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Client List Purchased

Advice on Accounting for value of Client List

Hi 

I haven taken on a small practice (not all clients) due to a sudden death of an accountant last year.  I had worked for him on a self employed basis for 16 years so knew many of the clients already.  

My question is: How do I account for the cost to me of the new clients?  Is it classed as a Goodwill?

Also, I am doing the previous accountants wife tax return and she will be receiving income from me. How do I account for the income she has received.  Will it be chargeable as a capital gain in full then claw back each year if the client goes elsewhere and I don't pay a share of that particular clients fee?

Thank you for any advice given.

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01st Nov 2017 08:58

You need to employ an accountant to take over the work of the practice for you, otherwise it looks as though things might start to go very wrong very quickly. Alternatively, try partnering with a local firm to take on the technical work while you concentrate on the work you did before the owner died.

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to Tim Vane
07th Nov 2017 14:53

Thanks. I am an accountant that has taken the work on. I just have not dealt with a purchase of client fees before.

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03rd Nov 2017 10:37

Presumably you will have entered into an agreement with the late practitioner's widow (as executrix of her late husband's estate) to enable the transfer of clients which will also set out the basis of the capital consideration involved? The sale would be by the estate, as such, rather than the widow - so would not affect her own tax position directly. There is no capital gains tax (CGT) on death, although the value of the practice may have implications for IHT on the estate (subject to Business Relief). Any payments made by you for the goodwill of the practice will be capital, subject to the clawback provisions in the agreement.

Separately, if the widow is receiving income from you that would imply either employment or self-employment and liable to income tax rather than CGT. Again, you will be assisted by referring to the terms of the agreement reached with the estate and the widow on this.

I suspect you are comfortable dealing, in general terms, with the work of the practice you have taken over (as you say you previously dealt with the clients anyway) but inevitably there will be aspects that fall outside your "comfort zone". If you need further assistance do post again.

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to Johnday72
07th Nov 2017 14:59

Thanks. I have taken on about 50% of the client base. There isn't any formal agreement in place. The wife was in partnership with the accountant (his admin lady). I have agreed a years fee for each client on payable 25% each year they stay with me. What I am not 100% on is how I put the money paid to the wife/partnership in my accounts. Also how to account for it in the wife's self assessment tax return. Would the money from me only be classed as income rather than capital gains for the wife? Any help appreciated. I am ok on the clients work its just this is not a normal everyday situation. Thanks again.

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to uktaylor
07th Nov 2017 15:09

uktaylor wrote:
There isn't any formal agreement in place.

Then you have already made a silly mistake. A proper agreement would not only protect both you and the widow, but would make clear a lot of the things you are now just guessing at.

A bit of closing the door after the horse has bolted, but formalising the agreement on paper now would probably be wise. It would also be wise for you both to take paid-for legal and tax advice on it. It is an area you don't understand, so trying to wing it with advice from an online forum is not a good idea.

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to stepurhan
07th Nov 2017 15:13

Thanks I understand where you are coming from. I just landed the clients after working/helping the wife out for free for 2 months. I told her I couldn't do it anymore as I already had a practice. Thats when some of the clients came over to me. I will get some legal advice now. I should of done it sooner. Thanks for your advice its really appreciated.

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to uktaylor
07th Nov 2017 16:03

Ok, as "stepurhan" says a written agreement would have been ideal and would have clarified matters somewhat, but we are where we are. You are not the first, and will not be the last, to proceed on the basis of an unwritten agreement - especially if you were known to each other for some 16 years!

On the face of it the payments you are making are capital and whilst they can be included in your accounts, will need to be added back in the tax computation. As you acquired the clients (the goodwill) from a partnership under what is effectively an unconditional contract the whole of the consideration is taxable (under CGT and possibly subject to Entrepreneurs Relief - ER) on each partner (the estate and the widow) at the date of the contract (or possibly just the widow if the partnership transferred wholly to her at the date of death, depending on the terms of the Will) - in the absence of a written contract this will be the effective date of transfer of the clients. If the consideration is agreed, but subject to payment in instalments then the capital gain should attract ER in full; if the consideration is based on the "earn out" basis then there is a risk that ER could be lost on the deferred consideration - although you have not said what the amounts are and use of the annual exemption may reduce any actual tax depending on the figures. This is a complicated aspect and you will need to understand the law involved.

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to Johnday72
07th Nov 2017 16:24

Thank you for your reply. I am going to take legal advice. I think because I have not only worked with the previous practice for years I have become a friend of theirs so we didn't sort anything out officially it just landed in my lap. I had mentioned to the wife that she should benefit from me taking the clients from her. I am just waiting on a solicitor to call me back to get this properly sorted. Thanks again.

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03rd Nov 2017 14:58

A third option along tim's would be to partner up with a retired accountant who is looking for part time work. This way he can help with those areas in which you have little expertise.

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to pauljohnston
07th Nov 2017 15:00

There isn't enough work to give out to another accountant. Its only this area I an not experienced as I have not come across it before. Thank you for your reply.

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