Tax treatment on the sale of a business

Tax treatment on the sale of a business

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A client is selling their business, which they purchased three years ago. They bought freehold property £200k, goodwill £50k and fixtures £20k, none of which was treated as a company asset. The business itself is run as a limited company that rents the premises from the directors and no claim for relief on the goodwill and fixtures was made by the previous accountant. The split of the sale proceeds has not been finalised.

Can I treat the disposal as purely a sale of personal assets i.e. the goodwill disposal can be set off against its cost etc. or is the business effectively a company asset on which CT would be liable on the gain?

Replies (18)

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By sarahg
29th Sep 2014 20:20

Who owns what?

How was the business purchased 3 years ago?   Was it all bought through a limited company?

How has the property been treated?  Who actually owns it?

How is the business being sold?   Has someone bought the assets or the shares in the company?

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Replying to Tax Dragon:
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By davy9015
29th Sep 2014 21:53

The property was purchased privately by the directors and let to the company. No formal lease, just rent equalling interest payable on the mortgage. It seems the previous accountant should have put the goodwill and fixtures into the company, but didn't. Or at least that is how I might have done it.

The directors have an interested party who wish to acquire the freehold, goodwill and fixtures. There are currently 

negotiations over the split of these, which has brought this problem to light.

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By johngroganjga
29th Sep 2014 22:07

So fhe purchaser is not buying the shares in the company, or any assets that currently belong to the company?

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By davy9015
29th Sep 2014 22:33

There will be some fixtures that the company acquired subsequent to the initial purchase (NBV £1,600). They will also be buying the stock c£15k.

Otherwise no.

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By johngroganjga
30th Sep 2014 07:06

So the vendors will be keeping the trading vehicle, but presumably it will not continue to trade?

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By davy9015
30th Sep 2014 07:23

The company will remain in the hands of the vendors. At the moment they have no plans to buy another business, so it will either become dormant or be dissolved.

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By sarahg
30th Sep 2014 07:50

Purchase agreements
What do the purchase agreements for the assets and goodwill say? Who actually purchased them, the company or the directors personally?

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By davy9015
30th Sep 2014 08:52

It was all purchased privately by the directors. The only part of the purchase that went straight into the company was the opening stock.

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By johngroganjga
30th Sep 2014 09:14

So you have a sale of property, goodwill and fixtures by the individuals, and a simultaneous sale of fixtures and stock by the company.

Does that answer your question?

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By davy9015
30th Sep 2014 09:36

That is the situation, but does not answer my question.

My concern is that any goodwill will be treated as goodwill of the company that is running the business, that cannot be set off against the goodwill acquired by the directors personally.

Like I said, if the goodwill had been transferred into the company in the first place I would have no problem. Although equitably it makes sense that there should be set off, it does not necessarily mean the legal position is the same.

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By johngroganjga
30th Sep 2014 09:49

Your question was actually "Can I treat the disposal as purely a sale of personal assets ...".

That is the question I answered.

From what you say the goodwill is clearly outside the company.  So I don't see the problem.

 

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By cathygrimmer
30th Sep 2014 10:20

Goodwill

Surely the goodwill must belong to the trading entity i.e. the company? The director has assets used in the trade but no actual trade himself. I don't see that he can own goodwill on its own without operating the trade to which it was attached? See here for case law which appears to support that view:

http://www.hmrc.gov.uk/manuals/cgmanual/cg68030.htm

But John clearly thinks it can be so maybe I'm wrong. I don't profess to be an expert in the law of intangible property!

If the trade was acquired and operated by the company from the start (i.e. the director never traded), then it would appear that the goodwill may have been purchased on behalf of the company by the director and has been incorrectly treated in the accounts in previous years.

With regard to the property, if a market rent has been paid, no Entrepreneurs' Relief would be available on the disposal.

Cathy

[email protected]

 

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By davy9015
30th Sep 2014 10:21

So I can put on the directors SA return that they have sold goodwill that they purchased three years ago, that is effectively derived from a company that runs the business.

I have spoken to my tax manager, who feels that the goodwill will be part of the sale of the business, which is run by the company, so would be treated as the company's goodwill, regardless of who acquired it, which again takes me back to my point that it should have been introduced to the company at the start.

I would be happy to tell him he is wrong.

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By davy9015
30th Sep 2014 10:30

I think Cathy is on the same lines as my tax manager.

I think I would like to amend the previous year's accounts to bring in the goodwill and fixtures.

Would I have a strong argument that the company running the trade had effectively acquired the rights to the goodwill.and fixtures?

Or would HMRC smell a rat?

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By Portia Nina Levin
30th Sep 2014 10:44

I agree with your tax manager (and Cathy)

Any sale now of the business will have a goodwill element, which absent any agreement to the contrary is the company's.

As Cathy says, the goodwill cannot exist independently of the business. The directors could personally have retained a right over the goodwill, but then I would expect there to have been some form of licensing arrangement.

You might be able to argue that the goodwill was immediately transferred to the company, along with the business, at its then market value (£50K), and the director simply retained ownership of the property outside the company.

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Replying to RedFive:
By johngroganjga
30th Sep 2014 11:08

Exactly

Portia Nina Levin wrote:

The directors could personally have retained a right over the goodwill, but then I would expect there to have been some form of licensing arrangement.

But they wouldn't have needed an explicit licensing agreement between themselves and their own company, as there could never have been a dispute over it could there?  So the absence of an explicit licensing agreement doesn't mean that there wasn't an implicit one.  

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By davy9015
30th Sep 2014 11:07

I think I know the position now.

Thanks everyone for your interest.

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By Portia Nina Levin
30th Sep 2014 11:23

And now I agree with John :)

After a little digging, I've come across the insolvency case of Kubrik & Anor v Ucar & Anor [2013] EWHC 1499 (Ch), which is not on the BAILII website. I was only able to find it via LexisNexis.

Mr Ucar was a soletrader who transferred his business to a limited company, he certainly retained the freehold interest and nothing was expressly stated in relation to goodwill. It was held that he had retained the ownership of the goodwill, and was entitled to the proceeds that the company had received for the goodwill, when it in turn sold the business.

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