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Incorporation - transfer of VAT registration

Incorporation - transfer of VAT registration

A partnership client is looking to incorporate.  There are intangible assets in the form of goodwill, value unknown.  The VAT registration will be transferred but not the tangible assets (approx. £100k TWDV in plant).

My concern is that they want to protect the assets - there is a pending VAT audit.

- Will the goodwill need to be valued for capital gains tax purposes and how?  Since there is no tax relief for goodwill then the consideration for the shares may be minimal. Would the consideration be used for CGT or the market value?

- Would entrepreneur's relief be available if not all the assets are transferred?

- Would it still be TOGC for VAT if not all assets are transferred?

- Does the company take on all the VAT liabilities of the sole trade?

- Would HMRC prevent the transfer of the VAT registration until after the audit or ask for some kind of security from the company?

I only do the SA returns so do not know what will come up in the audit but am not happy with the incorporation timing or ring-fencing the assets (and the motivation).  Any comments would assist me in my reply. 

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21st Feb 2016 12:06

Loads of areas to look at
Goodwill can be valued by a professional or by HMRC shares and valuation department. The form & notes tells you how this is done. CG34. Iv done some vary basic ones mostly when incorporating and claiming ER a few years ago. Cruedly do an average of the last 3 years profits multiplied by say 2 or 3. Also Look at CG68050. They will either agree or suggest an alternative value.

ER relief denied for goodwill disposed between related parties see https://www.gov.uk/government/publications/capital-gains-tax-denying-ent...

The answer to TOGC...... Look here as a starting point VTOGC2050 and VAT Notice 700/9: transfer of business as a going concern

Answer to the transfer of the VAT number on incorporation is YES that registration contiunes and the company is liable for all previous VAT history

Unlikey the VAT number transfer would be held up if there are currently no VAT issues if done before compliance review.

Security would only be asked after the transfer if it was proven the directors have a previous history of bad VAT debt. In this case they obviously dont as it sound like you think that VAT and penalties will only be due after the visit. effectively in its simplest form the security is 30 days notice to cough up or cease trading. Unsure off the top of my head what happens if it discovered that the sole reason for incorporating was to avoid what you may think is a sizable liability personaly for the partners and make it a Ltd Co liabity.

If the partnership is to cease trading then there would be a dispose at market value on the £100k of assets if connected person transfer ie to partners, unless a claim is made by both parties to transfer at it WDV. If AIA has been used it could lead to a sizable balancing charge if no joint claim is made. CA23250 & https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil... should help here.

Take what iv wrote as a small pointer only and go research each point in more detail yourself. Hopefully someone else can jump in and put me right if im wrong on anything or expand a bit more for you.

The hard part is knowing the questions...... Finding the answers is sometimes the easiest even if it means paying someone to review your moves as a one off consultation. Normally these consultations are written reports on the strengths & weaknesses of each area and a blue print to follow to ensure you have as robust a defence against any HMRC challenge if your proposal is possible. These consultations for me have ranged from £250 to £3k if you want counsel to write an opinion on a particular area such as employment status etc.

Also have you considered your own position under the MLR if you have suspicion that VAT may have been under declared......if of course that is the case.

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By Matrix
22nd Feb 2016 06:22

Thanks so much for the detailed reply, I am still researching each of the points.

VAT audit - I will advise the client to go through their records and be upfront with HMRC if they find anything to mitigate any penalties.

CGT - Using your method the gain would be small, may be covered by the partners' AE, or claim s165 gift relief and then ER on sale of shares in due course.  I will advise them to seek a valuation.

Assets retained - There would be a transfer at MV on cessation of trade by the partnership, if greater than £100k TWDV then a balancing charge arises.  Would any adjustment be necessary if the proceeds are greater than the MV?  Or would the assets belong to partners and any gain subject to CGT?  What do you mean by the election to transfer to partners at TWDV given they will not be trading?

VAT on assets - Will the company be liable for VAT on MV of assets retained on cessation (since no deregistration VAT paid on VAT7 form)? But no VAT charged on any sale of assets to third party.

Any thoughts would be welcome.

 

 

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22nd Feb 2016 11:23

Partners
When you say the partners will not be trading once the transfer to Ltd Co is done....... What will they be doing with the assets they are taking from the partnership but nit putting in the company?? Doesnt the new Co need to use the assets

I assumed you were looking to have a new co with no asset but which accrues liabilities & the partners as sole traders would look to rent the assets to the company. New trade.... Ie partnership to sole trader and joint election for TWDV to be transfer from partnership to sole traders..... Ie not allowance or balancing charge.

Yes VAT would be chargable if vat was initial claimed if not a TOGC

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22nd Feb 2016 14:12

Incorporation - transfer of VAT registration

for future reference

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By Matrix
24th Feb 2016 08:04

Partner retiring

I now know that one of the partners is retiring and that the new company will be owned by the other partner.  The assets are not required by the company since it will hire assets from third parties going forward since no maintenance.

When the partnership ceases on formation of the company and the assets are treated as disposed at MV for CA purposes, then how will any gain on sale of the assets be treated?

If there is no sole trade (so no election to transfer to partners at TWDV) then will the assets then be capital and the base cost will be the MV? I don't really see how there would be a gain but would like to check that no tax on the disposal proceeds on the partners.

Thanks

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