The sixth part of our self assessment series tackles the problematic area of valuation and goodwill – something on which HMRC has placed increased emphasis in the past few years.
Serialised in eight parts, the Sage self assessment summit webinar features tax experts Rebecca Benneyworth and Paula Tallon outlining the main issues of the upcoming self assessment season, why they’re important and how to tackle them.
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Topic 6 of 8: Valuation and goodwill
Valuation and goodwill is something of a headache for practitioners, particularly at this time of year when they are pressed to get tax returns out and this kind of issue lands on their desk as something that has already happened.
One of the reasons the topic has been featured in this series is that there is an increased inquiry into the valuations placed on goodwill. Practitioners who have been involved in the incorporation of businesses and the transfer of goodwill will be familiar with this problem.
This is where a business has been transferred to a limited company and a valuation has been placed on the goodwill. That valuation is not agreed with HMRC in advance, it goes on to the tax return and the Revenue may inquire into it.
The difficulty comes if the accountant has not been involved in the transaction and is trying to deal with the resulting tax return – how do they deal with the valuation aspects?
First of all, the practitioner has to hope the client has a valuation. In a number of cases seen by Gabelle’s managing partner Paula Tallon there are no valuations in place; someone has plucked a figure out of the air based on past profits and said ‘I think my business is worth x’.
All good accountants should know the principles of valuation for tax purposes: willing buyer, willing seller, arms-length transactions, but what needs to be considered is what value can be placed on the business if it was independent third parties.
The multiples tend to vary whether they are looked at from a profits basis or, if the business is more consultancy-based, the Revenue will generally go for a multiple of turnover. For the practitioner responsible for the return it is about making sure the valuation stacks up.
It also about ensuring there is paperwork to back up the transaction. According to Paula Tallon many practitioners would be surprised at the number of people who have transferred substantial businesses into limited companies and have absolutely no paperwork to back it up.
Tallon advised accountants that the time to be asking the questions and putting together the file of evidence is as they are doing the tax return. While no accountant wants their client to get an inquiry into their valuation, it is worth being prepared to be able to respond to HMRC’s questions, and also to have a strategy for dealing with the shares valuation division.
It is also worth examining what rate of tax is being paid on the disposal of goodwill. If it is something that qualifies for entrepreneurs’ relief (ER) it is worth double-checking that ER is actually available. The accountant needs to verify if they are dealing with the transfer of a whole business, if the business was ceased and the assets transferred, or if the assets were simply transferred. If a client has simply transferred an asset, they may not be eligible for ER.
According to Paula Tallon it is a complex area because it is subjective what a valuation is, and until somebody buys a client’s business no one really knows what that value is – practitioners just have to use established principles and case law to calculate a value.