One of my clients wishes to convert their husband and wife partnership to a limited company. The husband is the main fee earner and his wife does a bit of admin work. Being an estate agent and property consultant, most of his fees only materialise when contracts are exchanged.
When the business is incorporated there are likely to be a few ongoing contracts. As the fee income cannot be recognised until contracts are exchanged there is no accrued income to go in the cessation accounts, even if most of the work has been done, as the fee would not be payable if the sale falls through. Therefore, it forms part of the goodwill valuation and is not part of the net assets acquired.
My query is whether you can time the incorporation to take advantage of this so you can maximise the value of the goodwill for pending contracts. Would that be seen as an arrangement substantially to avoid tax or would it get by on the basis that the incorporation itself is for commercial reasons? I wouldn't have thought HMRC could interfere with timings.
The advantage of course is that the partners only pay 10% CGT with entrepreneurs relief. The company would pay 20% corporation tax when the fees become payable but can offset that with tax relief on the amortisation. True, there is a cash flow effect as we would only amortise over 4-5 years, and we would have to do some sort of risk analysis on the value of the prospective fees and discount them accordingly, but the partners would still be saving a fair bit in tax, plus class 4 NI of course.
Can anyone see any pitfalls here? Being an estate agent he's familiar with the concept of huge fees for doing very little work, so I'm hopeful of a fat fee here! I quoted him 12.5% of the tax savings on the incorporation (excluding the ongoing ones you would get through a company anyway). Good advice from that book advertised on AW by Steve Pipe: Practical Pricing for Accountants. Well worth a read.