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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: UK Tax
Satisfied Customers: 3841
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Hi, I have a client who has just incorporated from a sole

Customer Question

Hi,
I have a client who has just incorporated from a sole trader and I want to advise her on goodwill on incorporation. She does PR and marketing and her sole trader turnover was in the region of £35,ooo a year and her only tangible assets are a computer and a printer. How would we go about valuing goodwill?
Submitted: 1 year ago.
Category: UK Tax
Expert:  Rakhi Vasavada replied 1 year ago.
Dear Friend,

Hello and welcome and thank you for using Just Answer.

Valuing goodwill is a tricky business. Especially HMRC is very sticky on this issue.

As you must be aware, there is no accurate science behind this and normally people value an average of all different methods of valuation. Let me try and throw some light on this. It would be a general idea as being precise is not possible.

HMRC are very keen on evaluating exactly what kind of goodwill a business has. Some goodwill is "personal", i.e. a one-man consultancy, some will be part of the property, i.e. a pub, neither of which is readily transferable on its own, and HMRC could argue that there is no transferable goodwill.

In your case, there are no major assets to transfer, as you say.

Having said this, the valuation is often arrived at by averaging the various different ways of valuation, i.e. 3 times net profit, or 1 times gross profit are two common ways, but watch out for the net profit one as it has to take account of the proprietors time if he's working in the basis, so a sole trader showing profit of £25k probably has no goodwill value as the £25k is little more than the guy's wage if he's working full time. If the net profit was £50k then you could deduct £25k prop's wage leaving £25k times 3 gives a £75k goodwill.

Also, some trades, professions, industries have their own goodwill valuations. For example accountancy practices sell for around 1-1.5 times their gross recurring fees - i.e. not based on profits at all, just recurring turnover.

Going by what I have seen so far, HMRC will only challenge goodwill valuations on two grounds - firstly that there is no transferable goodwill in the first place, so valuation arguments don't even come into it, secondly, when the valuation is ridiculously high or low.

Coming to your issue in specific, given that a person would have earned (I do not know what business your client is in), for example would have earned 25,000 had he been working elsewhere, around 10,000 can be taken / counted as goodwill. If you work around 2-3 times of the profit, I feel you will still hover around the same figure.

Kindly note that this is indicative.

I hope this helps.

You may please leave a positive rating if this helps. Alternatively, please feel absolutely free to revert with additional queries and I would be more than happy to keep assisting you with them.

Warm Regards
Customer: replied 1 year ago.

Thank you very much


 


There seems to be a lot of issues that can arise with goodwill on incorporation, do you think it is worth doing, is goodwill queried a lot by the HMRC? The sole trader business may be subject to tax on the gain on the sale to the ltd company less reliefs that are available. I don't want my advice to lead to problems in the future for my client.


 


Regards

Expert:  Rakhi Vasavada replied 1 year ago.
Dear Ally,

Hello and welcome again and thank you for your follow up question.

Yes, it is worth doing but looking at the quantum that you mention this is not worth it. If you want, you may moderately value it, not too high, not too low.

As such this should not create any problems for your client in future.

I hope this helps.

You may please leave a positive rating if this helps. Alternatively, please feel absolutely free to revert with additional queries and I would be more than happy to keep assisting you with them.

Warm Regards

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