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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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
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
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%!
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?
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.