The valuation of business goodwill for tax purposes is very subjective and is often a contentious area. HMRC have recently updated their guidance in their Shares and Assets Valuation Manual.
The guidance makes a distinction between goodwill for Capital Gains purposes and goodwill within the corporate intangibles regime where accountancy principles apply. The accounting rules define goodwill as the difference between the overall worth of a business when it changes hands and the value of its identifiable (including intangible) assets.
The HMRC guidance goes on to state that the goodwill of a business is the “attractive force” which brings in custom, it is the thing that distinguishes an old established business from a new entity. In a business reliant on the skill, personality and other personal attributes of the proprietor, it is likely that the goodwill will be personal to the proprietor.
The guidance also sets out the information required by HMRC Shares and Assets Valuation when asked to agree on a goodwill valuation with the taxpayer.
Note that the disposal of goodwill and customer-related assets by individuals no longer qualifies for CGT Business Asset Disposal relief (previously entrepreneurs’ relief) but the disposal would be subject to CGT at normal rates. Corporate intangibles relief for the acquisition of goodwill was abolished for acquisitions from 7 July 2017, although a restricted form of relief was introduced in the Finance Act 2019.
We can assist you in valuing the goodwill of your business and calculating the value of your business in general whether for tax purposes or when you are considering a sale.