HELP needed re Incorporation and Goodwill

HELP needed re Incorporation and Goodwill

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Hello all

A new client incorporated 3 months ago from being a 'talk producer' sole trader. There's no fixed asset. He uses an old computer but there's a huge collection of audio interview discs and books that he regularly references for work. He is unable to put a value on this though he sometimes charges other companies a nominal fee for access rights. The net profit is pretty low at an average of £25K over the last 3 years. There's no optimistic forecast but his main client suddenly decided to only deal with LTD companies, hence the hasty incorporation.

I need help with the following:

1. Bearing in mind that a market-value salary for his position is £55K+, will using average net profit + £55K be acceptable as a basis for goodwill?

2. Is there a need to record goodwill if the company is in decline at the point of incorporation? He hasn't got a penny to cover any cgt due and is currently struggling to pay last years income tax liability!

3. Does he have to transfer all assets to the company or can he hold on to his collection but allow the company access as and when needed?

In case anyone is wondering, his accountant of 40+ years just passed so he really is in dire straits and can't afford to pay a new accountant. He's an old boy and I do think the incorporation is a mistake but he needs the work he can get off the broadcasting giant.

Thanks all.

Replies (2)

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By johngroganjga
13th Jul 2014 18:38

I think you mean average net profit MINUS, not PLUS, £55k. If so the answer is yes, and given that the result of that sum is a negative number, the value of goodwill is clearly £Nil.

No he doesn't have to transfer all his assets to the company, or even any assets at all unless there is a good reason for him to do so.

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By JessicaRain
13th Jul 2014 19:19

Thank you!

I remember reading an article on here about adding salary to average profits though I also know that the tax office favours 'minus'. In any case, the negative value works great in this scenario.

Re assets, the only advantage is the tax-free 'cash' that'll probably sit on the loan account till the company generates enough funds to settle it but he's more in favour of keeping his collection personal so that resolves the other issue. He just needs to work out how much to charge the company for its use but I'll leave that for him to work out.

Thanks again.


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