If a very profitable sole trader incorporated, and the first years accounts were drawn up to 31/10/13, is there any possibility of still getting a CG34 approval of the valuation, and then amending the accounts, CT600 & SA100, or has the opportunity been missed?
This isn't personal goodwill, and the previous accountant could have claimed substantial goodwill (in my opinion).
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You have several tasks;
1. Apply for a post transaction value under CG34
2. Amend the SA Return to include details of the gain; do consider ER.
3. Amend the CT600.
You're in time for all of the above except possibly the ITSA - you can amend within 12m of ordinary filing date, but it is not clear when your client incorporated.
Thinking on it you also have a challenge of overcoming the Incorporation Relief provisions. The relief applies automatically unless disclaimed and I am not sure if the fact that the incorporation already occurred is conclusive and final. Maybe someone else can fill in the gaps?
As a matter of interest why does the transfer of goodwill have to be backdated? Why can it not just be reflected when the decision to make it is taken (i.e. now). Am I missing something?
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As a matter of interest why does the transfer of goodwill have to be backdated? Why can it not just be reflected when the decision to make it is taken (i.e. now). Am I missing something?
Whilst I like your approach that the original transfer was not erroneous but that a separate part was sold thus overcoming any amendments, would you not agree that if the remaining Goodwill is outside of the company a year later it is of little value or substantially impaired?
Commonly the goodwill at issue is relevant to contracts being serviced by the Company which would suggest to me that it has been transferred.
What are we talking about here? Contracts? Brand? Trademarks? Know how?
Arguably a gift
Arguably, the accounts are effectively saying that there was no consideration.
Upon incorporation it is recommended that at least a simple sale purchase agreement is drawn up with a price adjuster clause; HMRC accept that this allows the cost per the accounts to be restated in the event they are successful in arguing a lower value.
Conversely, having no documentation means that HMRC are likely to resist an adjustment in the opposite direction.
Incorporation relief
Just to fill in the gap incorporation relief can be disclaimed within 2 years from 31 January following tax year of incroporation.
Is this a one man band? If so, are you confident of your valuation of these contracts? (Eg personal goodwill)
Re Gift Relief, it may look like it has happened, but in the absence of a claim, it has not happened.
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Let John have his say as to benefit of transferring Goodwill now in case he has some magic but for my money you need to do the amendments discussed and a good starting point is the CG34 request together with an election to disapply incorporation relief and take the amendments from there.
What was the value of the transaction?
If the business was transferred and the accounts do not record a value, surely the consideration was nil. The transaction happened but no value was put on it. Sounds like a gift to me.
A holdover claim can be made within 4 years from the end of the tax year of transfer.
Colley and Another v Clements [2005] STC (SSCD) 633 may be worth a read; here the partners were unsuccessful in arguing that there was a pure gift in absence of any entry on their tax returns because there was a cost of goodwill recorded in the accounts. It is interesting that the accounts were subsequently amended to show no consideration for the transfer. The Special Commissioner found that the taxpayers had not satisfied the evidential burden that the original accounts were wrong.
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If the business was transferred and the accounts do not record a value, surely the consideration was nil. The transaction happened but no value was put on it. Sounds like a gift to me.A holdover claim can be made within 4 years from the end of the tax year of transfer.
Colley and Another v Clements [2005] STC (SSCD) 633 may be worth a read; here the partners were unsuccessful in arguing that there was a pure gift in absence of any entry on their tax returns because there was a cost of goodwill recorded in the accounts. It is interesting that the accounts were subsequently amended to show no consideration for the transfer. The Special Commissioner found that the taxpayers had not satisfied the evidential burden that the original accounts were wrong.
Your scenario suggests the following:
1. incorporation relief has been disclaimed.
2. Gift relief has been claimed.
In the absence of any evidence to indicate that being the case and in the interests in securing an advantageous outcome for this Client how , if at all, would you construct an argument to arrive at a tax deductible Goodwill position?
Perhaps the director on the incorporation of the company decided to retain his goodwill and allow the company to exploit the use of it free of charge, but he now on reflection wishes to transfer full ownership of it to the company. Its value has not been impaired because it has been in full use, and been kept fresh and up to date throughout the company's period of use.
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Probably not worth the effort at this late stage.
For information, the client told me he did ask for goodwill to be calculated but the accountant advised it wasn't worth it. The client should have asked for an explanation, or obtained a second opinion.
How much are we talking as a ball park?
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Sales £260K, WIP £65K, net profit £190K
With those figures surely you have to give it a crack.
If you can demonstrate that there was goodwill
Then whether or not it is actually in the accounts is irrelevant. You are entitled to tax relief and had a chargeable gain (unless incorporation relief applied), because CTA 2009, section 845 says so.
It says that the transfer takes place at market value "for all purposes of the Taxes Acts."
Reviewing the thread
No one has asked and nobody has answered the question, "when did the sole trade commence?"
Goodwill on incorporation 1.11.2012
There are a lot of implications here but one that has not yet been mentioned is does this constitute an acceptable alteration to the personal Tax Return 2013? ( presumably that has been filed). Will that now create a tax liability? That should have been paid on 31.1.2014 so interest and 2 x 5% surcharges will be due.