed.
As a rough rule of thumb, take the £32k adjusted profit, knock off a manager's salary & rent if applicable, then mutiply the answer by say 5. The goodwill would be diddly.
Unless there is some IP or profitable contract not accounted for, take the £150K valuation and run.
If the purchase price was a mickey take or the business fell in value prior to March 2012 (possibly as a result of the loss of the vendors skills/contacts etc), then the client has as a matter of fact sustained a capital loss on the fall. A bit like buying a Picasso and 12 months later finding out that it is a fake!
Going forwards if you stick with the Ltd company you will be able to claim a tax deduction on the £150K. Not as good as £376K, but better than no write off at all, which is what would happen if you revert to a sole trader. I would also look to w/o over no more than 5 years given the facts.