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Goodwill or allowable cost?

Is the amount I am paying for clients in a previous firm an allowable cost or buying goodwill?

I have recently left an accountancy firm and set up my own practice. I have agreed to pay a % of all clients who come over to the new firm in the first year. I can't get my head around whether that is me purchasing their goodwill, and therefore non tax deductible, and to be capitalised and amortised, or whether it is actually an allowable cost of the business that can be put through the P&L as and when I pay for them?

I have been involved in purchasing a whole business before and the amount that was agreed was capitalised as goodwill but I think this is slightly different in that we are not paying for the whole goodwill of the firm, but are actually 'buying' specific clients. There are obviously tax consequences between the two different scenarios (that wouldn't have been even a few years ago).

I have searched and googled, but it is quite a specific question, and I haven't fouund a meaningful answer.

Thanks in advance for your help.

I apologise that I have posted this anonymously but it is of a sensitive nature.

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18th May 2018 06:28

Quote:

I have agreed to pay a % of all clients who come over to the new firm in the first year.


Unfortunately this key sentence is ambiguous/unclear. However I think what it refers to could reasonably be described as unascertainable consideration of a capital nature. I can see why you might be confused, but fundamentally you are not buying stock, consumables or anything else of a revenue nature. You are buying business.
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to Tax Dragon
18th May 2018 10:53

Thanks for your reply. Yes sorry I didn't make that clear. We are paying a % of the annual recurring fee.

My understanding was that it was in essence goodwill although I like your description of unascertainable consideration of a capital nature, but a colleague who I was discussing this with asked why it wasn't something like commission, and I couldn't give a proper answer which is why I doubted myself.

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18th May 2018 12:57

To me it sounds like commission. Revenue expense.

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to Red Leader
18th May 2018 13:37

Thanks for your response. Would be interested to hear why you think it is commission?

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By Bobbo
18th May 2018 15:16

You may have not realised but by replying to other commenters you have lost your veil of anonymity.

I don't think you've really added the necessary detail to Tax Dragon's point. Are you buying clients, on a case-by-case basis, from your old firm and paying the %? Or are you inviting clients to ditch your old firm for your new firm and giving the old firm some cash to make up for it?

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to Bobbo
18th May 2018 15:49

I realised once I'd done it - and couldn't see how to carry on posting replies anonymously, but needed to reply - ho hum!

Without giving away more detail, yes it is one of the two scenarios that you have described, but do you think the accounting treatment is different for each and that therefore would change the answer? Does one somehow lean more to commission and one to goodwill - and if so how?

TIA

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to hmwhiteca
18th May 2018 16:00

Couldn't you just let people know what is happening so they can give an opinion?

You are asking them to guess the question and justify an answer which might put off people who can help you.

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to hmwhiteca
18th May 2018 16:23

I don't see how this is commission. Commission is something an agent gets for selling your product. Here you are buying clients. Putting a % sign in the deal doesn't turn what you are paying into commission.

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18th May 2018 17:02

Helen,
I presume that there is a contract of the nature “we will pay you 30% of anything that we bill Mr X in the next 12 months, as & when we bill him / receive the money”. The wording around & outside of this will (IMO) be important.
Are you only allowed to approach specific clients? What happens if you take on a client that isn’t on the list, or one whom approaches you?

As Andy said, if you want some relevant (proper) answers, you’ll need to be a bit freeer with the relevant info.

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to atleastisoundknowledgable...
18th May 2018 19:39

I don't think this forum is the place to upload legal agreements for discussion. Could you help the OP a little by saying what "info" you might consider "relevant"?

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to Tax Dragon
20th May 2018 08:58

“I don't think this forum is the place to upload legal agreements for discussion.”

Didn’t say it was

“Could you help the OP a little by saying what "info" you might consider "relevant"?”

The same info that others have asked, and which was mentioned in my post.

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to atleastisoundknowledgable...
20th May 2018 11:22

Looking at it today, my post probably read arsier than I'd intended. Apologies if so.

Anyway it appears that consensus has broken out - there is nothing in the limited information provided to indicate anything other than the norm.

But I've been wondering whether your questions ("Are you only allowed to approach specific clients? What happens if you take on a client that isn’t on the list, or one whom approaches you?") could be answered in a way that would indicate revenue expense. Struggling to think of one, tbh.

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to Tax Dragon
20th May 2018 22:55

Quote:

Looking at it today, my post probably read arsier than I'd intended. Apologies if so.

Thanks TaxDragon, much appreciated & you should be applauded for saying so.

Quote:

But I've been wondering whether your questions ("Are you only allowed to approach specific clients? What happens if you take on a client that isn’t on the list, or one whom approaches you?") could be answered in a way that would indicate revenue expense. Struggling to think of one, tbh.

My mind had been going along the lines of ‘punitive’ payments for taking non-defined clients would be revenue items, that being the case could an argument be made for the rest, but couldn’t make that final leap.

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19th May 2018 09:16

Has anyone considered how the 'old firm' should treat the payments it receives?

The questioner and the old firm ought to be singing from the same hymn-sheet.

Personally in the light of the limited information given so far, I think the expenditure/ receipt is capital in nature and can probably be categorised as goodwill.

P.S. There is also the question of possible VAT implications, which I leave to others to consider

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to chicken farmer
19th May 2018 16:18

Quote:

The questioner and the old firm ought to be singing from the same hymn-sheet


I had wondered about that. There is of course no general rule that says this (it would blatantly be false). But in this case it is not unlikely that the sale and purchase would have mirror treatment.
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19th May 2018 10:56

Sounds like you're buying part of a business to me.

I don't see it as a commission. It's not like these people are going out and finding you clients, which I agree would be a commission. These folk are selling you clients they already have.

How are they treating this money ? I'm guessing Sale of Goodwill - with all the tax benefits that might bring.

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to lionofludesch
19th May 2018 12:13

You've convinced me. I withdraw my earlier comment.

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21st May 2018 09:49

Thanks all for all your comments and thoughts, and for the various discussions had. I think I'm convinced that the payments we are going to be making are us buying part of a business and therefore should be treated as goodwill. Which is a shame, but probably correct!

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