The First Tier Tribunal decision in Graham Michael Wildin (TC03586, published on 23 May), considered the valuation of an accountancy practice as at 1 April 2003. The valuation at 30 April 1982 was also relevant, as the practice had been formed in July 1981 when Mr Wildin left his former practice, taking with him a block of fees of £100,000.
The dispute between Mr Wildin and HMRC centred on the correct method for valuing the goodwill of the practice and in particular whether the valuation should be calculated by reference to a multiple of gross recurring fees (the “client book” basis), or by reference to the firm’s net assets (the “whole practice” basis).
The tribunal concluded that it could not be correct that the value of a professional firm’s net assets should affect its overall goodwill value. If, as HMRC asserted, there was a link between net assets and goodwill, the valuation would give rise to obvious anomalies where the business owned its premises or where practices have different approaches to profit retention. A more accurate method of valuing the goodwill of a professional practice would be a “client book” basis, which is the basis on which most practitioners would value their business.
The tribunal then considered what multiple should be applied to the “client book”. Mr Wildin had argued that in 1982 practices were valued on the basis of a multiple of three, and referred to advertisements in the professional press for the sale of blocks of fees, and to his own correspondence with his bank when he raised finance in 1982. However, the tribunal agreed with HMRC, who argued that there was no third party evidence to support a multiple of three, and that advertisers had a clear incentive for inflating the price at which blocks of fees were offered. HMRC were able to provide some evidence for multiples up to 2, and that the average in 1982 was 1 to 1.5.
Wildin and Co’s client base was typical of a small local accountancy practice, and with no niche clients, so the tribunal could not see why the firm should attract a premium. Any premium attached to Mr Wildin personally, although the tribunal recognised that the practice was successful. In his first year Mr Wildin had increased turnover by about 70%. The tribunal concluded that a reasonable multiple for the practice in 1982 was in the range of 1.5 to 1.75.
The tribunal agreed with Mr Wildin that the best estimate of turnover for 1982 should be based on the accounts for 1983, although this figure should not include WIP for 1982, which would include an element of double counting.
The tribunal looked at the 2003 valuation using a similar approach, and arrived at a similar multiple for that valuation.
Mr Wildin’s appeal was allowed in part. The value for 2003 determined by the tribunal was close to the value returned by Mr Wildin, although the March 1982 value was determined as about half the value used by Mr Wildin in his CGT computation.
What does this decision mean for practitioners?
This decision probably confirms the approach that most practitioners take when valuing a professional practice, by applying a multiple of about 1 to 1.5 to turnover. Professional firms cannot be valued on the same basis as other trading businesses, where the net assets usually form a more integral part in the value, so the “whole practice” approach is not appropriate to such valuations.