Where a business is sold that includes 'trade- related property', issues have often arisen on the allocation of proceeds amongst the assets acquired. This is important given the different tax and stamp duty treatment of different assets. In a number of these cases HMRC has, for example, refused to consider that a significant amount of value can be attributed to any goodwill that may exist. The corollary is that in HMRC's view the value should be allocated to the property itself.
A trade related property is defined as a property which has been designed for the business and its location is such that the property value reflects the trading potential of the business e.g. a public house, restaurant or cinema. Therefore, the property is intrinsically linked to the returns generated and arguably the business cannot be sold separately from the property.
HMRC has now issued a new practice note. In this, they accept that if a business is sold as a going concern, with trade-related property, the sale may include some element of goodwill. The question to be answered is what the value of the goodwill should be, as in HMRC's view, it is often difficult to directly attribute a sum to goodwill. HMRC prefer the deductive approach to calculating the value of goodwill rather than a just and reasonable apportionment. The deductive approach values all the other assets and deducts their value from the total to leave a balancing figure for goodwill value. This approach places great significance on the valuation method used for other assets when arriving at the balancing figure for goodwill.
According to Corporation Tax Act 2009 goodwill should have the same meaning as it does for accounting purposes. That is, the difference between cost of an acquired entity and its fair value of identifiable assets and liabilities. Therefore, a calculation of the value goodwill must begin with whether or not the accounts are prepared in accordance with generally accepted accounting practices (GAAP). When this is not the case purchased goodwill must be calculated as if the company has applied GAAP conventions.
The other assets in a business acquisition must also be valued, particularly the property itself. In the practice note, HMRC has indicated some ways of doing this and the assumptions to be adopted, comparing a 'profits' based and 'investment' based approach to valuation. The profits based approach assesses the trading potential of the property operated by a 'reasonably efficient operator' and is meant to exclude the impact of any profit in excess of that level.
The practice note also includes some examples showing how HMRC would approach calculating appropriate values in given circumstances.
The practice note gives HMRC's view of apportioning value in business transactions involving trade related property and is easier to understand than previous versions. However the note is written with an HMRC view and it may be useful to get another opinion before submitting figures based on the practice note for agreement.
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