SVM107070 - Capital Gains Procedures: Goodwill

Although it was once the responsibility of Inspectors to agree the value of business goodwill, all goodwill valuations (both corporate and non-corporate) are now undertaken by SAV.

Non-corporate goodwill valuation requests are in the main referred to SAV by Risk and Intelligence Service (RIS). In these cases, the request is pre-enquiry for an informal opinion on the value claimed. SAV Risk Assessors will consider the valuation and report to RIS on the lines that either:

a - The valuation can be accepted

b - The valuation is either an under or over valuation and supply their opinion of Open Market Value

c - Inform RIS that they have insufficient information upon which to form an opinion

In the case of a response under b or c above, RIS will issue a Standard Intelligence Package to Individuals & Small Business Compliance (ISBC) who in due course will raise an enquiry and refer the matter back to SAV for an agreed valuation.

Non-corporate Goodwill valuation requests may also be received in SAV direct from the Instructing Office for example ISBC or Wealthy & Mid-Sized Business Compliance (WMBC).

Corporate Goodwill valuations will be received in SAV direct from the Instructing Office and may be in the form of informal or formal requests.

Upon receipt of goodwill requests involving Trade Related Property, SAV will liaise with the Valuation Office Agency specialists in the Land Portfolio Valuation Unit.

It is possible that in settling a company’s Corporation Tax liability on the disposal of its assets, a value for goodwill may have been agreed either by the Inspector or SAV, on acquisition and/or at 31 March 1982. If a share valuation at the same date is required and is calculated by reference to a whole company value, we may well be bound by the previously agreed value for goodwill. In this situation you should obtain any PSV file that was created in respect of the goodwill valuation. The value of the company is not necessarily arrived at by simply adding the goodwill value to the value of the net tangible assets, if that entirety value is not supported by earnings.

In some instances, a value for goodwill could only be achieved by selling off the benefit of the trade away from the other assets of the business leaving only a shell out of which costs of consequent redundancies/liquidations have to be met. Deduction for those could be a legitimate reduction from the total value of the separate assets, including goodwill.

Points to consider when valuing goodwill

For CG purposes goodwill should be construed with legal rather than accountancy principles. A distinction must be made between goodwill for CG purposes and goodwill within Part 8 CTA 2009 where accountancy principles apply, and goodwill is simply the difference between the overall worth of a business when it changes hands and the value of its identifiable (including intangible) assets.

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. Personal goodwill can be found in businesses where these attributes are essential to the existence of the business such as, but not limited to, chefs, hairstylists, artists etc, though it may not be the only type of goodwill the business has. It may also be found in relatively new businesses, but as usual, each case has to be judged on its own merits.

If the business could not continue without the proprietor, the goodwill is likely to be personal. If other individuals were also employed there is likely to be business goodwill, but the value will be lowered by the personal element because any profits attributable to the reputation, personal skill or ability of the proprietor must be excluded.

As far as synergy is concerned, we are required to consider an open market value for the goodwill transferred. Maybe a purchaser would be prepared to offer a premium on the basis of obtainable synergies; however this assumption introduces the concept of a special purchaser to the valuation. There should be no expectation of a synergy-based value on an open market value basis unless synergy in a particular market is commonplace.

When valuing the goodwill of a business the valuer should have regard to the following:

  • the full sale and purchase documentation relating to the transfer of both tangible and intangible assets
  • succession arrangements
  • the valuation approach used – eg capitalisation of profits, super profits or a trade specific method
  • the activities of the business and role of the owners within it
  • the financial statements/accounts (including the detailed trading and profit and loss account) for the 3 years before valuation
  • any other relevant financial information
  • appropriate yield and multiples of comparable companies and sectors
  • the commercial and economic background at valuation date
  • how the personal goodwill of the owner has been reflected in the valuation
  • any other relevant factors

Additional Guidance: SVM150000