Relief for Goodwill Amortisation

When someone buys a business they will often pay a price which is more than the value of the net assets of the business. The same is often true when a business owner decides to incorporate their sole trader business or partnership. This additional cost is called ‘goodwill’ and is an intangible asset. As this is a capital cost, it is written down in the accounts over a number of years, with the amortisation each year being shown as an expense in the profit and loss account.

The allowability of the amortisation depends on when the goodwill was acquired, and recent changes have made this even more confusing. Here’s a simple guide to the rules.

Pre 2002 Goodwill
Any goodwill acquired before April 2002 falls under the old rules for goodwill, and amortisation is not allowed for this goodwill. It is important to note that due to connected party rules, goodwill is still considered old goodwill even where it is sold to a connected party after April 2002 if the original business was in existence before 2002. For example, if an unincorporated business was set up in 1995, but subsequently incorporated in 2005, then the goodwill is still considered ‘old goodwill’ and no deduction is allowed for the amortisation. The same applies if one company in existence before 2002 was bought by a connected party after 2002.

Post 2002 Goodwill
The rules changed in 2002 and any goodwill acquired after April 2002 (except from a connected party that was in existence before April 2002) was therefore allowable. The general rule is that the tax relief will follow what’s in the accounts, therefore no adjustment is necessary in the tax computation.

Recent Changes
In his 2014 autumn statement, the Chancellor announced the withdrawal of relief for goodwill amortisation on incorporation of a business. This takes effect so all businesses that incorporate on or after 3 December 2013 won’t be able to claim relief for amortisation.

The amendment announced in the Autumn statement only affected incorporations and not purchased goodwill arising as a result of the purchase of unconnected businesses. A further announcement has now been made in the 2015 Summer Budget, disallowing goodwill amortisation for all business purchases made after 9 July 2015.

The recent changes to allowability of goodwill amortisation has come as a blow for many business owners, particularly owners of unincorporated businesses who were thinking of incorporating. In these circumstances, extra consideration will need to be given to the valuation of other assets in the business such as stock and business property to maximise what tax relief they can get.

 

To find out more on the subject, please contact 01772 821 021.