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November 15, 2013
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Nursing Homes - Allocation of Consideration (Goodwill), Tribunal Decision Imminent

When a nursing home is acquired as a going concern by a limited company it is important for accounting and tax purposes that the consideration is allocated appropriately between i) the property, ii) free standing chattels and iii) goodwill of the business.

In 2002 the rules changed in principle to allow tax deductions for acquired goodwill.

Therefore any acquisitions after 1/4/02 of nursing homes that are trading have been under close scrutiny from HMRC in terms of the amount allocated in the accounts (and thus for tax purposes) to goodwill.  There are also issues in relation to SDLT and capital allowances.

In such cases it is agreed that the value of goodwill is the difference between the total price paid for the business and the freemarket value of the property.

We have been brought in to specifically assist a taxpayer with a tax enquiry along these lines and met with a team from HMRC recently.

Two things are clear:-

1) There is potential material discrepancy of views on how the property is to be valued, between the Valuation Office (assisting HMRC on these matters) and professional valuation consultants (who might assist the taxpayer).  These seem to hinge (in a very high level summary) around the detail of the assumptions to be adopted on acquisition, in calculating how long the nursing home would take to get to full capacity and profitability.

2) HMRC are keen to explore their ability to press for penalties should the goodwill in the accounts need to be reduced following their enquiry.

We were informed at the meeting that at least one taxpayer has appealed a determination on this matter to Tribunal.

It is understood that the matter is likely to be heard at the First Tier (tax) Tribunal initially.  The First Tier Tribunal's job will be to provide clear guidance as to the assumptions/parameters on how the property should be valued and then, if the parties can't agree a value then, those instructions will be provided to Land Tribunal.

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