In a decision released on 14 May, in the case of Graham Michael Wildin [2014] TC 03586 [2014] UKFTT 459 (TC), the taxpayer, Mr Wildin, set up his own accountancy practice in July 1981 and incorporated the practice on 1 April 2003.

Valuations of the practice goodwill were therefore required at 31 March 1982 and at 1 April 2003 for capital gains purposes. The questions at issue were the appropriate methodology to be adopted, the amounts of the respective fees and multiples to be applied.

HMRC argued that the valuation should start with a ‘whole practice’ valuation from which should be deducted the value of the net assets of the practice. However their view was that this ‘whole practice’ or ‘total practice’ value was arrived at by the application of a multiple to gross recurring fees.

Wildin, presenting his own case before the tribunal, maintained that the normal method of valuing accountancy practices was simply to apply a multiple to the gross recurring fees; the net assets did not enter into the calculation at all.

The tribunal rejected HMRC’s arguments; it disagreed that there was any necessary link between the net assets of a professional firm and the value of its goodwill, indeed anomalies could result if HMRC’s approach was adopted.

It held that taking the ‘client book’ (ie, gross recurring fees) as proxy for the value of goodwill is a reasonable and more accurate method of arriving at a goodwill valuation for capital gains tax purposes for professional firms.

Having determined the appropriate methodology to be adopted, the FTT went on to consider the multiples and figures of gross recurring fees to be taken into account.

Wildin had proposed a multiple of 3.5 for 1982 as against HMRC’s 1.0. On the evidence presented, the tribunal slightly favoured HMRC and applied a multiple of 1.65. It also upheld Wildin’s claim that his accounts for the year to June 1983 were the best estimate of the figure of gross recurring fees at 31 March 1982.

In the case of the 2003 valuation, the tribunal accepted Wildin’s multiple of 1.5 and his figure of gross recurring fees.

‘This decision confirms what has generally been accepted that the value of goodwill in a professional practice in normally determined by reference to its gross recurring fees. After all a hypothetical prudent purchaser is basically buying an income stream; such assets as office furniture and equipment will be largely irrelevant,’ said Trevor Johnson, tax writer at CCH.

‘Although the rest of the case concerns the value of a particular business at particular dates, there is an aspect which might be of interest generally.