HMRC have recently become more aggressive in their attitude to the idea of ‘goodwill’ being a part of certain types of business. James Bailey looks at why HMRC want to attack goodwill and why it is worth arguing with them.
Goodwill is the value of a business over and above its physical assets such as plant and machinery. In most cases goodwill is valued as a multiple of the expected profits.
Goodwill is important in two cases: where a business is being transferred from a sole trader or partnership to a limited company, or where the business is being sold and the sale includes business premises.
In the case of a transfer to a company, goodwill can produce a capital gain taxed at only 10% (after entrepreneur’s relief), and a large director’s loan account that can be drawn down tax free as and when cash flow permits. In many cases, it will also be possible to claim a tax deduction as the goodwill is ‘amortised’ (reduced in value each year), as required by accountancy practice.
In the case of a sale, SDLT is payable on the premises but not on goodwill.
Because of these attractive tax-planning features, there have been numerous disagreements with HMRC, both over the details of how to value goodwill, and also over its very existence.
HMRC have recently established a ‘think-tank’ to which goodwill claims are referred to consider whether goodwill actually exists in any particular case. Only if they decide there is goodwill is the case referred to SAVD (the Shares and Assets Valuation Division) for them to negotiate the value to be attributed to it. My spies tell me that SAVD are not happy about what they see as interference from another department, so we may expect them to be even more supercilious and waspish than usual once they start negotiating.
There are two lines of attack:
‘Personal’ goodwill
If it can be shown that all the value of the business relates to an individual person, HMRC will argue that the goodwill is ‘personal’ and thus not capable of being transferred or sold. In some cases, such as well-known actors or musicians, it could be difficult to argue with this, but HMRC argue that any business with a charismatic leader involves ‘personal’ goodwill.
If the business generates merchandising, or a brand name that attracts custom, and if staff deal with customers instead of the big name behind it, these are all arguments against the goodwill being ‘personal’. Think about those celebrity chef restaurants where the chef in question is seldom or never present.
‘Inherent’ Goodwill
This goodwill cannot be separated from the business premises. Examples are hotels, filling stations, and care homes. HMRC say that the value of the business is essentially the value of the premises - that is, the building and its location. When valuing such business premises, a chartered surveyor will consider the profits that can be expected as part of his valuation process, as he would consider the rental to be expected from an investment property.
To some extent I have to agree with HMRC, but there is more to this than they claim. There is also additional goodwill associated with the specific way the business is run – a good team of staff, a reputation, and customers who return every year (the latter more the case with hotels than care homes, I suppose!). This is, I would argue, ‘free’ goodwill and does not form part of the premises.
Practical Tip :
Incorporating a business to release the value of goodwill can be a good planning strategy, but expect resistance from HMRC. Get an independent valuation, and have a good tax adviser lined up to deal with the attack from HMRC.
