Goodwill and incurring expenditure

A guide for subscribers. 

This is an interesting query that came to our Virtual Tax Partner service via a firm of accountants, they did not want to pay for any advice, but the query was then passed around various professional bodies when it came back to us for a second opinion. We thought it was interesting but had not seen this argued before.

HMRC has sought to argue that there can be no deduction under the corporate intangibles regime for goodwill purchased by a company from a related party individual who created it after 1 April 2002 because the individual has not actually incurred any expenditure on the goodwill in question.

Is HMRC right?

The starting point is that s.715(3) CT 2009 tells us that in Part 8 of CTA 2009 - the intangible fixed asset rules, ‘goodwill’ has the meaning it has for accounting purposes (and includes internally creased goodwill). S714(4) adds that for the purposes of Part 8 goodwill is treated as created in the course of carrying on the business in question.

S.882 says that the corporate intangible rules may apply to assets created or acquired on or after 1 April 2002 in certain situations, 882(c) says that provided that they are acquired by a company from a related party, and that the assets were created on or after 1 April 2002 by either the person from whom they are acquired or any other person.

So we are looking at assets that are created by the seller or someone else and are then sold on to a company.

S.883 says that assets are created or acquired when expenditure is incurred.

S.887 says that expenditure on the acquisition of an asset is treated as incurred when it is recognised for accounting purposes.

S.887 is silent about when expenditure on the creation of an asset is treated as being incurred. However, looking back at s.715(4) that says that “goodwill is treated as created in the course of carrying on the business in question.”

The inspector’s angle has been to disallow amortisation on purchased goodwill as follows:

“For expenditure on amortisation to be allowable the goodwill has to be created by having the expenditure incurred on it. However, the original sole proprietor created the goodwill without incurring expenditure…”

We take a different view, as follows. The requirement is that the individual incurs expenditure in creating goodwill. It does not define the exact nature of the expenditure, which is presumably not prescribed because there are many different forms of goodwill including the internally generated variety. S.714(4) says that goodwill is treated as created in the course of carrying on the business. Therefore we simply need to incur expenditure in running a successful business and we create goodwill and then expenditure has been incurred on the creation of goodwill.

We will wait and see what the outcome is.

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