Existing Ltd Co. taking over sole trader
Discussion
A bit of advice please. I've asked my accountant this before but he wasn't very clear and I've forgotten the specifics he mentioned.
Situation is a ltd company expanding and taking over another business currently run as a sole trader. So I'm assuming it would be classified as an asset sale? If so, would the purchase of these assets costing say £10k come out of pre-tax profit or after-tax profit?
Reason is, i'm trying to work out what's the best way of structuring the deal, as at £10k if its after Corp. tax then its actually costing £12.5k, but if its pre-tax then it'll also reduce the CT liability, possibly to zero.
This may sound a bit bumbly as I'm still trying to get my head around it, hope someone out there understands what I mean!
Situation is a ltd company expanding and taking over another business currently run as a sole trader. So I'm assuming it would be classified as an asset sale? If so, would the purchase of these assets costing say £10k come out of pre-tax profit or after-tax profit?
Reason is, i'm trying to work out what's the best way of structuring the deal, as at £10k if its after Corp. tax then its actually costing £12.5k, but if its pre-tax then it'll also reduce the CT liability, possibly to zero.
This may sound a bit bumbly as I'm still trying to get my head around it, hope someone out there understands what I mean!
Seany88 said:
A bit of advice please. I've asked my accountant this before but he wasn't very clear and I've forgotten the specifics he mentioned.
Situation is a ltd company expanding and taking over another business currently run as a sole trader. So I'm assuming it would be classified as an asset sale? If so, would the purchase of these assets costing say £10k come out of pre-tax profit or after-tax profit?
Reason is, i'm trying to work out what's the best way of structuring the deal, as at £10k if its after Corp. tax then its actually costing £12.5k, but if its pre-tax then it'll also reduce the CT liability, possibly to zero.
This may sound a bit bumbly as I'm still trying to get my head around it, hope someone out there understands what I mean!
Yes the limited company will get tax relief on the assets purchased from the sole trader which will probably consist of equipment, goodwill and possibly stock depending on the type of business.Situation is a ltd company expanding and taking over another business currently run as a sole trader. So I'm assuming it would be classified as an asset sale? If so, would the purchase of these assets costing say £10k come out of pre-tax profit or after-tax profit?
Reason is, i'm trying to work out what's the best way of structuring the deal, as at £10k if its after Corp. tax then its actually costing £12.5k, but if its pre-tax then it'll also reduce the CT liability, possibly to zero.
This may sound a bit bumbly as I'm still trying to get my head around it, hope someone out there understands what I mean!
To the extent that the purchase price is allocated to equipment, the cost is likely to be written off for tax in the year purchased (depending on other asset purchases in the same year). Any amount allocated to goodwill will be written off over a number of years (realistic minimum of 5 years).
So the purchasing limtied company will want more of the cost allocated to equipment but the selling sole trader will probably want more allocated to goodwill as they will pay a lower rate of tax on the sale of that than the sale of equipment (generally speaking). So you need to get your solicitor warmed up to that - sometimes they don't even think to question the proposed allocation of the cost or involve the purchaser's accountant in the discussions.
Hope this helps. As an accountant in practice I know that we sometimes don't always manage to explain things to clients as clearly as we should!
If the new limited company physically "pays" the sole trader, there is the chance that the sole trader could be liable to Capital Gains Tax on the disposal proceeds - although the tax would only be payable at 10% (the special CGT rate on business asset disposals under a lifetime limit of £1 million).
The new limited company will create an asset in its balalnce sheet covering the purchase cost of the old sole trader business. That "asset" would probably be subdivided into the various categories of asset that constituted what it actually bought from the old sole trader i.e. equipment, machinery, land, buildings, stock and, perhaps, goodwill.
Some of those assets will be eligible for Capital Allowances in the new limited company. Others will not.
The new limited company will create an asset in its balalnce sheet covering the purchase cost of the old sole trader business. That "asset" would probably be subdivided into the various categories of asset that constituted what it actually bought from the old sole trader i.e. equipment, machinery, land, buildings, stock and, perhaps, goodwill.
Some of those assets will be eligible for Capital Allowances in the new limited company. Others will not.
Sorry for the late reply, I am the Ltd co buying the business.
So buying the physical assets and stock will basically cancel all of my profit for the year (and my CT bill) and I guess that can be written off future years too (if the value is high enough)?
Then the goodwill (which I need to aim to keep low) will be noted as a Capital Allowance and gradually written off.
Is that right? The seller is well aware that they'll face a big tax bill, but we're not aware of any way around it?
They intend to keep the freehold but then sell it in a few years, with a contract drawn up to the effect of first dibs etc which will allow them to use their CGT allowance for another year.
So buying the physical assets and stock will basically cancel all of my profit for the year (and my CT bill) and I guess that can be written off future years too (if the value is high enough)?
Then the goodwill (which I need to aim to keep low) will be noted as a Capital Allowance and gradually written off.
Is that right? The seller is well aware that they'll face a big tax bill, but we're not aware of any way around it?
They intend to keep the freehold but then sell it in a few years, with a contract drawn up to the effect of first dibs etc which will allow them to use their CGT allowance for another year.
Seany88 said:
Sorry for the late reply, I am the Ltd co buying the business.
So buying the physical assets and stock will basically cancel all of my profit for the year (and my CT bill) and I guess that can be written off future years too (if the value is high enough)?
Then the goodwill (which I need to aim to keep low) will be noted as a Capital Allowance and gradually written off.
Is that right? The seller is well aware that they'll face a big tax bill, but we're not aware of any way around it?
They intend to keep the freehold but then sell it in a few years, with a contract drawn up to the effect of first dibs etc which will allow them to use their CGT allowance for another year.
The cost of buying physical assets will not be completely written off against your annual profits. What you can offset against your profits depends on the nature of the assets.So buying the physical assets and stock will basically cancel all of my profit for the year (and my CT bill) and I guess that can be written off future years too (if the value is high enough)?
Then the goodwill (which I need to aim to keep low) will be noted as a Capital Allowance and gradually written off.
Is that right? The seller is well aware that they'll face a big tax bill, but we're not aware of any way around it?
They intend to keep the freehold but then sell it in a few years, with a contract drawn up to the effect of first dibs etc which will allow them to use their CGT allowance for another year.
Plant and machinery - you will be entitled to either the Annual Investment Allowance (100% write off) or Writing Down Allowance (20% each year on a reducing balalnce basis).
Motor cars (not vans or other commercial vehicles) 20% generally although there arecertain classes of cars to which other rates apply
Land and buildings - no capital allowances
Stock - this is just added to your normal Purchases for Resale items so you will write this off against the profits taking into account closing stcck on hand at the finacial year end.
Goodwill - this is amortised over time for accounts purposes but there is no tax relief available on this write off.
Eric Mc said:
Seany88 said:
Sorry for the late reply, I am the Ltd co buying the business.
So buying the physical assets and stock will basically cancel all of my profit for the year (and my CT bill) and I guess that can be written off future years too (if the value is high enough)?
Then the goodwill (which I need to aim to keep low) will be noted as a Capital Allowance and gradually written off.
Is that right? The seller is well aware that they'll face a big tax bill, but we're not aware of any way around it?
They intend to keep the freehold but then sell it in a few years, with a contract drawn up to the effect of first dibs etc which will allow them to use their CGT allowance for another year.
The cost of buying physical assets will not be completely written off against your annual profits. What you can offset against your profits depends on the nature of the assets.So buying the physical assets and stock will basically cancel all of my profit for the year (and my CT bill) and I guess that can be written off future years too (if the value is high enough)?
Then the goodwill (which I need to aim to keep low) will be noted as a Capital Allowance and gradually written off.
Is that right? The seller is well aware that they'll face a big tax bill, but we're not aware of any way around it?
They intend to keep the freehold but then sell it in a few years, with a contract drawn up to the effect of first dibs etc which will allow them to use their CGT allowance for another year.
Plant and machinery - you will be entitled to either the Annual Investment Allowance (100% write off) or Writing Down Allowance (20% each year on a reducing balalnce basis).
Motor cars (not vans or other commercial vehicles) 20% generally although there arecertain classes of cars to which other rates apply
Land and buildings - no capital allowances
Stock - this is just added to your normal Purchases for Resale items so you will write this off against the profits taking into account closing stcck on hand at the finacial year end.
Goodwill - this is amortised over time for accounts purposes but there is no tax relief available on this write off.
Where do fixtures and fittings come into it all? Under Plant and Machinery?
And if i'm taking a lease on the property, would the rent would count as a business expense?
So if I bought a load of stock at the end of the year which would make a high closing stock figure, that would reduce the profit figure?
I think i'm confusing myself here...
pcourt400 said:
Eric, i hestitate to ask but are you sure that there will be no tax relief on the purchased (from an unconnected party presumably) goodwill?
I would have thought that in this case the amortisation would be an allowable deduction following Sch29 FA02 ?
You are correct. Limited Companies are allowed the amortisated amount against their company profits. I would have thought that in this case the amortisation would be an allowable deduction following Sch29 FA02 ?
It is not a Capital Allowance claim as such but the "Annual Amortisation Charge" is not "added back" in the tax computation - as used to be the rule.
Sole traders cannot claim this tax relief.
jon- said:
Sorry to thread hijack but how does this differ if you are the sole trader, and the company buying you is your new Ltd Co. which you as a director?
In essence it won't differ except that it will depend upon when the 'goodwill' was created (before or aftr April 2002) as to whether or not the purchasing limited company will get tax relief or not; this is a complicated area though and advice should be taken on the specific circumstances ....Seany88 said:
Sorry for the late reply, I am the Ltd co buying the business.
As always the fountain of knowledge, thanks Eric. To clarify though, is it just a case of deciding whether or not these things count as a business expense in order to reduce CT liability?
Where do fixtures and fittings come into it all? Under Plant and Machinery?
And if i'm taking a lease on the property, would the rent would count as a business expense?
So if I bought a load of stock at the end of the year which would make a high closing stock figure, that would reduce the profit figure?
I think i'm confusing myself here...
Yes, fixtures and fittings count as plant and machineryAs always the fountain of knowledge, thanks Eric. To clarify though, is it just a case of deciding whether or not these things count as a business expense in order to reduce CT liability?
Where do fixtures and fittings come into it all? Under Plant and Machinery?
And if i'm taking a lease on the property, would the rent would count as a business expense?
So if I bought a load of stock at the end of the year which would make a high closing stock figure, that would reduce the profit figure?
I think i'm confusing myself here...
Yes, rent is an allowable business expense
Buying a load of stock at the year end makes no difference as the cost of the purchases is offset by the increase in closing stock which cancels it out.
Under certain circumstances, an element of the purchase of freehold property can be claimed as plant and machinery and therefore capital allowances are due - specialist area though
Edited by lozzom on Wednesday 24th February 22:48
lozzom said:
Buying a load of stock at the year end makes no difference as the cost of the purchases is offset by the increase in closing stock which cancels it out.
Ahh ok thanks, I understand now.Ok final question, if the seller does decide to keep the freehold to be sold at a later date, are there any potential tax avoidance complications to consider?
And following on from this, would a sale be allowed over a period of 2 years, maximising CGT allowances while also giving time to raise capital to buy the assets?
Ok, fair enough. What if it was a legitimate drawn-out takeover? I spoke to my accountant briefly about it yesterday, and he said something like if it was pre-approved by HMRC (and the seller was willing) we could form a payment plan where the business would be gradually bought over and tax paid in instalments. Does this seem right?
Essentially what it would do is buy breathing room to raise capital in stages, which would be very welcome!
Essentially what it would do is buy breathing room to raise capital in stages, which would be very welcome!
Is he saying that separate Capital Gains Tax computations would be caried out every time a tranche of the money was paid or is he saying that a single CGT computation would be performed giving rise to a single CGT liability, all related to one tax year only?
My understanding is that, if an asset is disposed of, then the gain arises on that date. The tax will be calculated on the basis that the entire gain happened as a single event in a single tax year.
If HMRC are prepared to allow the CGT to be paid over a spread time period, that is a separate issue.
My understanding is that, if an asset is disposed of, then the gain arises on that date. The tax will be calculated on the basis that the entire gain happened as a single event in a single tax year.
If HMRC are prepared to allow the CGT to be paid over a spread time period, that is a separate issue.
Eric Mc said:
Is he saying that separate Capital Gains Tax computations would be caried out every time a tranche of the money was paid or is he saying that a single CGT computation would be performed giving rise to a single CGT liability, all related to one tax year only?
My understanding is that, if an asset is disposed of, then the gain arises on that date. The tax will be calculated on the basis that the entire gain happened as a single event in a single tax year.
If HMRC are prepared to allow the CGT to be paid over a spread time period, that is a separate issue.
Eric I think he implied the latter, that the CGT could be paid over a period of time i.e. when the Ltd co. pay each instalment of the takeover. All subject to being pre-approved by HMRC. So now, who at HMRC do I talk to? My local tax office or someone higher up?My understanding is that, if an asset is disposed of, then the gain arises on that date. The tax will be calculated on the basis that the entire gain happened as a single event in a single tax year.
If HMRC are prepared to allow the CGT to be paid over a spread time period, that is a separate issue.
Seany88 said:
Eric Mc said:
Is he saying that separate Capital Gains Tax computations would be caried out every time a tranche of the money was paid or is he saying that a single CGT computation would be performed giving rise to a single CGT liability, all related to one tax year only?
My understanding is that, if an asset is disposed of, then the gain arises on that date. The tax will be calculated on the basis that the entire gain happened as a single event in a single tax year.
If HMRC are prepared to allow the CGT to be paid over a spread time period, that is a separate issue.
Eric I think he implied the latter, that the CGT could be paid over a period of time i.e. when the Ltd co. pay each instalment of the takeover. All subject to being pre-approved by HMRC. So now, who at HMRC do I talk to? My local tax office or someone higher up?My understanding is that, if an asset is disposed of, then the gain arises on that date. The tax will be calculated on the basis that the entire gain happened as a single event in a single tax year.
If HMRC are prepared to allow the CGT to be paid over a spread time period, that is a separate issue.
Ok, offer has been initially accepted! I think the vendor is going to do the whole application to HMRC for deferred tax payments so no longer my issue 
Can anyone tell me, how is the apportionment of goodwill and tangible assets worked out? The obvious answer is from their previous accounts, but am I right in assuming this?
And what are normal leasing terms? When I spoke to my bank regarding a business loan they mentioned something about requiring a 99 year lease, which having thought about it, I think they misunderstood what I was saying as that is 'effectively' buying the freehold like in the case of residential flats no? The vendor is suggesting a 3+3+3 or 5+5+5 arrangement with first refusal on freehold, hopefully within 5 years. Is this normal?
I may not require a bank loan to purchase the assets so I'm trying to figure out what things I need to do regarding the property that the bank would normally do to assess the value to lend. I've come up with: asbestos survey, land survey, land registry check. Any more things I need to consider?
I'm so excited about this! Hence a sunday afternoon post!
Can anyone tell me, how is the apportionment of goodwill and tangible assets worked out? The obvious answer is from their previous accounts, but am I right in assuming this?
And what are normal leasing terms? When I spoke to my bank regarding a business loan they mentioned something about requiring a 99 year lease, which having thought about it, I think they misunderstood what I was saying as that is 'effectively' buying the freehold like in the case of residential flats no? The vendor is suggesting a 3+3+3 or 5+5+5 arrangement with first refusal on freehold, hopefully within 5 years. Is this normal?
I may not require a bank loan to purchase the assets so I'm trying to figure out what things I need to do regarding the property that the bank would normally do to assess the value to lend. I've come up with: asbestos survey, land survey, land registry check. Any more things I need to consider?
I'm so excited about this! Hence a sunday afternoon post!
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