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The Book-keepers Forum -> Corporate Law & Companies House -> Goodwill on Incorporation
Post Info TOPIC: Goodwill on Incorporation
Don Tax


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Posts: 714
Date: Tue May 31 15:43 2011
Goodwill on Incorporation
 

I had been at a client to incorporate for years and gave up trying.   Now that I've lost the partner who specialised in this has left, the client's mate has told him that due to goodwill, he won't pay any tax for years if he incorporates.   As I say, this isn't my area but I don't want to lose the client.

The self employment has been going for decades and the turnover is £250K.

I'd be interested in any suggestions.   I'm not very good at asking for help, but I think I may need someone to hold my hand through this.



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gbm


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Date: Tue May 31 16:23 2011
 

Oh, the old "my mate says.." - don't you love clients who would rather take the advice from someone who knows sweet FA about tax?

I would agree, if this is an area that you don't know much about, you would be as well getting someone to help you out (which is in no way meant to be condescending).

In the meantime, to get you going...

The goodwill must be genuine. It must be 'free' goodwill and have a value that someone else would be willing to purchase.

The value is variable and subjective, but as a rough guide, you can take 3 times net profit. So if net profit is £40k, goodwill could be £120k. NB you could reduce the NP in respect of a market wage for the owner.

The taxpayer would be looking at Entrepreneurs Relief under CGT, roughly @ 10%, due with their IT.

The company would get tax relief @ 20% on the goodwill amortised.

As a newco wouldn't have any cash, the journal would be dr goodwill, cr DLA. Any withdrawals aginst the DLA would be tax free.

You would be advised to get HMRC to agree the goodwill figure before you complete the personal tax return, just so they can't come back and disagree with the valuation.

There, a few things to think about. A lot of it depends upon how much the goodwill is.


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Nick

Website: www.gbmaccounts.co.uk
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Will


Newbie

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Posts: 1
Date: Tue May 31 16:47 2011
 

Another point to note, if the sole trader has been 'running for decades' there may well be an issue, as goodwill will have been generated pre April 2002 and therefore not allowable for amortisation which will have an impact on the amount of corporation tax relief available.

Will

Farnell Clarke Ltd

www.farnellclarke.co.uk



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gbm


Guru

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Date: Tue May 31 19:40 2011
 

oops - of course, thanks Will. Just dealing with a relatively new one at moment, forgot about the pre 2002 thing.

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Nick

Website: www.gbmaccounts.co.uk
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Don Tax


Guru

Status: Offline
Posts: 714
Date: Mon Jun 13 10:34 2011
 

Hi again.   Thanks very much for your helpful replies and it's not in any way condescending.   The business started in the 1960s but really took off in the 1990s.   I'd thought that as there has been a slight decline since 2002 then there would not be much in the way of Goodwill.  Shows you how much I know about it :o)

There should be over £100,000 of Goodwill to draw upon so I'm starting the process of getting an independent valuation and forming a new company.

Thanks again.



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Why do I never get to sing in this show. Wanders off whistling 'Bless Your Beautiful Hide'.

BudgetB


Guru

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Posts: 560
Date: Mon Oct 31 15:09 2011
 

So, if you have a sole trader who commenced before 2002, what are the tax advantages to the new Ltd/director co if they can't amortise the goodwill?

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Robert Pearce


Senior Member

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Posts: 145
Date: Mon Oct 31 15:38 2011
 

BudgetB wrote:

So, if you have a sole trader who commenced before 2002, what are the tax advantages to the new Ltd/director co if they can't amortise the goodwill?

 

Although the company won't be able to get tax relief on the amortisation, the introduction of the goodwill will still result in the director's loan account being credited. The director can then withdraw this tax free, whilst (presumably) only paying 10% capital gains tax on the value of the goodwill.

The limited company may also benefit from having a stronger balance sheet, e.g. in terms of credit rating or when trying to raise finance.



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Pearce & Co - Chartered Accountant and Chartered Tax Adviser 

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These comments are outline only and are not a substitute for specific professional advice.
BudgetB


Guru

Status: Offline
Posts: 560
Date: Mon Oct 31 16:04 2011
 

The tax free benefit to the owner is only if they are a higher rate tax payer? They can take dividends to the higher rate threshold and then use the goodwill money after?

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