Tax on sale of business

Tax on sale of business

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I am a bookkeeper in practice and incorporated a couple of years ago with goodwill of £30,000 which has not been amortised. I am now selling the major part of my fee base for £25,000. Am I correct in assuming that there is no tax liability on this amount as there is no profit?

Thanks for any guidance!
Susan
Susan Macharg

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By User deleted
01st Aug 2005 21:52

Goodwill Valuation
It depends...

Had you remained a sole trader then assuming you'd been in business more than two years the Business Asset Taper Relief and Annual Exemption would have taken care of the gain.

I would ask the question how you did you value the £30,000 goodwill transferred over to the company? Did you file a CG34 for approval of the goodwill valuation? If not the Revenue may attack your valuation on the grounds that it is actually personal goodwill (ie associated with you) and had no value at that time. Unfortunately you can't use the benefit of hindsight now.

If they do value it at nil or less than the £25,000 you now sold it for then your company is potentially looking at a gain subject to CT. One way round this is for you to sell the shares in the company instead of the goodwill itself.

To justify the goodwill valuation then it is advisable to draw up a proper valuation report.

best of luck.

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By markfaherty
02nd Aug 2005 13:08

Company first
Valuing the goodwill of a business such as yours can be based upon expected turnover from recurring business and should be accepted by as non-personal. If that is the case the company will have made a capital loss and will not pay any corporation tax in this respect. You then need to consider your tax position: how do you treat the transfer of the funds from the company to you? This would normally be by way of a dividend, unless you have a balance in your director's current account to be repaid to you. However, if you apply to the Inland Revenue in advance, confirming that all accounts have been filed and CT is up to date and that all creditors have been paid, you may request that the company is treated as if it were formaly wound up and for all distributions to shareholders to be treated as capital distributions. You may then utilise business asset taper relief on the amount paid by the company for your shares and make use of your annual exemption. It's a case of which fits best to your circumstances.

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By AnonymousUser
02nd Aug 2005 16:03

You say the major part ...
... of the fee base, which of course implies there is a minor part which is not disposed of. What that part is worth will of course affect the calculation of the gain or loss on the part disposal. Obviously what you are selling the goodwill for (presumably to an unconnected third party) is a 'given' but if the CGT calculation results in a loss the Revenue are likely to say that the original value was too high (maybe not, the figures aren't massive). In that case if you have drawn the money out of the director's loan account they may try to treat the excess as a distribution, though it may not matter much if this does not involve a higher rate liability. If you are saying that the remaining goodwill is worth £5,000 then the result will be nil. As presumably you will not have much use for a capital loss anyway, I'd be tempted to present the comp on that basis (assuming that is something like the reality). It will look a bit too neat but on the figures SV are unlikely to be too interested in arguing values and the inspector has no authority to do so.

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By User deleted
02nd Aug 2005 17:05

Plenty of questions unanswered here
Although you say "you" have sold part of the goodwill, it appears that the vendor is a company, as you say you incorporated.
So the first question is what is the tax consequence for the company.
That in turn requires the answer to another question.
When you valued the goodwill at £30,000 when you incorporated, what exactly did you do?
Did you credit yourself with £30,000-if so that was a CGT disposal by you at the time-probably wityh the benefit of Business asset taper relief.
You cannot claim holdover relief under TCGA s.165, as a gift to a body corporate after 1998 no longer qualifies.

Did you perhaps qualify for rollover relief under TCGA s162. If so
a] that applies automatically unless you elect to disapply it under s162A

b) the base cost of your shares is reduced by the gain you would otherwise have made.

What you have to realise is that you cannot escape tax on this profit-the question is who makes the profit, and when.
If a s.162 analysis is appropriate, then arguably the company has no tax laibilty, but you have one when you sell the shares of or liquidate the company.

Finally the £30,000 figure you used when you incorporated does not bind the Revenue-it is the true market value at the time which applies, as you and the company were "connected" persons at the time

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By User deleted
01st Aug 2005 22:28

Goodwill
Under what accounting mechanism did you bring the Goodwill into the Comapany on Incorporation ?
How were the shares issued and for what perceived value - especially the Goodwill?
You say that most of the Goodwill is to be sold but how would you evaluate this to the existing book value ?

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