Tribunal rules on goodwill value of accounting firm

Working out how much capital gains tax (CGT) is due on the goodwill of an accounting firm that has been sold can be tricky, but a recent tribunal may help.

The case [Graham Michael Wildin v HMRC] was about how to calculate the goodwill value of a Gloucestershire accounting practice that was sold in 2003. Wildin and HMRC disagreed over the CGT Wildin owed after he sold shares in his firm.

It was a complex case, which the Institute of Chartered Accountants of Scotland has analysed.

The key point for accountants is the tribunal's decision that the value of an accounting firm's goodwill (an intangible asset that can include an organisation's brand name, customer base and proprietary technology) can be calculated by using a multiple of client fees, which gives an approximate market value for the firm.

The tribunal ruled that the multiplier for calculating Wildin's CGT bill should be 1.6 times client gross recurring fees.

Ken McManus, head of practice support at ICAS, said the tribunal's decision was sensible and reflected how most small and independent practices are valued.

"This case should be kept in mind if negotiating with HMRC although it should be remembered that the multipliers determined by the tribunal reflect not only the general market conditions but also the specific factors relating to the practice,” McManus said.