For some years now, the apportionment of consideration to goodwill in connection with the business sale of a hotel (or other trade related property (“TRP”)) has been a contentious issue. HMRC has historically classified goodwill as falling within the following categories:
- Personal goodwill, which relates to the skills and personality of the proprietor and is therefore not transferable (dog goodwill under the zoological classification);
- Inherent goodwill, which is related to the location of business premises and is therefore subsumed within the TRP valuation (formed of cat and rabbit goodwill);
- Adherent goodwill, which arises from the carrying on of a particular business for which the premises have been specifically adapted and is therefore subsumed within the TRP valuation (formed of cat, dog and rabbit goodwill); and
- Free goodwill generated independently from the premises and capable of being transferred as a separate asset (rat goodwill).
This approach was questioned in the case of Balloon Promotions Ltd v Wilson SpC 524, in 2006 and there has been uncertainty on this issue since that case.
To alleviate these difficulties, HMRC has published a new Practice Note (the “Note”) concerning the method of apportioning the price paid for a business transferred as a going concern.
The Note dismisses the subdivision of goodwill into ‘inherent’, ‘adherent’ and ‘free’ goodwill as causing confusion. It does however maintain its position that ‘inherent’ and ‘adherent’ goodwill should form part of the value of the TRP.
The Note specifies that the value apportioned to goodwill should be calculated by deducting the value of all the tangible assets as an operating entity from the price paid for the business as a going concern. The value of the operating entity being the market value of the TRP based on a fair market operating profit per annum multiplied by an expected number of years purchase, and reflecting the facts as at the valuation date; there should be no assumption of an empty and bare TRP unless that is in fact the case.
Although this methodology differs from the previous classification of inherent, adherent and free goodwill, in practice it seems that there will still be a minimal value attributable to goodwill and more to the TRP. This will result in increased SDLT costs and less relief under the intangibles regime.