A look at the impact of the Finance Act 2002 on the treatment of goodwill amortised by companies
The Finance Act 2002 changed the treatment of goodwill amortised by companies.
It does not apply to goodwill acquired prior to 1 April 2002 which continues to be treated within the capital gains regime; neither does it apply to internally-generated goodwill.
Where a trader transfers his business to a limited company of which he is a 'substantial shareholder' (40 per cent or more), they are treated as 'related parties' and the transfer must be at market value, subject to transfer pricing rules. HMRC has confirmed that the regime will only apply to goodwill created wholly after 31 March 2002.
Jolyon started practising as a solicitor on 1 July 2002 and incorporated his practice on 1 July 2005. His goodwill on incorporation was £200,000.
This can be amortised in accordance with accounting practice and the amortisation will be an allowable against the company's profits.
Norman started practising as an accountant in 1980. On 31 August 2002, he decided to incorporate his practice when the market value of the goodwill was £300,000.
This cannot be amortised under the new regime, as it was generated prior to 1 April 2002. Instead, it will remain within the capital gains regime.
David bought a practice from an unconnected party on 1 August 2002, paying £200,000 for the goodwill, which was the fair market value of the asset.
On 30 September 2006, he transferred the practice to a limited company.
The goodwill is being written off by the company over five years, so the deduction of £40,000 will be allowable against the company's profits.
Goodwill relating to personal services - for example, an author - is not normally considered to have a market value, as it cannot be transferred.
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