Trading losses can only be carried forward against profits of the same trade. This means that brought forward losses cannot be offset against chargeable gains. However often when goodwill is disposed of it will not give rise to a chargeable gain. Since April 2002 goodwill is dealt with under the rules for intangibles, FA 2002 Sch 29. This means that any transactions relating to goodwill acquired on or after 1 April 2002 fall into these new rules. The ‘gain’ on the goodwill gives rise to a taxable credit instead of a capital gain. This means that it is treated as an income receipt of the trade. S393 TA 1988 allows trading losses to be carried forward and set against trading profits in the following accounting period and this can include profits on ‘new’ goodwill.
A common mantra is to recommend that shares are sold rather than assets so as to avoid a double tax charge (corporation tax in the company and then extraction costs). The logic of this mantra may not hold when the company has brought forward losses and ‘new’ goodwill. In these circumstances it may be possible to sell the goodwill without triggering corporation tax and then the company can be liquidated at a tax rate of 10% (assuming Entrepreneurs’ Relief). This scenario can be relevant to many high value tech start-up companies which can build up goodwill without making profits. Also, many purchasers prefer to acquire goodwill rather than a company due to the transactional simplicity of an asset sale.
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