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Tax treatment of lump sum in return for income stream? Tax treatment of income stream?

Tax treatment of lump sum in return for income...

I have a UK client company which is to be paid £4300 a month for 97 months.  The client wants to sell this income stream for an up front lump sum payment.  This will be approximately £325,000, giving the person paying the lump sum a return of approximately 6% per annum gross.

Any ideas regarding the correct tax treatment?  Does my client treat the lump sum as a trading receipt in year one (the monthly payments are being received under a contract for partnering support, which is part of the company's trade).

And what about the tax treatment for the individual receiving the income stream?  The receipts of £4,300 will be part capital and part income - is there an HMRC formula to calculate the income element?  Does tax have to be deducted at source on any element?

Thanks for any advice.

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25th Mar 2011 14:52

Income streams

Have you seen s752 CTA 2010?  Your client may be caught by this.  It basically says that the income from the sale of the income stream will be treated in the same way for tax purposes as the original income stream.  The income will become taxable at the time it is recognised in the accounts under the relevant GAAP.  So the question isn't a tax question, it's an accounting question.

As for the individual, there is guidance on HMRC's website (how helpful it is, is another matter!):
http://www.hmrc.gov.uk/manuals/cfmmanual/CFM77160.htm

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25th Mar 2011 15:00

Interesting one

I've been though something similar recently and this is how that one is working.

One of my NFP clients has obtained what is known as "Quais-Equity" funding whereby it has entered into a "revenue participation" agreement with a funder under which it contracts to pay it X% of it's gross revenue, over X years to the funder for which the funder pays a lump sum up front. The difference in my case is that there is no guarantee of return to the funder, ie they may get some, all of or more than their "investment" back. 

Just as an aside this is a briilant concept in which the funder shares risk with the funded and is why I enjoy working in the NFP/Charity sector, can you imagine Barclays offering this?  Sorry, back to subject.

My case therefore is essentially the same as yours but I obviously don't know if the legal wording of the arrangements are the same.  The accounting treatment recommended, and taken up, is to recognise the sale of the participation right (your £325K) in the P&L when received and also to make full provision under FRS 12 for all the estimated payments under the agreement over the full term.  Then each year that goes by the provision is reassessed and, over the period, the loss or profit to my client flows out of or into the P&L.

Where yours differs is that the sums seem certain, ie £325K in & provision for £417K out, which would create a loss in year one.  Then, over the 8 years, the money in (£4,300 pm) represents pure income and the payments out (£4,300 pm) go to pay off the provision.  So you get a large loss up front followed by years of profits.

I think the final treatment therefore will follow the wording of the agreement AND whether FRS 12 can be applied to it. In my case the tax treatment will follow the accounting treatment.

 

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