Business sales and incorporations may be on the decline in the present economic climate, but goodwill valuation is very much a ‘live’ issue.
HMRCs guidance on goodwill changed in September 2008. Previously (following case law) HMRC likened the behaviour of business customers to certain types of animal (i.e. dogs, cats, rabbits and rats). Developing this principle, in HMRC’s view there existed three components to goodwill (i.e. personal, inherent and free). However, a Practice Note was issued on 30 January 2009 (‘Apportioning the Price Paid for a Business as a Going Concern’), explaining that HMRC and the Valuation Office Agency (VOA) consider that the price paid for a business as a going concern should be apportioned between goodwill and other assets included in the sale, and describing how this should be done. Referring to the various goodwill components, HMRC state “These subdivisions are no longer considered helpful as they tend to cause confusion”.
In the context of business incorporations, HMRC state the following (CG 68050):
“If on the incorporation of a business the transferor has control of the company, the disposal of goodwill will be a transfer between connected persons within TCGA92/S286(6). Where the transfer is between connected persons, any goodwill transferred to the company will be deemed to have been disposed of for a consideration equal to its market value in accordance with TCGA92/S17 and TCGA92/S18.”
“If you are dealing with a transfer of goodwill between connected persons it is essential that you should establish by reference to the facts whether the transferee has, in fact, succeeded to the business as a going concern (as opposed to having acquired one or more of the business assets) before sending a request to SAV for a valuation of goodwill. You should not accept that there has been a disposal of goodwill unless there is factual evidence of a transfer of the business as a going concern.”
HMRC consider that because goodwill is inseparable from the business from which it is derived, the disposal of a business as a going concern must involve the transfer of goodwill.
Where businesses are carried on from ‘trade related property’ (e.g. public houses, hotels, petrol stations, cinemas, restaurants, care homes etc), HMRC appear to accept that there will be an element of goodwill in such businesses when sold as a going concern. However, they consider that the sale price will reflect the value of tangible assets and other assets such as goodwill, and that it is necessary to consider the contribution that each asset makes to the combined value. The broad message of the Practice Note seems to be that goodwill valuations of businesses carried on from trade related premises will generally be lower than for other types of businesses.
Of course, the Practice Note is only a statement of HMRC’s views regarding goodwill, and does not carry the force of law. The approach described in the Practice Note was rejected by the Royal Institute of Chartered Surveyors, and further discussion between HMRC, VOA and interested professional bodies seems likely. In the meantime, the valuation of goodwill in trade related properties should be treated with caution, and specialist valuation advice should be considered.
If any goodwill is attributable to the personal skills of the proprietor (e.g. a chef or hairdresser), in HMRC’s view such personal goodwill is not transferable on a sale of the business (CG 68010). This view has not changed, but unfortunately this presents a trap for the unwary. HMRC guidance on goodwill and trade related properties and the above Practice Note can be found on HMRC’s website.
The above article is reproduced from ‘Practice Update’ (May/June 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. See the Newsletters section.