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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Goodwill: meaning of goodwill

Goodwill is an asset within the meaning of TCGA92/S21(1). This guidance explains the nature of goodwill and its treatment for CG purposes.

Halsbury’s Laws of England, 4th edition, Vol. 35 at page 1206 states that:

The goodwill of a business is the whole advantage of the reputation and connection with customers together with the circumstances whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to the customers which the name and reputation possesses.
A new business will not have an existing reputation but from the commencement of its activities it will begin to generate goodwill so that on a subsequent disposal of the business as a going concern we would expect that one of the assets comprised in the disposal would consist of goodwill.

The term “goodwill” is not defined for the purposes of the CG legislation in TCGA 1992. The leading legal authority on its meaning is found in IRC v Muller & Co Margarine Limited [1901] AC 217, a stamp duty case where in answer to the question “What is goodwill?” Lord Macnaghten said:

It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start.
In the same case Lord Lindley said at page 235:

Goodwill regarded as property has no meaning except in connection with some trade, business or calling. In that connection, I understand the term to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers and agreed absence from competition.
It should be noted that Lord Macnaghten indicated that:

Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here; and another there.
For further information about some of the elements that may be comprised in goodwill see the guidance on trade secrets and know-how at CG68200 and unregistered trade marks at CG68210.

The decision of the Special Commissioners in Balloon Promotions Ltd v Wilson, SpC 524 [2006] STC (SCD) 167, provides authority for the fact that for CG purposes goodwill should be construed in accordance with legal rather than accountancy principles.

Goodwill is inseparable from the business in which it is generated and has its existence, see CG68030. When a business is disposed of as a going concern any goodwill attributable to the business will be transferred to the new proprietor.

Any goodwill attributable to the personal skills of the proprietor, for example the personal skills of a chef or a hairdresser, will not be transferred to the new proprietor. Advice should be obtained from the CG Technical Group if it is claimed that the goodwill attributable to the personal skills of the proprietor have been transferred with the business because his/her services have been retained for the foreseeable future by means of an employment contract. All of the relevant facts and circumstances should be established before referral to the CG Technical Group.

Further information about disposals, part disposals and deemed disposals of goodwill is given at CG68050.

Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.