Transferring sole trader business to corporation

drb01

I set up a very simple consultancy business as a sole trader (schedule D) about 20 years ago which I now want to transfer to a limited company which I set up a few months ago.

As I understand it, the limited company can pay me cash for the goodwill (i.e. customers) and I then pay 10% capital gains tax on this amount through my self assessment form.

But I can not work out what the tax treatment is for the limited company? E.g. is the cash payment offset against corporation tax? I think not as the sole trader business was established pre 2002, in which case there seems to be tax advantage to transferring the business.

Pennywise

drb01 wrote: »

I set up a very simple consultancy business as a sole trader (schedule D) about 20 years ago which I now want to transfer to a limited company which I set up a few months ago.

As I understand it, the limited company can pay me cash for the goodwill (i.e. customers) and I then pay 10% capital gains tax on this amount through my self assessment form.

But I can not work out what the tax treatment is for the limited company? E.g. is the cash payment offset against corporation tax? I think not as the sole trader business was established pre 2002, in which case there seems to be tax advantage to transferring the business.

The company can't get corporation tax relief on the goodwill it buys from you because, as you rightly say, it is "old" goodwill. When the company sells the goodwill, then it can offset the purchase price against the sale price, so will get tax relief at that future time.

So, effectively, you're volunteering to pay 10% tax that you wouldn't have paid if you hadn't decided to sell the goodwill to the company. Not a particularly sensible idea unless it's part of a bigger plan.

Another aspect is whether you have any "goodwill" to sell. HMRC regards "personal goodwill" as not being transferable - i.e. if the goodwill is "you" rather than premises, intangibles, etc - the question is whether the "goodwill" is transferable and valuable to someone else.

Conversion from sole trader to limited company is fraught with problems but there are also some interesting and beneficial reliefs/elections. It's one of those areas where a decent accountant can save you far more than their fees.

drb01

That is very help, thank you. I did get an accountant who was recommended to me but he turned out to be pretty useless. Since the business is so simple, and has a pretty small turnover these days, I doubt very much that there is much to do. I will just pass future income through the limited company (which has income from another source too).

Do I have to formally close the schedule D business down or can I let it drift on with zero turnover/expenses just in case I start running it as a sole trader again?

CKhalvashi

Pennywise wrote: »

So, effectively, you're volunteering to pay 10% tax that you wouldn't have paid if you hadn't decided to sell the goodwill to the company. Not a particularly sensible idea unless it's part of a bigger plan.

I'd disagree with this, especially if OP will continue with the business and will pay tax in the near future.

What you're effectively doing is creating a balance on a directors loan account, which if large enough, can have a tax benefit of £millions. OP will be a creditor of the company.

Whilst the benefit is likely to be (much) smaller in this case, it can be something worth discussing with an accountant.

CK

chrismac1

This is a highly topical issue. Goodwill on a purchase of business assets from an unincorporated, connnected business such as this CAN be held on the company's balance sheet and amortised against tax so long as the business was set up after 1 April 2002.

The reason for this date is that HMRC fought a losing battle prior to then to prevent this from happening. Now although many people who work for HMRC are pretty clueless, they fought this battle to prevent tax savings.

You can claim incorporation relief to avoid any capital gains tax arising on your disposal of the business to the limited company, so no tax to pay there.

Over in the limited company books, you have £20k of goodwill as an asset and the company owes you, its director £20k. So that is £20k of cash you can legally take from the company no questions asked, it's a payment of the debt the company owes you.

But that's not all. Under international accounting standards, goodwill MUST be written off over a period of 20 years or less. Let's say you plan on running this business for the next 10 years, then you MUST take £2k per year as a charge against trading profits for goodwill amortisation.

If this business began trading after 1 April 2002, there is no adjustment in the corporation tax calculation for this expense item. So that is £400 knocked off the corporation tax bill (assuming a 20% rate) for the next 10 years.

This is all box standard stuff. To do this properly you need to have some sort of supportable calculations arriving at the £20k, this is not hard for most profitable enterprises.

There might well be some more posts on this in the next few days. If so I am off for a long weekend, back Tuesday so catch up with the thread then. For those of you who work for HMRC, see you next Tuesday!

chrismac1

I now see you set up 20 years ago so although there may be benefits in the limited company transfer, goodwill is not one of them.

drb01

Very interesting. The original business was set up about 20 years ago so it appears that the tax benefits are limited/zero. Nevertheless I would like to take future income through the limited company anyway for other reasons (e.g. limited liability). What do I do about the existing schedule D business which is VAT registered? Do I have to wind it up formally? Or can I just run it with zero accounts in case I want to revert to taking the income as a sole trader again?

CKhalvashi

chrismac1 wrote: »

I now see you set up 20 years ago so although there may be benefits in the limited company transfer, goodwill is not one of them.

Sorry, I was skim reading, as I was in a meeting.

This is correct, so please ignore my post.

I will leave it up, for business started after 2002.

CK

atilla

drb01 wrote: »

Very interesting. The original business was set up about 20 years ago so it appears that the tax benefits are limited/zero. Nevertheless I would like to take future income through the limited company anyway for other reasons (e.g. limited liability). What do I do about the existing schedule D business which is VAT registered? Do I have to wind it up formally? Or can I just run it with zero accounts in case I want to revert to taking the income as a sole trader again?

At the very least you will need to tell HMRC you are no longer self employed. (they'll be wanting your NI (Class 4?) contributions otherwise.
Regarding VAT. You can apply to transfer it across to the new Ltd Co.
When i went through similar procedure i found HMRC surprisingly helpful.
If you do go Ltd i would suggest you really do need an Accountant though. He/She will save you from a whole world of pain. you may not see the benefit immediately but 12 months on you certainly will. Plenty around, don't let one bad experience put you off.

chrismac1

To do this properly:

1. Decide on a date for cessation as sole trader. A month end is good, 31 March 2013 will save you doing a tax return as you'll finish in 2012-13 tax year.
2. Ensure the limited company has been formed by then.
3. For incorporation relief to work, ALL the assets of the unincorporated business should transfer ownership to the limited company.
4. Get the VAT number transferred.
5. Register the new company as an employer, wait unitl after 6 April to avoid loads of HMRC hassle for not filing 2012-13 returns.
5. Let ALL suppliers and lenders know that you are "limited" as otherwise you may not secure limited liability if they can claim they believed they were dealing with a sole trader. If they continue to raise invoices in the sole trader name, call them and insist on invoices in the limited company name before you pay. Anyone who raises an invoice on someone ending "limited" can hardly claim they thought they were dealing with a sole trader.
6. Ensure your sales invoices show the full name of the limited company, the company number and the names of directors.

There are other things, these are the main things though.

zygurat789

chrismac1 wrote: »

To do this properly:

1. Decide on a date for cessation as sole trader. A month end is good, 31 March 2013 will save you doing a tax return as you'll finish in 2012-13 tax year.
2. Ensure the limited company has been formed by then.
3. For incorporation relief to work, ALL the assets of the unincorporated business should transfer ownership to the limited company.
4. Get the VAT number transferred.
5. Register the new company as an employer, wait unitl after 6 April to avoid loads of HMRC hassle for not filing 2012-13 returns.
5. Let ALL suppliers and lenders know that you are "limited" as otherwise you may not secure limited liability if they can claim they believed they were dealing with a sole trader. If they continue to raise invoices in the sole trader name, call them and insist on invoices in the limited company name before you pay. Anyone who raises an invoice on someone ending "limited" can hardly claim they thought they were dealing with a sole trader.
6. Ensure your sales invoices show the full name of the limited company, the company number and the names of directors.

There are other things, these are the main things though.

Sorry I thought you were an aCOUNTant
otherwise I wouldn't have mentioned it!!!:rotfl: