Goodwill payments under taxman's microscope

The Revenue and Customs (HMRC) has announced its latest crackdown on small businesses which incorporated to take advantage of the Chancellor's brief fling with a zero per cent rate of corporation tax, according to the Telegraph.

The Telegraph claims that the taxman is scrutinising the amount of goodwill that firms say was attached to their unincorporated business and which many then 'sold' to their new company for a one-off tax-free windfall.

Goodwill is the value of the business over and above the value of any physical assets. This includes the particular skills and reputation of an individual as well as any protected intellectual property.

Assets that have been owned for more than two years are taxed at only 10 per cent rather than the standard 40 per cent rate when sold. As each person can have £8,500 of capital gains income tax-free each year, many accountants advised clients to sell the goodwill to their newly formed company.

The Revenue believes that many firms overvalued their goodwill and could owe tax. In guidance to accountants, it said it would not accept goodwill valuations unless they had been made by someone outside the firm.

In 2002, the Chancellor introduced a zero corporation tax rate on the first £10,000 of profits generated by smaller businesses. He U-turned 18 months later in what became known as IR591, amid claims that some people had incorporated to take advantage of the Chancellor's good-nature.