Goodwill valuations!

Incorporating a client’s sole trade or partnership business can be a very attractive option from a tax perspective resulting in:
The ability to minimise tax paid on profits.
The generous tax position created by Entrepreneurs Relief on the Capital Gain realised by the sale of the goodwill of the sole trade or partnership to the limited company.
Having successfully agreed the valuation of the goodwill with HMRC (SAV) the Capital Gain is taxed at 10% (subject to qualification for Entrepreneurs Relief) and consideration for the purchase of the goodwill is typically credited to the Director’s Loan Account in the incorporated company and is available to draw down as cash flow permits.The generous tax position created by Entrepreneurs Relief has led HMRC to place valuations of goodwill for incorporation purposes under increased scrutiny resulting in many accountants and tax advisers entering into protracted correspondence and negotiation with HMRC increasing:
The financial cost of incorporation to the client.
The risk of an enquiry into the disposal of the goodwill being opened by HMRC.
The value of goodwill being significantly reduced or worse considered to be nil.
HMRC are challenging valuations of goodwill where there is typically:
A misunderstanding of the nature of the asset being transferred.
A lack of documentation supporting the transfer of the asset.
3. Incorrect timing.
Use of unsustainable, inappropriate and unsuitable multiples.
Adjustments to relevant earnings (e.g. salaries) and a failure to make relevant reductions.
If you would like to see how we deal with these issues and the steps we take to prevent them please contact us.

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