Goodwill valuation successfully defended

    Abbey Tax was instructed by an accountancy client to assist in a dispute with HMRC concerning the valuation of goodwill relating to a trade-related property where a partnership had incorporated.

    The original valuation of £570,000 was based upon a detailed valuation report produced by one of the UK’s leading valuation firms but was challenged by HMRC in its belief that trade-related properties attract no tangible goodwill. HMRC proposed a figure of £100,000 without any firm basis simply to resolve the dispute.

    At this point an impasse was reached and Abbey Tax was engaged to advise on the options available and ultimately resolve the matter. The accountant and his client perceived that the only option was to seek the tax tribunal’s decision but we recommended that the client utilise ADR (Alternative Dispute Resolution) in the first instance. This provided the opportunity to try to resolve the issues with HMRC in a controlled environment without the strict governance of the tribunal process and the much higher costs associated with it. It also did not compromise the taxpayer’s ability to follow the tribunal route at a later date if ADR didn’t work.

    The accountant and his client instructed us to apply for ADR and the case was accepted into the ADR process.

    HMRC then decided it prudent to carry out a full on-site valuation rather than rely on its previous ‘desk-top’ valuation. This contributed to an increase in HMRC’s offer to value the goodwill at £160,000, which again was rejected.

    We prepared the accountant and his client for the meeting and strongly encouraged the involvement of the independent valuer. The importance of this thorough preparation cannot be overstated as experience has shown that this has a direct bearing on the potential success of the case.

    During the ADR meeting the independent valuer was able to present a strong case to support the original valuation. HMRC’s response was to change the valuation method but the independent valuer was able to demonstrate that this actually made little difference to the original valuation. 

    In the light of the strong case made at ADR, HMRC agreed to ask their valuer to meet separately with the taxpayer’s representative to review similar businesses in the local area to compare results which would then be used to inform the valuation in this case.

    HMRC eventually accepted that the goodwill should be valued at £450,000.

    Whilst the number of enquiries of this nature is diminishing there will still be a number of similar cases being challenged by HMRC. At the root of this challenge is the fact that HMRC’s principles of valuation in this type of case are very different to that of professional valuers working outside of HMRC. It also maintains that its position is supported by tax cases but it appears that this refers to test cases that have not yet been heard. It is therefore vital for advisors to be prepared and to be ready to justify the original valuations in the knowledge that it is still possible to negotiate a reasonable conclusion in such cases.

    Abbey Tax has considerable experience and a proven track record in successfully resolving all types of tax disputes and assisting clients whose goodwill valuations are under scrutiny. We are ideally placed to assist to whatever extent is needed. For more information contact Steve Price or call 0345 223 2727.