Substance over form?

Substance over form?

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I have just taken over a client who, frankly, has let his accounts get in a confused mess.

He has two limited companies, lets call then Old Ltd and New Ltd.  He wants to close down Old and do all business through New.  Unfortunately he has not done this in a systematic way but rather he has mentally transferred business rather than legally transferring the business!  There are no other shareholders to consider - just the owner/manager.

The most blatant example is payroll where the Old Ltd's payroll scheme has continued to exist but the payments have been made from New Ltd's bank account.  No revenue is coming into Old Ltd anymore.  The two employees are obviously working on behalf of New Ltd, and generating income in New Ltd, despite, technically, being paid from Old Ltd's payroll.

Is this a case of substance over form?  Can I treat the payroll costs as being those of New Ltd for accounting and tax purposes? I am, by the way, setting up a new payroll scheme in New Ltd and closing down the one in Old Ltd so this is a historic problem.

Any advice would be gratefully received!!

Replies (13)

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By MBK
15th Feb 2014 13:59

It's a question of fact

If the employment of the individuals was genuinely transferred from Old Ltd to New Ltd but PAYE continued to be operated through Old Ltd then that makes Old Ltd paymaster for New Ltd. So, yes, you are perfectly justified in just booking the accounting entries in New Ltd.

Much better, of course, to tidy it up as you are now doing.

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By petersaxton
15th Feb 2014 15:40

Disagree

You need to put entries in old company and then invoice new company. There may be VAT consequences.

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Replying to DJKL:
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By Gameplan
16th Feb 2014 09:23

Disagree

petersaxton wrote:

You need to put entries in old company and then invoice new company. There may be VAT consequences.

Neither company is VAT registered...

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By lingus
16th Feb 2014 01:21

Consider this suggestion

For the sake of matching expenses to revenues record the payroll expenses of Old Ltd.'s employees in New Ltd since there service was used to directly generate income in New Ltd. To legitimize the transactions the owner should write severance letters to the two employees of Old Ltd. and create contracts for them so they may now be employed by New Ltd. I hope the employer would also be kind enough to give those two, severance pay pending their duration of employment. Be conscious of the contract dates since its a historical problem.

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By MBK
16th Feb 2014 14:33

We'll have to agree to disagree!

It just depends what the underlying facts really are.

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By ShirleyM
16th Feb 2014 15:20

The employees should be transferred under TUPE

So that their length of service is continued. Their employment hasn't ceased.

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By taxhound
16th Feb 2014 16:04

write to hmrc

and ask them to transfer the scheme to newco - I am sure you used to be able to do this but I have not tried recently.... (in the same way that you can transfer a VAT registration when a business is transferred to a new owner)

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Replying to stepurhan:
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By Gameplan
16th Feb 2014 19:39

I tried this...

I spoke to the helpline so you can imagine how far I got with that...!!!

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By Peter Bonetti
17th Feb 2014 08:45

Paymaster services for assoc company

It is possible that the payment of the payroll from OldCo is outside the scope of VAT if the cross charge is at cost.

What does the company do? Are there two employees and the owner/director? How is it not VAT registered given the level of income needed to generate the salaries/other costs/profits?

Sounding like a broken record now, sorry for that.

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Replying to puzzel:
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By Gameplan
17th Feb 2014 15:03

How not VAT registered?

They provide marketing services to organisations based outside the EU...

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By taxhound
17th Feb 2014 08:47
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By Peter Bonetti
17th Feb 2014 15:24

Ok, thanks for the clarification.

The old Revenue nose was twitching.

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By angusnicolson
18th Feb 2014 11:12

Forget the legalities and accounting issues for the moment and move straight to creating a new PAYE record for Newco.  P45 everyone from Oldco and put them onto Newco.  Problem solved going forward.

As for the legalities, isn't Oldco just acting as agent, given that Newco actually paid the wages?

If you think about the journal entries for raising invoices it's just one big circular transaction.  And you are then saying the Oldco was not dormant....

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