Tax perks differ in buying goodwill

DS writes: Our family business, which had a turnover of £7m last year, is close to taking over another company. We have been asked by the vendors to pay their legal and advisory fees and reduce the amount we pay for the company accordingly. How will the goodwill we are paying be shown in our accounts and are there any implications for us?

Answer

Any amount you pay towards the vendors’ legal and advisory fees will be included in the cost of buying the company in your own firm’s books, writes Jon Sutcliffe, partner at Kingston Smith.

The amount you pay over the “fair” value of the new company’s assets is goodwill. On your company’s balance sheet the total paid, including the vendors’ fees, will be shown as an investment. If you then prepared consolidated accounts, the goodwill would be shown on your consolidated balance sheet, amortised over its useful life and charged as an expense in the consolidated profit-and-loss account.

You appear to have chosen to buy the other firm’s shares rather than just the trade, goodwill and associated assets and liabilities. This means you inherit its history. If there is a risk of liabilities coming to light that relate to the period before you bought the company, you should think about buying the trade and goodwill instead of the shares.

Goodwill purchased in this way is treated differently for tax purposes from the goodwill that arises on consolidation when buying the shares. Amortisation of purchased goodwill is tax deductible, and so could be a big benefit for you. The vendor’s tax treatment will also change, so both your commercial considerations and tax positions will be factors in the deal.