last minute panic - tax return query

Eliza_2

I bought an existing business during the year, where do I put the cost of this and the associated legal costs on the tax return? There's a section for professional expenses but not sure this includes legal expenses or just ongoing accountants etc

Help please!

Thanks

chrismac1

Mmm not sure this is suitable for DIY return unless very small business. Anyway, here goes. You should have had a completion statement, I am going to give you an example based on a pub which is about as complex as it gets in small business purchases and sales - all figures in £000:

Building 200
Fixtures 50
Stock 20
Brewery Loan taken over -50

Overall net assets = 200+50+20-50 = 220

Price paid = 250

Goodwill = 30

How to treat all of this:

Goodwill - balance sheet asset, if you are a limited company you can write this off over, say 10 years. If you are a sole trader or partnership, no write off.

Building - capital item, but may be some plant you can claim tax allowances for if properly identifiable

Fixtures - capital item, can claim tax allowances as vendor will need to show a credit for this element.

Stock - your opening stock on the balance sheet

Loan - within loans and creditors on your balance sheet.

Legal fees and other similar fees - for exmaple planning fees - in connection with the purchase are generally capital and so not claimable. However, there may be elements within the fees which relate to revenue / trading so can be separately identifed and claimed. Not often, but always worth a look.

Eliza_2

Thank you - I'm a sole trader

So purchase was broken into 2 parts on document (figs for illustration only)

£5k goodwill

13k fixtures and fittings incl stock.

Legal costs for purchase were say £1k, mostly for transfer of building lease

So can I put the £13k f and f etc down as expenses but not claim anything for the other stuff?

If so, ouch but thank you again for clarification. I borrowed all the money to fund the purchase.

nomunnofun

From the op questions, I imagine that she may be a novice and that may present as quite scary stuff chrismac, exceedingly helpful as it was. I completely agree that, if your information was equired, a DIY return is not recommended.

When was the business purchased? What is the nature of the business?

chrismac1

Business expenses in the above are:

Definitely the stock - just as with any stock you've bought since running the business.

Fixtures - you claim capital allowances on these in the capital allowances section of the tax return.

Nothing else on your list. Given that this is deadline day and the database is erratic, just submit something in the next hour or so!

You then have until 31 Jan 2014 to re-submit. If you are in any doubts, take the stuff to a professional and let him or her re-submit for you. Whilst what I posted above may seem scary, it is base camp stuff for this sort of deal - this is a risky area for a beginner to have a go at.

nomunnofun

It certainly is - that is why I am hoping that , when the op says 'during the year', she means after April 2012. Otherwise, it is certainly better to submit, even with provisional figures, than ignore.

Eliza_2

Thanks very much. Its fine, very clear indeed, not scary, just want to get it as right as I can that's all. Really so grateful

No I meant I bought the business during the financial year ending March 2012

Eliza_2

Ok next question oh helpful people:

My total income is made up of some paye work, some pensions and this business. The first 2 sections are fine, but the business made a loss, mainly as it was the first year. Will this loss automatically be deducted from the tax I paid on the paye and the pensions (so i then get a refund?) or how do I get HMRC to do this.

Thanks again - nearly there with this now.

Edited - sorry, have just found the losses helpsheet now. Thanks for reading.

Pennywise

chrismac1 wrote: »

Definitely the stock - just as with any stock you've bought since running the business.

Don't forget to adjust your "purchases" for the closing stock value at the year end.

No tax relief on the legal expenses of buying the business - it's capital and can be set against the gain when you sell it.

chrismac1

I really think you'll benefit greatly from having a professional revisit this.

You have 2 main choices on the loss - set it off against your other income this tax year is one, carry forward to future year's business profits the other. Method 1 gets an immediate tax refund but some clients nonetheless opt not to do this.

Box 32in the self-assessment section is the place for this, and if there is still some loss left you can go back another 2 years in box 33. Be sure to include bank account and sort code for a quick refund - and be sure to call them in 5 weeks time if the refund is not yet in the bank as this probably means they are blocking it for no good reason.

Now why might it not be a good idea?

Suppose the loss is £10,000 and your other income is £12,000 on which you paid £905 PAYE. Great stuff, a £905 refund you can have in 4 weeks!

But suppose the business makes £20k in 2012-13. You'll pay 3,495 in tax and NI on this. Instead, you could pay just 595 by letting the first year loss carry forward instead of claiming loss relief now - 2,900 less.

So when you ask clients if they want 905 right now, or 2,900 in a year's time, they mostly go for the second option.

Already here we have the complexities of business purchase and the interactions of loss reliefs with other tax allowances, and we probably haven't scratched the surface.

Eliza_2

Thank you.

In the previous few years, my income was very low, barely scratching the then threshold. This return is showing the tax due is around £350 (My pensions, paye etc all include tax) so without the business I am still bouncing not far over the threshold. So it wouldn't be worth going back years, I wouldn't gain, tho even the £350 would be nice right now.

So the best solution would be to use this first years loss against future years with the business as you say. Can I add the £350 I currently owe to the tax already paid on the pensions (as shown on their P60s) and get that back by offsetting, then use the remainder of the loss for future years?

I know, I will get an accountant, unfortunately my previous one cost me a fortune over VAT incorrect advice and now is not a good time to find another. Will do so next month after this deadline is past.