Amortisation Quickens?!

Amortisation Quickens?!

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I have just listened to a short Tolley CPD 'update' on the "latest goodwill issues".

In this update (presented by Gerry Hart), it is suggested that HMRC now accept that a write off of 1/3 per annum is reasonable in the UK - thus allowing the cost to be written off for tax purposes over 3 years.

Now this is news to me!  This contradicts everything that I have seen, heard and read about the write down of allowable goodwill.  Am I missing something or are Tolley's/GH?!

To my mind, universally writing goodwill off over 3 years is going to create many an investigation ...

Replies (15)

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By cparker87
06th Nov 2012 13:11

.

Go for it. As long as a reaosnable justification can be set out then why not?

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Replying to Red Leader:
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By tazmaniandevil
06th Nov 2012 13:30

That's the point ...

The Tolley update doesn't mention anything about the write down having to be reasonable - it just says that HMRC accept that 3 years IS REASONABLE!  I cannot see that HMRC would accept this ...

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By George Attazder
06th Nov 2012 13:34

Err...

How long do you think purchased goodwill lasts?

Three years after purchase any goodwill that the business has is unlikely to be the goodwill that was bought.  Most purchasers either fudge the business up in the first five minutes or otherwise make their own mark on it.

So who actually goes beyond 5 years?

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Nichola Ross Martin
By Nichola Ross Martin
07th Nov 2012 11:51

Depends on who sold you the goodwill

I have no concerns about a write down where the purchase was from a third party at arm's length, there may be reasons to justify it.

If your personal company has purchased goodwill off you as a sole trader and the company writes it down very fast then I would sense that the goodwill could be overvalued, as clearly it is not worth what was paid. HMRC: I have seen various cases where goodwill valuation and write down is challenged they all have differences so it is very difficult to comment on a general scenario as each case will tend to turn on its own facts. Happy to review any cases.

Virtual Tax Support for accountants: www.rossmartin.co.uk

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By George Attazder
07th Nov 2012 13:09

Why Nichola...

... should the situation differ between a purchase from an unconnected party and a purchase from a connected party?

If an objective (appropriate and realistic) valuation has been carried out, and an objective (and reasonable) estimate of the useful life of the goodwill (that has been purchased) has been performed, the only relevance of whether or not the vendor and purchaser are connected should be to determine whether it's "old" or "new" goodwill.

HMRC can challenge the transfer valuation, but a tribunal will only disturb the valuation if it isn't objective, appropriate and realistic.

And HMRC say in their own manuals that reasonable estimates shouldn't be disturbed, per this extract from BIM46555:

"It must be accepted that sometimes absolute accuracy is impossible, so that there is no single right figure. Directors and business proprietors have a responsibility when preparing accounts to make judgements, and there will often be a range of possible answers within which their own business expertise will be the main factor in deciding the final answer. What we expect them to do in arriving at an estimate is to exercise their judgement in a reasonable manner, taking into account the information reasonably available to them and other relevant factors including their own business expertise. If they have done this, and arrived at a result that accords with the requirements of GAAP, then Inspectors are not entitled to substitute a different figure just because they might have exercised their own judgement differently."

What's your view on the potential range for an appropriate useful life of purchased goodwill?

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Nichola Ross Martin
By Nichola Ross Martin
07th Nov 2012 13:55

I would have thought it very obvious!

George,

Overvaluation: if an asset is going to be written off in 3 years it can't be worth a lot. See this piece by Matthew Hutton

http://www.taxationweb.co.uk/tax-articles/business-tax/goodwill-and-incorporation.html

 

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By JamesPrice
07th Nov 2012 14:32

Standard Setters

The new FRS102 regime will, I understand, contain a rebuttable presumption that the useful economic life of goodwill cannot exceed 5 years. Perhaps HMRC are a bit more tuned in to these forthcoming changes than some accountants?

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By George Attazder
07th Nov 2012 15:37

Matthew Hutton doesn't suggest that a relatively short estimated economic life is indicative of overvaluation.

The reason being, that the length of that estimated useful life is not indicative of the value.  In the case of goodwill, it's unlikely to not have been replaced by internally generated goodwill within a very short period.  It commands its premium because without the initial goodwill, the generation of the replenishment goodwill starts from ground zero, rather than an established base.

You didn't answer my questions though.  Why should the position differ, just because the vendor and purchaser are connected? And what's your view on the potential range of an appropriate useful life of purchased goodwill.

James is indeed correct that paragraph 19.23 of FRED 48 says "if an entity cannot make a reliable estimate of the useful life of goodwill, the life shall be presumed to be five years".

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Nichola Ross Martin
By Nichola Ross Martin
07th Nov 2012 16:17

With FRED the point is that if you are unable to make a reliable estimate of the useful life of goodwill then perhaps this also indicates that it is not a very valuable asset, as in valuing any asset you have first off think that it is going to remain in existance for rather longer than the ink is dry on your sales contract, otherwise you will find that you have purchased fresh air.

For example, goodwill attaching to customers - presume that this asset remains whilst you still have loyal customers, so you would not write it down unless your customer numbers depleted.

Goodwill on trade property - presumed to exist whilst you mange and run a successful business from that property, and not written down until your move, or you know that your lease is running down.

Goodwill on an IFA business, presumed to be in existence whilst you are still in receipt of passive income.

etc.

If your business fails or if you make losses you may well write off all your goodwill in that year, depending on circumstances.

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By George Attazder
07th Nov 2012 16:56

No, no, no...

Nichola, I did read and digest your original post originally and that's why I asked the questions that I did.

Under your approach you're including the "last" of internally generated goodwill in your useful economic life of the purchased goodwill.  Taking your three examples:

I'm either going to upset the "loyal customers" in the first five minutes or turn them into MY "loyal customers" in the first six months (at which point the purchased goodwill has fulfilled it usefulness).  Estimated useful life of the purchased goodwill is somewhere between five minutes and six months, it's hard to reliably estimate it (all depends on how fickle they are!).  Please read and digest my first post!There isn't any goodwill to recognise separately.  It's all part of the cost of the property.  Come on. Sing from HMRC's hymn sheet!Unless you're purchasing the rights to the passive receipts, which isn't goodwill, I think you're just looking at a variant of number 1.  The passive receipts don't arise from use of the goodwill, so they occur beyond its useful life.

The price paid for a thing and the length of time it lasts aren't related. 

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Replying to slipknot08:
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By tazmaniandevil
08th Nov 2012 12:40

Great minds think differently!

Thank you to everyone for your comments - except the personal ones!  :)

I see the "price paid for a thing and the length of time it lasts aren't related" comment was modified slightly! I must say it amused me! I also look forward to seeing George in The Hobbit!

My main point was that the course MERELY said that it was appropriate to write off fully over 3 years when, I believe, we would expect there to be a realistic and reasonable approach which could be justified/supported.

I think differences in approach/opinion in this area are rife and that this is not fair on the HMRC "end customer"! 

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By carnmores
08th Nov 2012 17:12

George where is your comment re the Old Etonians

as one i think i should see it and reply but its disappeared. PM me if you have been struck off i will have a word with the Archbishop too , tho i have been trailing his appointment for 2 months on Facebook - i should get out more old school tie and all that old chap

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By George Attazder
08th Nov 2012 17:53

Henry...

... did admonish me as expected, but I'm still here!

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By gerryhart.tax
09th Nov 2012 08:50

GOODWILL WRITE-OFF

As the presenter of the Tolley CPD update originally referred to, let me elaborate and I hope this will be useful.

The rate of amprtisation of goodwill acquired should follow GAAP rules as there are no specific rules in the tax legislation. In the USA the standard rate is 20% per annum over 5 years. I have been advised by an HMRC officer that they will ordinarily accept 1/3rd per annum over 3 years as being reasonable in the UK and I have also heard this from several accountants, but  I am not saying that 3 years across the board will be appropriate. It all depends on what is right from an accounting perspective.

Of course, wrting-off goodwill over 3 years may not be wisein any event given the effect on distributable reserves, and 20% per annum may be better. I have certainly never come across any HMRC dispute using that rate over many years. 

Another alternative, if the effect on distributable reserves is unacceptable, is to elect under the intangible assets regime for a tax write-off at only 4% per annum.

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Nichola Ross Martin
By Nichola Ross Martin
12th Nov 2012 11:29

Challenges by HMRC

have seen and continue to see HMRC investigation into large write offs when goodwill purchased from connected parties. Quite obvious to me why HMRC do this: they see a sitting duck - overvalued or non-existent goodwill and it stands out prominently in the accounts.

As Gerry says the effect on the accounts of big write offs can often be undesireable especially if you are tying for bank funding, suddenly find that you can sell the business or if you completely overdo it and the business nose dives to you are then are unable to pay any dividends. I have seen cases which feature each of those problems, as it goes.

Of my examples I cannot comment on accounting policy of individual businesses I gave examples of goodwill attaching to particular classes of asset where you would probably not see any inpairment in goodwill unless the business folded. However the argument remains the same:

1) if you did not think that there was any goodwill attaching to say a block of customers/fees/customer list you would not pay much for goodwill, and so the write off would not be an issue.

2) Goodwill and trade related property: you normally have a good idea of how your goodwill is apportioned to a property because you will have done a valuation and talked to a surveyor and agent so not unreasonable to amortise over the period of a lease/business life.

3) IFA's passive income is income from past policies which tends to be transferred with the IFA business. At any balance sheet date you can calculate it and it never goes away unless the policies lapse.

It does depend on the asset. I know that many larger acccountancy firms do not recognise goodwill in their own practices when they are buying and selling and admitting partners etc, I think this says quite a lot about goodwill and our attitude to it. Perhaps untimately the international standard setters will decide that it is more transparent not to recognise it as an asset at all but write it off as an expense of purchase.

 

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