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Incorporation questions

I have a client who's thinking of incorporating from sole trade - so I just have a few questions!

Am I right in saying that if he started trading after 1 April 2002 then goodwill is allowable for CT deduction?

How do you go about putting a value to goodwill and then agreeing it with HMRC?

He also owns quite a large garage (worth about £70k) so presumably the title of this would need to be transferred to the company?

Any help much appreciated!

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04th Jan 2012 08:48

Yes, if the trade started post-2002 then the goodwill should be allowable for CT deduction.  If you say what the trade is, it might be easier to suggest how to go about a valuation.

It is not necessarily the case that you would need to transfer the garage to the company, for example the individual could retain it and rent it to the company.  However, by not transferring the asset, you might not qualify for incorporation relief on the transfer.  

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04th Jan 2012 10:24

Care needed

If the goodwill is inherent (for example the trade can't be carried on without the property) then it may not be within FRS10, and therefore not within the intangibles regime. 

There is obviously a fair value for the property (perhaps the £70K you mention) but does that carry with it the right to trade from that property? Is it the sort of property - the classic railway arch comes to mind - that no-one would actually buy for any other purpose but to trade from it? In that case the £70K includes the goodwill, but it's not FRS10 goodwill.

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04th Jan 2012 10:29

S162

Incorporation relief under TCGA 1992 s162 is normally not used in this situation and so the loss of it by not transferring the garage is unlikely to be an issue. Typically shares are issued for cash and then assets including goodwill (but not necessarily the garage) are sold at market value to create a loan account that can be drawn down if needed (having taken a small salary and dividend up to the basic rate band limit). The main advantage of withholding the garage is for commercial protection should the company fail. The main disadvantages are only 50% business property relief for inheritance tax purposes and possible loss of entrepreneur's relief on a later sale if rent is charged. Normally there is no need to charge rent unless there is a outstanding loan when interest can only be relieved against rental income. 

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By blok
04th Jan 2012 11:08

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Andrew, I am genuinely interested in the subject of "property related goodwill".

In your example where you are trading from a garage under the bridge.  If I agreed to pay you £70k to take the freehold and therefore obviously the "business".  

HMRC would say the £70k related to the bricks and mortar.  The tax payer would attempt to say that he was buying a business so there should be an apportionment.

In that example I would tend to side with HMRC's point of view but I take the point that a) most lawyers dont appreciate the difference. b) most sellers dont appreciate the difference c) everything is done retrospectively without formal valuations and d) people see what they want to see sometimes.

Not really a question, just a rant I suppose.

 

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04th Jan 2012 11:58

... thanks to everyone!

... the client is a mechanic and is selling his garage (and associated land) for around £70k but continuing to trade from home... any other issues you think I should be aware of?

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By blok
04th Jan 2012 12:27

"but continuing to trade from

"but continuing to trade from home"

does that mean that he never traded from the garage?

I'm confused...

Is he selling garage to someone esle or is he selling to his company? 

Are you claiming ER on this disposal?

Is the comapny going to trade from his home or is he going to do this?

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04th Jan 2012 13:35

@blok

... sorry, didn't explain it very clearly.

He is continuing the same trade (mechanic) but working from his own home/garage rather than the huge garage he's got at the moment, which he's selling off - so yes, the garage he's currently working from will be sold to someone else.

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By blok
04th Jan 2012 14:09

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Ah OK, I see...

No ER on this disposal in this case.

 

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04th Jan 2012 14:19

Capital gain

The issue of the capital gain and no ER may not be as simple as blok suggests - what sort of gain is likely?

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04th Jan 2012 17:23

whole or part of business

i would say there would be ER on the disposal of the larger garage

as long as your client sells the property at the same time as they incoporate

 

sounds like they are selling the whole of the business - just to two different parties. newco and whoever buys the garage

 

 

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By blok
04th Jan 2012 17:25

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yes - I forgot about the incorporation of the business.  so in theory you could have an associated disposal. apologies.

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A bit of light reading

As a good resume of the issues involved I'd suggest you read ACCA's valuation factsheets issued in May last year.  In particular 171 addresses the particular issue of combining/differentiating goodwill and related property and also contains a link to HMRC's practice note.

The issue here seems therefore to be how much the business goodwill has been depleted by getting rid of the property, ie do punters see the existing business as being heavily connected with the property/location.  The double edged sword here is that if the answer is no they don't, as they see the goodwill as vesting in the person, then you have the problem of the goodwill being personal rather than business, and it's only the latter that can be transferred to the company.

Not sure if anyone has mentioned it but the process of agreeing any value with HMRC is the "post transaction" procedure using form CG34.  Just search for CG34 on HMRC's website for details.

 

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06th Jan 2012 06:39

... thanks to everyone...

... for their comments - it looks like the client wants to incorporate on 1st April but may be potentially selling the garage at auction around June/July time, despite keeping up the same sort of level of turnover working from his garage at home - so maybe best to keep the garage in his own name and charge the company rent until it's sold?

... in answer to Paul's point, I guess a lot of the general public see the current garage as the 'business' and I wonder how many of his customers will leave him when he goes back to working from home - his garage is right in the middle of a major town and his house is a bit more 'out in the country'...

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06th Jan 2012 12:38

Loss of business

It may be of interest to readers that I have a client who disposed of his garage and is now mobile.  Business continued at the same level - clients tend to see a mechanic like an accountant.  They value him/her for expertise and trust worthiness.

 

 

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06th Jan 2012 17:16

ER on assets

In most cases difficult to obtain ER on the disposal of an asset (the garage) unless there is also cessation so probably OK in this case. Goodwill sounds highly personal although you would need to look at the business in the round before making a valuation. Have seen HMRC quibble about particularly small amounts so a post valuation transaction check is a good idea. If you have no experience in valuation then probably very sensible to think twice about undertaking this side.

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