Client purchased a business for 90k. He received fixed assets approx Market value 35k and stock 3k. The vendor has allocated the 90k fee as all goodwill in the purchase agreement. So in my clients accounts do I have to classify it all as goodwill? Or can i do a different split than perhaps the vendor will be showing in his accounts?
Thanks
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E V Booth (Holdings) Ltd v Buckwell
Assuming the buyer and seller were unconnected, your client appears stuck with the figures in the contract for tax. Shame they did not seek advice from you beforehand.
For accounts, I suppose you could charge £38K extra amortisation/impairment of the goodwill, and revalue plant by a similar amount, but you won't get extra tax relief, and your clients P&L will look £38K the worse as the revaluation is a credit to a seperate reserve.
I am constantly amazed ..
that I am consulted on how to split the sale price and 9 times out of 10 nobody on the purcahsers side even queries it. Sounds like your client has bought one of mine!!
The problem is ...
The problem is that the purchaser often does not engage an accountant until after the purchase unfortunately. They usually wait until a tax return is needed.
Fair Values
I disagree with the first response. E V Booth is a CGT case, limited in its scope to the application of S.52(4) TCGA 1992 by a taxpayer. See CG14773. It's also likely to apply for the purposes of S.165 CTA 2009 (or S.176 ITTOIA 2005), unless HMRC take issue.
As a matter of legal agreement, the proceeds have been allocated £90K to the goodwill and the stock and fixed assets have passed for nil consideration.
But for accounts purposes, legal agreement (and E V Booth) isn't relevant. Substance (and GAAP) prevails. The acquirer has purchased a business in its entirety and should recognise that acquisition (in accordance with FRS 10 and FRS 7) by bringing in the identifiable assets and liabilities of the business at their fair values. Any excess of the consideration paid over the fair values of the net identifiable assets acquired should then be recognised as goodwill and amortised over its estimated useful life.
The suggestion that the £90K goodwill should be recognised and then impaired is incorrect. It doesn't accord with GAAP, and it certainly doesn't present a true and fair view.
Goodwill
Assuming an acquisition by a corporate, the intangibles regime applies to intangible assets acquired and calculated from GAAP compliant accounts (that's what the law says), which means that a reduced amount of goodwill is recognised (over what was in the agreement) and amortised.
The vendor will be taxable on the amount shown in the agreement either, probably as a chargeable gain, but possibly under the intangibles regime.
Stock
Opening stock will be recognised at market value and it will have the effect of reducing profits, which will form the basis of taxable profits in accordance with S.46 and S.160 CTA 2009 (or S.25 and S.172E ITTOIA 2005).
For the vendor, the stock will be deemed disposed of at the agreed price under S.165 CTA 2009 (or S.176 ITTOIA 2005), unless HMRC take issue.
Fixed Assets
Fixed assets will be brought in at market value, and will need to be depreciated over their useful economic lives.
For capital allowances purposes though the assets have been sold for nil consideration, and so the purchaser has no expenditure on plant and machinery to recognise.
So the purchaser's acquisition position, doesn't mirror the vendor's disposal position.
Not Just a Lack Accounting advice
What was the buying solicitor thinking of when the apportionment came through, any Solicitor involving themselves in business disposals should have at least a good understanding of CGT, VAT & CA's etc. I would go straight back to him and ask why he didnt query the split.