June  2013

Part 6 - Goodwill

31.10A.120  Definition of goodwill

A key definition of the term “goodwill” was given in the House of Lords on 20 May 1901 in the case of IRC v Muller & Co Margarine Ltd (1901) AC217
[note 1]:

"What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and disadvantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one good thing which distinguishes an old-established business from a new business at its first start."

31.10A.121 Types of goodwill

The three primary types of goodwill have been generally established as:

  • Inherent goodwill - generated by the location of the property rather than the carrying on of a particular business. This may be because of the attractiveness of the address (such as in a well regarded part of town) or the strategic location (next to a main road or in the town centre)
  • Personal goodwill - which is generated by the personality, special skills or reputation of the person carrying on the business
  • Free goodwill - which relates to the success of the business generated by historical reputation, the quality of staff or existing contracts.

31.10A.122 Goodwill in trade related properties (HMRC)

Following disputes arising in relation to the tax due on sums paid in transactions involving businesses carried out from 'trade related properties' (in particular the case of Balloon Promotions Ltd v Wilson (Inspector of Taxes) [2006] S.T.C. (S.C.D.) 167) [note 2], HM Revenue & Customs (HMRC) has found such categorisations as detailed at paragraph 31.10A.121 can cause confusion in assessing goodwill and its value.  HMRC has reviewed its approach in dealing with the identification and valuation of “free” goodwill in relation to businesses conducted from trade related properties (e.g. public houses, hotels, petrol filling stations, cinemas, restaurants, care homes etc.), and now acknowledges that when a business is sold as a going concern, the sale price should reflect the total value of tangible and intangible assets, along with the benefit of other business assets such as customer, staff and supplier contracts or customer records

HMRC considers that 'inherent' and 'adherent' goodwill are attributes that add value to the property in which a business is carried out, rather than representing goodwill in themselves.

31.10A.123  Goodwill - value unlikely following insolvency

Goodwill is valued based on the advantage or reputation a business has acquired due to the quality of its product and/or service and/or the holding of a respected brand name.  Where a business has ceased to trade,  its goodwill will usually be worthless. If a director, partner or bankrupt includes goodwill in a statement of affairs or other document the official receiver should seek an explanation as to its inclusion as an asset.

31.10A.124 Valuation and sale of goodwill

The valuation of goodwill is difficult because of its vague nature. The value is very much dependent on the particular circumstances of the business and is only likely to be an issue where an insolvent's business is being sold as a going concern and the goodwill will only have a value if the purchaser is willing to pay an additional sum for goodwill.

The costs associated with the sale of the goodwill (and the business as a whole) should be provided by the potential purchaser, and it is recommended that at least one independent valuation be provided by the purchaser at his/her own expense.


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