Uninvoiced work

Uninvoiced work

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I am in the midst of preparing the 2012 TR for one of my clients, she is in "marketing" and has a turnover of around £200k.

On 6th April 2012 she incorporated and sold her goodwill to newco, gain will go on 2012/13 TR

Books were drawn up to 5th April 2012 and all endeavours were made to ensure all work was invboiced at cessation before sale.

It transpires now that of a fee charged in June 2012 by Newco to one of her clients she sold across, of £20k (approx) included a ream of work done on the project during the 2011/12 tax year - potentially £10k worth. - this "WIP" was not mentioned in the sale/incorporation.

Sorry if I am being dense but, does that £10k of work done in 2011/12 have to be accrued and hence taxed on her 2011/12 sole trade tax return OR could that £10k be deemed to be included in the fee that the trade was sold across to Ltd Co for.

At present Ltd co will pay CT on that income at 20% but if it was in teh sole trader it would be more like 62% as that £10k would all fall in teh £100k-£115k loss of personal allowance band.

£4.2k is quite a difference in a tax bill!

Anyone who has any poiners or ideas will be listened too with open ears!

  

Replies (6)

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By User deleted
26th Jan 2013 14:55

Sounds like ...

... UITF40, accrued income in the sole trade on the face of it. If it was all her work, with no chargeable staff then WIP likely to be nil

see here

http://www.icaew.com/~/media/Files/Technical/Tax/Tax%20news/TaxGuides/TAXGUIDE-8-06-UITF-40-and-Taxation.pdf

There may be accrued income to account for however, but it is up to you to decide how to value that, which would be based on knowledge at the date of transfer, not with the benefit of hindsight! So, although it turned out to be worth £12k, would that have been known at the time?

This is the HMRC take on it, read down there are examples to look at

http://www.hmrc.gov.uk/manuals/bimmanual/bim74270.htm

 

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By Ding Dong
26th Jan 2013 17:23

Thankyou for your posts

My opinion on the subject was that at the time the work - which was all her own - (she employs no-one at all) was not considered as part of the sale so Newco had the benefit of the deal.

Her work was all reviewed in detail (by her not me might I add!!) and she was confident all was invoiced - I guess that's the danger of leaving it to someone who is far better at creating weird leftfield marketing campaigns than a set of books!

I was considering NOT including and leaving the income in the Newco taxed at 20% but maybe was just wary that the saving was such that should our friends at HMRC decide to look into it (the Capital Gain will go on the 2012/13 return) or indeed look into the 2012 return - lucky me - then they may just get excited at the possibility of a lot (comparatively) of additional tax

I will have a further mull!

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By User deleted
26th Jan 2013 17:31

On the income levels you mention ..

.. she will have to pay extra tax to extract from the company anyway, so only deferring the additional 20%!

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Teignmouth
By Paul Scholes
26th Jan 2013 17:48

Agree it's the self employed income

Have had a couple like this but fortunately, clients advised me of the work done, yet to be invoiced, and sums were shown as accrued income in the closing S/E balance sheet.  One (correctly in my mind) raised an invoice on the self employed letterhead, so never touched the Ltd company and the other "sold" on the accrued income, to contra the income in the Ltd company.

Although unlikely from what you say, was there any condition that stopped the work being invoiced, ie why did she wait 3 months?

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By Ding Dong
26th Jan 2013 18:00

was actually longer

@Paul, she actually waited (forgot) longer than three months, the £10k of work was done originally dribs and drabs between Aug-Dec 2011, I guess she was just making too much money to care!!!

Thinking aloud, as ther is a "price adjuster clause" in the sale agreement, we could do that accrue in the closing B/sheet and that could form additional g/will in Newco.

Wish I'd have insisted this one got done sooner now..... :-(

 

 

 

 

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By dwgw
01st Feb 2013 12:09

Is this free goodwill?

Different issue but how much of the goodwill is free (and thus transferable to the company) and how much is personal (residing in her, so not separately transferable to the company)? 

Are you planning to put all of it on the return as goodwill sold to the company or is there an apportionment between free and personal goodwill?

If she has no staff, what prevents all of this being personal goodwill?  She is the asset and the company has acquired that by means of her directorship/employment, not as a separate, saleable asset.  Just playing devil's advocate but, if I was the Inspector, that would be my starting point.

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