Are sold-on contracts income or chargeable gains?

Are sold-on contracts income or chargeable gains?

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I have an estate agent client who is incorporating from a partnership (with his non fee earning wife) to a limited company. I valued the goodwill in his business (which derives mainly from his list of contacts over 32 years) with an 80% discount for the personal element, which will hopefully satisfy the HMRC valuation people. The other main asset in the incorporation is the value of his ongoing contracts.

Any fees already earned but not invoiced (such as on contracts already exchanged) have been excluded from the valuation and will be in the cessation accounts. Of the rest, some are pretty much guaranteed such as valuations and lease extensions. Others are almost guaranteed such as sales where exchange of contracts is imminent. Others are 50/50 such as properties he has recently placed on the market. I treated anything that was less than 75% certain as part of the goodwill figure (which was based on an income multiple) and excluded this bit from the 80% deduction for personal elements. Those above 75% are treated as individual assets to be sold to the company (after an appropriate discount for the latent risk of not materialising).

My question concerns the corporation tax treatment for the company. Obviously any ongoing contracts not valued as individual assets are part of the goodwill, so they will be taxed as income with relief for the annual amortisation. But what about the others - for example a contract due to exchange in a couple of weeks time?

I would say these should go in the balance sheet as purchased contracts and the fees should be treated as disposal proceeds, not as income. There will then be a small chargeable gain for the discount off the asset value. But does HMRC have special rules in this situation? For example, should the contracts be treated as goodwill, with the fees taxed as revenue and an immediate tax deductible write-off for the amortisation?

It won't make any difference to the final tax bill if the full write-off would be allowed in Year 1 anyway, but I want to get the tax treatment right.

Has anyone else come across this situation?

Chris

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By JeremyNewman
05th Sep 2011 10:42

WIP

Surely this should be dealt with as work in progress. That is then transferred at market value unless an election to substitute cost or actual proceeds is made (s 185 ITTOIA). I can't see how any WIP would fall to be included in goodwill.

 

I presume that there is a sale & purchase agreement governing the sale.

 

Apropos goodwill amortisation, the company will only get relief if the trade started after 31 March 2002.

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By cfield
06th Sep 2011 00:38

Clearing up a few points

......Surely this should be dealt with as work in progress """'""""£££   ......

No its not, the client was appointed to do the work but it is still in his in-tray, so no fees have been earned on it yet. I did say in the question that any fees already earned (ie WIP) have been excluded. Surely open contracts are a valid asset to value in their own right without having to lump them in with goodwill. Particularly as the fees are due within a month.

......I presume that there is a sale & purchase agreement governing the sale. 

Of course, although no one will ever see it except me and the client.

......Apropos goodwill amortisation, the company will only get relief if the trade started after 31 March 2002. 

Yes, thank you, I did know that. He may have been as estate agent for 32 years but he has only been self-employed since 2009.

Chris

 

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