Tax on selling a sole trader business

Tax on selling a sole trader business

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Good Morning 

I currently prepare the the accounts for a small sole trader business. 

My client is looking to sell the business and believes she will get £90k for it

This is the current balance sheet for the business, which has been running for about 12 years.

Can any one help me with the tax implications on this. My tax advisor is off ill at present and the client is keen for an answer.

      2014
         
FIXED ASSETS      
Fixtures and fittings               353  
Motor vehicles               200  
Computer equipment               136  
                    689
         
CURRENT ASSETS      
Stocks              4,950  
Bank account             1,440  
Cash in Hand               100  
         
               6,490  
CURRENT LIABILITIES      
Accrued expenses               250  
                 6,240
         
NET ASSETS              6,929
         
CAPITAL ACCOUNT      
Brought forward            6,793  
Add        
Net profit            15,499  
         
             22,292  
Less        
Drawings            15,363  
                 6,929

Replies (14)

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By Harrison88
21st Apr 2015 10:33

Structure

Completely depends on the structure of the sale. Not something that is easy to advise on here and I doubt many people would be willing to give solid advice that will be relied upon via these forums. They're mainly for technical points I believe. E.g. what is the criteria for entreprenuer's relief?

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paddle steamer
By DJKL
21st Apr 2015 10:30

Silly question

Possibly silly question, and not really what you asked, but £90,000 for a business that turns in circa £15,499 profits (as a sole trader with no salary to the owner) and which does not appear to have any meaningful assets to be sold, appears to be a pretty high price. If the owner  works full time in this business to achieve the £15,499 there would barely be any goodwill.

You do not say what is being included in the £90,000 (Stock/ equipment etc) or whether £90,000 is merely for the goodwill/ equipment with stock at valuation  in addition.

A little bit of guidance as to where is the  perceived value might assist?

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By Bungo
21st Apr 2015 10:35

£90,000?
Yep agree with the above, I cannot see what the buyer is getting for £90k, no assets to speak of and a trickling income stream, in fact it could quite easily be loss making if a salary were paid. Has she actually had an offer of £90k? Because it could be a moot question.

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By frankfx
21st Apr 2015 10:35

Tax question or valuation question

If it is tax question 

Then capital gains tax and entrepreneurs relief and the effective rate of tax arising will be the main consideration. 

If it is sale of business, then it is down to valuation 

What is being sold? 

A future stream of income 

A solid order book 

Aformidable customer database of profitable customers 

Ithink a job is being sold with little upside and really little prospect of achieving anything at all 

The Op should ask himself. With my business knowledge how much would I be prepared to pay for the venture? 

The opportunity cost of £90 000, cost of capital, will soon give the answer to the question, and whether it is worth anymore time 

 

YourS

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By EmmCam
21st Apr 2015 10:36

Hi there

£90k is what one of there competitors is offering them, I think it is a good deal myself. The turnover of the business is £40k per year and I am presuming the buyer is basing his value on turnover. 

The sale would be for all assets and liabilities. My client would cease to trade and pass on all contacts to the seller. There is no shares as it is only a sole trader. I am not looking for an exact figure at present just a rough amount of tax which would be due. My client would 

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Replying to chrisacc1985:
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By EmmCam
21st Apr 2015 10:45

They are getting the assets

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paddle steamer
By DJKL
21st Apr 2015 10:49

Yes, but what is being sold?

Somewhat unusual to sell a sole trader's bank balance/petty cash. There are really no creditors (A very low accountancy accrual, perhaps?) The stock is obviously a moving target as are debtors/cash/drawings.

Does the vehicle go with the business and if so at what value?

Does the equipment go with the business and if so at what value?

Does the computer go with the business and if so at what value?

Will the purchaser require a price allocated to each above their tax wdv?

Given the balance sheet is fluid it would be more normal to agree a price for each static item and then sell the debtors/creditors/stock at their valuation on A day. 

So, how is the £90,000 to be allocated? Goodwill,equipment, debtors. stock?

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By EmmCam
21st Apr 2015 13:55

All assets are going at book value.

The buyer simply offered £90k for the business. By business i mean everything, all assets bank etc and all all at the value of what was reported in there accounts.

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Replying to Wanderer:
paddle steamer
By DJKL
21st Apr 2015 14:22

Well at face value

EmmCam wrote:

All assets are going at book value.

The buyer simply offered £90k for the business. By business i mean everything, all assets bank etc and all all at the value of what was reported in there accounts.

 

Well at face value, however unusual the position re the cash/bank balance to be included, given the moving target so much of the £90,000 that covers each item  allocates to said item, the seller deals with balancing allowances/charges (if any) re the fixed assets which will fall in to income tax, the stock and funds for cash/ allowance for creditors are tax nothings (well the funds for stock comes in to final books but matches the carrying stock, so no tax) and the balance of the £90,000 is evidently goodwill subject to CGT as appropriate to the seller in the year  of disposal.

So presuming the purchaser is not connected with the seller, and presuming the business was a trade qualifying for ER re the sale, and presuming the goodwill has no base cost (certainly none reflected within the accounts) the seller will no doubt (if still available) claim ER against the resulting gain ,effectively paying 10% tax on the gain ,and may also have available their annual CGT allowance.

 

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By EmmCam
21st Apr 2015 17:39

Thank you very much DJKL

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By frankfx
22nd Apr 2015 10:46

What is the activity

Many accountants would like to release value from thier own businesses  at the levels implied in the question. 

Indeed many of my own clients would be intrigued by the multiples suggested. 

I can not help but wonder that I am in th the wrong business sector. 

 

The tax liability arising would be a mere trifle! 

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By JDBENJAMIN
22nd Apr 2015 12:43

'My tax advisor is off ill', eh?

That is not a sensible reason for asking such an important question as this in a public forum to posters who don't know your client's affairs properly. Are you a book-keeper? If so, don't pass on tax advice got from posts on the internet, as that will legally be your advice, for which you could be sued if wrong. Wait until your tax advisor recovers, or if that is not within the timescale your client requires, engage another tax advisor.

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7om
By Tom 7000
22nd Apr 2015 13:47

what DJKL said...but

Tell the cliemt his tax bill is  about 80k x28% =  22kk if he sells but you might get it down lower if he qualifies for a few releifs ie  you can claim entrepreneurs relief and it might be less than 10k.

Its complicated though and the fee for sorting it out is £xxxxx???

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Replying to Cheshire:
RedFive
By RedFive
22nd Apr 2015 14:01

you should be in business

Tom 7000 wrote:

Tell the cliemt his tax bill is  about 80k x28% =  22kk if he sells but you might get it down lower if he qualifies for a few releifs ie  you can claim entrepreneurs relief and it might be less than 10k.

Its complicated though and the fee for sorting it out is £xxxxx???

   /\   /\    /\    /\    - like :-)

 

 

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