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Does a sole trader amortise their goodwill?

Amortisation of sole trader goodwill.

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Sole trader purchased a business from an unconnected party. Goodwill not allowable as a deduction against tax but is the annual amortisation charge still booked? 

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By mikeyban
14th May 2021 21:07

If you are being precise all accounts should follow UK GAAP ...

The truth is sole trader accounts are really just drawn up for the tax man so as long as the amortisation is added back that is the reality of the situation..

I hope this helps..

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By Paul Crowley
14th May 2021 21:29

I do not bother
But then do not have that many with purchased goodwill
Old figure left on balance sheet is a permanent reminder for later CGT
One less thing to get wrong

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Replying to Paul Crowley:
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By Tax Dragon
15th May 2021 07:29

It is possible to follow UK GAAP and still get the tax right. For example, by recording cost and accumulated amortisation separately.

But I can't immediately think of an occasion when it might matter - lenders eg ask about taxable profits. Possibly there's a theoretical issue around interest deductibility within the business in some circumstances, but I doubt such circumstances exist in reality.

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RLI
By lionofludesch
15th May 2021 13:57

I haven't had a sole trader with goodwill for many years but, no, I never did.

As Paul says, it's useful information for the day when the goodwill is sold.

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Replying to lionofludesch:
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By Paul Crowley
15th May 2021 20:52

Particularly if client moves agents.
Most accounts software for sole traders just shows brought forward balance
NOT cost and accum depreciation.

On a recent incorporation the client had bought goodwill that we had no record of,
bought before we started acting 30 years ago.

True and fair only applies to companies and the like. Not people. People do not need to disclose all their assets and liabilities

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Replying to Paul Crowley:
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By Tax Dragon
16th May 2021 07:07

Paul Crowley wrote:

True and fair only applies to companies and the like. Not people.

IANAA but I simply don't believe this. Requirements as to format of the accounts you produce may be lacking, but the requirement to maintain records that conform to accounting principles and give a true and fair view must exist.

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Replying to Tax Dragon:
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By Paul Crowley
16th May 2021 15:10

Real life means that all that matters is getting the tax correct.
On a company true and fair means disclosing all assets and all liabilities, loans to shareholders and related party transactions together with lots of other disclosures.

No such need or regulation on a sole trader.

DIY often only prepare a tax return and no formal accounts. The return often 3 line.
Can cash accounting ever be true and fair?

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Replying to Paul Crowley:
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By Tax Dragon
16th May 2021 19:52

But if BIM45700 is (or might be) in point, you may need to know what the amortisation is to make sure the tax is correct!

We're talking about a tiny number/percentage of cases here, I don't doubt. Just seems sloppy to me for accountants knowingly to prepare accounts that don't meet accounting standards.

Is the same true of depreciation (ie it can't be recorded separately in your sole trader accounting software, but is perforce netted off)? If so, do you have issues sometimes with balancing charges - or if not how do you make sure not?

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Replying to Tax Dragon:
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By Paul Crowley
19th May 2021 10:00

I deal with over 100 self employed on small income. (Big income jobs are much easier)
Result they want is tax correct, not clever accounts.
Tax is all that matters.
You suggest that I waste an extra couple of hours on pointless work?
Why?
Lenders just want what HMRC get, tax calculation and tax year overview.
If you did this stuff you would get a system in place that works.

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Replying to Paul Crowley:
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By Tax Dragon
19th May 2021 10:09

Paul Crowley wrote:

I deal with over 100 self employed on small income.

How many of those have purchased goodwill*? (I thought they were the ones we were talking about? Unless you are saying you just can't be bothered to do a proper job at all for any small client? I'm actually not sure what you are saying now!)

*And, of those few, how many have interest charges/finance costs of more than say £500?

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Replying to Tax Dragon:
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By Paul Crowley
22nd May 2021 12:51

'true and fair' is a concept on an entity such that an investor can make a decision.

Accounts can be accurate in figures for tax, but still not be true and fair.

True and fair considers, amongst other matters, contingent liabilities, going concern doubts and disclosure of all assets, liabilities and warranties, Guarantees...

True and fair comes from Companies act and auditing
When I started in this game all companies had audits and all companies had full accounts that needed to be true and fair
The term has no meaning for accounts where the entity is a Human

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Replying to Paul Crowley:
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By Tax Dragon
22nd May 2021 18:29

If true and fair is meaningless, I guess that's why mikeyban opened the replies instead with a reference to UK GAAP.

My point, which you are either missing or ducking, concerns the potential interplay between depreciation and amortisation and relief for interest expenses etc. Am I right* that if you don't depreciate and amortise in accordance with GAAP, then you overstate your assets and balance this by overstating the current/capital account? If so, you may fail to restrict interest etc per BIM45700 when you should.

It won't arise often. But I'm still left wondering how you know you've got the tax right (as you say you do) in those few cases if you don't get the accounts right.

*If not just tell me. Explain in idiot's terms if you can, but if not I'll shut up anyway.

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Replying to Tax Dragon:
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By Tax Dragon
23rd May 2021 07:11

I think you are wrong, Dragon. Have a look at example 3 in BIM45700.

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Replying to Tax Dragon:
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By Paul Crowley
23rd May 2021 17:18

This is going way beyond the OP
Never yet come across an example 3, but traders have always been able to refinance a business on a business loan, but not drawings in excess of business assets.

The point on a small trader is the continued existence of the asset. If the loan was for the purpose of the business eg buying a van then depreciation on the van after purchase is irrelevant as all the loan was used for the purchase of van and van still exists.

Example three shows that HMRC will appear to subsidise the private loan secured on a business asset as trader was able to finance the business equity as part of the loan arrangement.

The example is a bad example. If new trader bought the business at the correct values then the value of the building becomes the cost.
What idiot would present accounts is that way
Who sold (or gave)the business to new trader?
Do not think example 3 would happen in real life. Old owners had a building and gave it away at cost
CGT comps? Holdover relief?
Feel free to explain the full tax position of example three

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Replying to Tax Dragon:
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By Paul Crowley
23rd May 2021 17:54

You have however raised an important BBL issue.
Whilst I have almost no clients who are sole traders with business loans other than van funding I suspect that BBLs may become an issue
Inside a company, under control
Sole traders? If all drawn then under current rules no tax relief on interest.
Worthy of a designated thread.
But not an issue re 2021 tax returns, this comes up next year once interest is being paid.
Do you want to start the thread or shall I?

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Replying to Paul Crowley:
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By Tax Dragon
23rd May 2021 21:00

You.

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