Buying into a Limited Company

I am buying into an accountancy practice (limited company) and taking my client list with me.

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I am buying into an accountancy practice (limited company) and taking my client list with me. I will be paying some cash consideration to the existing director for their shares. We will each own 50% of the shares. I’m confused about the correct journal entries that should be made at the date of transfer. Can anyone shed some light please?

 

For ease:

Existing LtdCo clients = £100k

My clients = £40k

Cash consideration = £30k ((£100k + £40k / 2) less £40k clients I’m bringing)

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Replying to fawltybasil2575:
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By Tax Dragon
08th Jul 2019 22:40

So the goodwill must transfer to the company. (I'm not interested in whether the accounts reflect that; I am interested only in where the goodwill goes.)

That's a 40k disposal by the OP to the company, with CGT. Do you agree?

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By fawltybasil2575
09th Jul 2019 12:24

@ Tax Dragon (your 22.40 post 0n 8 July 2019).

With respect of course, I do not agree your statement that the OP’s Goodwill/Client list has been disposed of to the company for £40,000. Indeed, this would conflict with (3)(a) of my 13.02 (8 July 2019) first post, in which I stated that ONE HALF of the Goodwill should be disposed of to the DIRECTOR/SHAREHOLDER (PERSONALLY) for £20,000.

Digressing somewhat, you will of course be aware of the (relatively) recent opinions espoused by HMRC, in relation to “GOODWILL”, specifically as regards their attempts to analyse that “GOODWILL” term between constituent parts, and thereby claim for example that “Personal” Goodwill may not be Goodwill of the business at all. No purpose is served by delving into the rights and wrongs of such views, and I envisage many twists and turns in relation thereto in the future, which MAY impact upon the CGT affairs of the OP, and/or the director/shareholder and/or the company in the (unlikely to be near) future. Suffice to say that, so as to simplify matters for the OP, and others interested, I intentionally did not elaborate too much on my reasoning for my recommended treatment of the £20,000 referred to in my first post (and above).

One must draw a distinction between (i) the company’s commencing to act for the OP’s clients, as evidenced by the Engagement Letters [which by their very nature are contracts cancellable by either party (client or accountant)] and (ii) the “amorphous mass” monetary value of the Goodwill (notwithstanding those two aspects (i) and (ii) being relatively loosely inter-related).

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
09th Jul 2019 13:38

Is this (naughty) sleight of hand or am I missing something basic?

What you are saying (correction, what I am reading) is that the client base, valued at 40k, would become an asset of the company, but that it would not be disposed of to the company.

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By fawltybasil2575
09th Jul 2019 15:24

@ Tax Dragon (your 13.38 post).

To answer your question, it would indeed appear that you are “missing” ONE basic point.

You are “reading” (into my last post) a FACT which I have NOT written, namely that the current Goodwill of the OP would, if my advices were followed, “become an asset of the company” (in the context of inclusion in the Financial Statements) - I believe that I have in fact stated entirely to the CONTRARY in my previous posts.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
09th Jul 2019 15:59

It was your reference to the "£40K Goodwill/Client list introduced by the OP" (in your 20:07 post on 8 July) to which I mentally appended "to the company". Such appendix seemed appropriate, in the context.

If I was the OP, I would WANT the client list in the company. It adds value to my shares that way. It's no use (or value) to me outside the company.

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By fawltybasil2575
09th Jul 2019 17:17

@ Tax Dragon (your post at 15.59).

(1) Re your first paragraph, and in intending no offence, I feel that a fuller quotation from my post [ie “ . . arising from NOT RECOGNISING GOODWILL (emphasis added) in the Financial Statements of the company, either re the £100K "existing" Goodwill/Client List or the £40K Goodwill/Client list introduced by the OP”], even disregarding my OTHER TWO explicit references to not including the OP’s Goodwill in the Financial Statements, illustrated my point that such Goodwill would not be included in those Financial Statements: but I apologise if I was unclear.

(2) Re your second paragraph, and as I have previously explained, I was conscious of not over-complicating my response [I could have over-complicated my responses by referring to the short-term and long-term CGT consequences of my recommendations].

I am still seeking not to over-elaborate, and hence I shall be brief: from a short-term perspective a CGT disposal of £20,000 would normally result in a minimal CGT liability, and correct Financial Statements. From a longer (but possibly still a short-term) perspective, there are options for the OP and the director/shareholder to dispose of their respective £20,000 assets (to the company or to other third parties) at later dates (there are many options, for consideration by the three parties in the future, and such options would be subject to change if “circumstances change” and/or if CGT rules change).

If one can achieve (as I tried to achieve in my recommendations in my first post) a short-term solution which is EFFECTIVE both in terms of taxation and compliance with Company legislation: AND leave FLEXIBILITY for the future, then such is IMHO the best approach (for the avoidance of doubt I do not disagree your second paragraph comments).

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
10th Jul 2019 09:21

Yesterday, the OP had a £40k business. Today, she implements your proposal; her clients sign up with the company, but she (somehow) keeps half the goodwill and transfers half to the other shareholder. Tomorrow, Hypothetical Bob comes along and makes an offer for the company. However, on finding out that £40K of the business is not owned by the company, he withdraws the offer. In a few years, a sale of the goodwill of the company completes, including the business that the OP introduced. We find £40k of base cost is missing.

Why not instead use s162, keep things simple and clean and do something along the lines that Try_to_help suggested? Where you say "flexible", I read "unresolved" and "a fudge/mess". Sorry, but that's how I see it.

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By fawltybasil2575
10th Jul 2019 12:35

@ Tax Dragon (your post at 9.21)

I am unsure whether your “Hypothetical Bob” scenario was intended to be tongue in cheek but, if not, I must respectfully point out that, in the “10,000 to 1” chance of such “Bob” appearing out of the blue so soon after the OP’s joining forces with the other party, and the company’s also being interested in such proposed disposal, then the simple expedient of the OP’s, and the existing director/shareholder’s, disposal of their Goodwill of £40,000 to the company, prior to Bob’s acquisition, should be a straightforward solution to the problem which you envisage.

In no way disparaging Try_to_help's recommendations, I personally do not consider that a company's having two share classes is especially conducive.

I maintain that my proposal is as simple as one can achieve, and that it is flexible and tax-efficient. If you consider to the contrary, then of course I respect your contrary view.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
10th Jul 2019 13:28

fawltybasil2575 wrote:

the simple expedient of the OP’s, and the existing director/shareholder’s, disposal of their Goodwill of £40,000 to the company, prior to Bob’s acquisition, should be a straightforward solution to the problem which you envisage.

Obviously, but my suggestion remains to do this now, whilst reliefs (specifically, s162) are on hand, rather than on Bob's prompting, when no reliefs (including ER) would be available.

And it doesn't have to be two share classes - not that that would be particularly unfavourable.

I should make it clear that I accept that your approach is (or, at least, may be) possible. I'm just not seeing any (tax or commercial) advantage to it, whilst I do see potential (tax) downsides, such as the one identified in this post. You may well have thought more deeply about it than have I, though. Since you seem insistent, and since you are undoubtedly highly knowledgeable, I suspect I am still missing something fundamental.

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Psycho
By Wilson Philips
10th Jul 2019 13:30

I’m joining this discussion late so out of necessity have not read everything before and apologies if I’ve missed any salient points. But it seems straightforward to me.

Individual sells client list (goodwill) to company. Regardless of subsequent accounting treatment that is a chargeable disposal and company has a base cost of the same amount. It is nonsense to suggest that the goodwill is personal and therefore cannot be transferred - the individual could have sold the client list to the company and walked away in which case it would be absurd to consider that the goodwill remained with the vendor. The individual’s relationship with the company is irrelevant.

Moving on to the accounting, there is nothing inconsistent in recognising purchased goodwill but not internally generated goodwill.

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Replying to Wilson Philips:
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By Tax Dragon
10th Jul 2019 17:15

Re: Sofra Bakery suggests that Basil's plan might not be absurd in the abstract. It is a bit frustrating though that, in the interest of not confusing us all with technical detail, he's not given any technical detail.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
10th Jul 2019 18:16

I accept that in theory (ie in the abstract) it is possible to hold goodwill outside of the business entity. However,

(a) this is not an incorporation of a practice (as I said, the vendor could have sold to the company and walked away)

(b) If the contract for sale is between the vendor and the company I don’t see how one can reasonably argue that the sale was to anyone else.

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Replying to Wilson Philips:
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By Tax Dragon
10th Jul 2019 19:52

Basil can speak for himself, but my understanding was that he was suggesting the sale should NOT be to the company (per your b) but to its (current) shareholder. The company then services the clients on behalf of its owners. In so doing, it preserves the value of the goodwill, held outside the company.

Why you would choose to do that (assuming you could - which point may still require testing) remains a mystery to me.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
10th Jul 2019 20:15

Ah I understand now - as I said, I think I have missed earlier comments. Like you, though, it does seem to be a rather cumbersome way of arranging things and I cannot see what benefit it would bring.

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