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Client selling fee base - tax advice needed.

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I have a client working in IT and they have a fee base of customers paying a monthly standing order for IT services that can be called upon.

The client is a small Ltd company owned and operated by a lady with her husband as a 2nd director.

My client has been approached by another IT company wishing to purchase her client list and fee base but NOT the Ltd company (the shareholding) and this fits in with her vision as she is now ready to retire from the busy working life and concentrate on other things (like hobbies etc.).

The question is what would be the tax implications to this? On first thought, CGT route may be appropriate but would she also be elegible for Entrepreneurs Relief? However, on doing some research, it would appear that the sale would have to go through the Ltd company and therefore chargeable to CT but then when she extracts those funds (sells back shareholding) she will then be subject to income tax on the proceeds - effectively being taxed twice for the same transaction.

Is this correct or is there an alternative way that I have not seen?

Thanks

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By Maslins
11th Feb 2019 10:34

Your second thought is correct, though they can perhaps do an MVL shortly after sale to then get CGT...but this would be after CT already suffered on the lion's share of the sale proceeds. Their situation is a fairly typical "buy the shares or the trade and assets" question.

Generally speaking the buyer will want to buy the trade and assets. Tax reasons for this, plus tidiness (they don't then have a separate Ltd Co to dispose of), plus reduces risk of them inadvertently inheriting skeletons in the closet.

Generally speaking the seller will want to sell the shares. Tax reasons, plus finality (ie don't then have hassle of closing the shell of a company).

You may end up with a two tier price, eg where offer for trade and assets is maybe 20% higher than offer for shares.

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11th Feb 2019 10:53

Would it be possible to close the Ltd company and for my client to revert to a sole trader before signing any contract therefore putting the sale through CGT and claiming ER?

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to AndersonAccountancy
11th Feb 2019 11:06

You can do it, but it is not as simple as that. The company can't just hand over demonstrably valuable assets.

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to stepurhan
11th Feb 2019 11:28

No, but the company could sell to the sole trader for a notional amount? Afterall, didn't Philip Green sell BHS for £1?

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By DJKL
to AndersonAccountancy
11th Feb 2019 11:50

Market Value issues.

( The £1 BHS price tag came with a fair few financial obligations to be met)

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to AndersonAccountancy
11th Feb 2019 12:50

Is Philip Green operating BHS as a sole trader? You learn something new every day.

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to andy.partridge
11th Feb 2019 13:36

I may be wrong, but wasn’t Lady(?) Green the sole shareholder and as a citizen of Monaco not liaible to UK IT on the dividends?

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to atleastisoundknowledgable...
11th Feb 2019 15:01

You're not getting mixed up with Harry Redknapp's dog, are you?

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By DJKL
to atleastisoundknowledgable...
11th Feb 2019 15:08

I do recall that she certainly had a significant holding but would not, given current news , wish to comment on any holding Sir Phillip may or may not have enjoyed.

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to andy.partridge
11th Feb 2019 15:39

I may be wrong, but wasn’t Lady(?) Green the sole shareholder and as a citizen of Monaco not liaible to UK IT on the dividends?

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to AndersonAccountancy
11th Feb 2019 15:45

Your best option is likely to pass your client on to another professional who has more regular dealings with this sort of thing.

Your comment about Philip Green is the sort of thing the man from down the pub would say to justify his latest brainwave so best pass this on and not open yourself up to a PI claim.

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to AndersonAccountancy
11th Feb 2019 16:45

AndersonAccountancy wrote:

No, but the company could sell to the sole trader for a notional amount? Afterall, didn't Philip Green sell BHS for £1?

BHS was in trouble. Even ignoring the other complications, it was not a valuable asset. Philip Green was still investigated as to whether the price was justifiable.

That is not the position your client is in. You are leading them into a world of hurt if you tell them selling for a nominal amount is a valid route.

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12th Feb 2019 08:50

The aim of the question was really just to confirm my research in that the sale will be shown as a disposal of asset within the business and subject to CT as normal.

The main issue then is when the client wishes to extract the proceeds, she will taxed again as income albeit only 7.5% if she takes it as a dividend.

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to AndersonAccountancy
12th Feb 2019 09:07

Its not really being taxed 'again' though is it?

Do you class her sales income as being taxed 'again' when she draws her profits as dividends?

The company makes a transaction on which it is taxed. Then if funds are paid to the shareholders that is a separate transaction subject to tax also.

It isn't good to explain a client that they are being taxed 'twice'.

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to JCresswellTax
12th Feb 2019 09:28

In a way it is double taxation - in this case, she is considering selling her business and reaping the rewards of years of hard work.

If she was a sole trader, she could simply put it through CGT, pay 10% using ER so, assume she receives £50k - her tax bill will £3800. As a Ltd company, she pays CT at 19% on £50k £9500 and then taxed again when she withdraws the balance; another £3038 - and THAT is what the client will see; total tax paid of £12.5k.

It's not a case of explaining to the client they are not being taxed twice, they can see that they are.

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By DJKL
to AndersonAccountancy
12th Feb 2019 09:42

But exit was one of the parameters that the client (and her agent) ought to have considered when creating the company in the first place.

The advantage of say a lower rate of CT than IT plus NI over the years maybe also needs balanced here against the cost, plus limited liability for x years.

This is why taking full notes re client aspirations and future wishes/plans is so imperative before placing them into the construct of a limited company or any other vehicle and why the first accountant to invent a 100% reliable crystal ball will never be short of clients.

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to AndersonAccountancy
12th Feb 2019 09:24

You can basically steal the clients from the company for nothing in the real world, but in the tax world there will be a deemed MV disposal under s 17 and/or 18 TCGA 1992 (and it may also be treated as a distribution).

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