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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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.
Disagree
You need to put entries in old company and then invoice new company. There may be VAT consequences.
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.
The employees should be transferred under TUPE
So that their length of service is continued. Their employment hasn't ceased.
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)
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.
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....