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Goodwill re Limited company to sole trader?

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Sole director/shareholder of a financial services limited company is transferring trade/goodwill from Ltd company to sole trader with the intention to sell onto a third party within 2 years and retire. I understand this will create a corp tax charge in the company based on deemed market value. Tax specialists have also advised that the value of goodwill could be 'gifted' to shareholder so no money changes hands and then deemed market value becomes base cost for the individual to offset against future sales proceeds received from 3rd party.  

Goodwill has been internally generated by company so no value on balance sheet. What is the double entry in the ltd company accounts if deemed market value is £100K? Credit profit on diposal of intangible asset - Debit??? or is it just an adjustment on tax computation/ct600?

Thanks. 

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By paul.benny
13th Aug 2019 17:52

If it the goodwill is not on the company balance sheet, there are no entries to make on disposal - apart from recognising the tax charge.

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By unearned luck
14th Aug 2019 02:17

Paul

I beg to differ. £100K is likely to be material and accounts must show a T&F view, even if there is no auditor to express an opinion on whether or not that has been achieved.

Claire is right there should be a £100K profit on disposal of a fixed asset in the P&L. Where the debit goes depends on the capacity in which the director/shareholder receives the GW.

Qua director and the debit goes above the line effectively cancelling out the chargeable gain. The company will have a class 1A NIC liability on which it can obtain CT relief. The director will have IT to pay probably at these rates: 40%, 60%, 40%.

Qua shareholder then we have a dividend in specie and the debit goes below the line. The company will pay CT on its chargeable gain. The shareholder will pay IT possibility at these rates: 32.5%, 45%, 32.5%.

Claire

These tax charges are ‘dry’ and the shareholder pays tax at the above rates rather than at 10%, so why do it? Also why does the client wish to abandon Limited liability this late in his career? Will he need personal run off insurance?

If the shares still have value after the company has given away its GW then you won't get CGT treatment on any formal or informal liquidation as the anti phoenixing TAAR will apply.

The underlying facts of Veltema v Langham is vaguely similar to your case and so should be worth a read as would SP1/06. If the client goes ahead, the value of the GW needs to be agreed with HMRC: complete form CG34. Mr Veltema’s failure to use form CG34 did him no good - he ended up paying the correct amount of tax and incurred considerable legal fees in resisting doing so.

The 'deemed market value' as you put it will apply in any case regardless of any cash changing hands: the parties are connected. If the full MV is paid then there would be no BIK but on liquidation will not give you a cap gain. the TAAR will ensure that any capital receipt in a MVL will be taxed as a dividend.

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Replying to unearned luck:
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By paul.benny
14th Aug 2019 09:33

I understand what you say. On the other hand
- there are no provisions in accounting standards for recognising internally generated goodwill - so no recognised asset in this case
- there is no profit on disposal because the company is giving away an asset.

What we have is a company receiving nil proceeds for an asset with nil (book) value - albeit with some tax consequences.

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Replying to paul.benny:
Caroline
By accountantccole
14th Aug 2019 12:39

Surely at the point of sale it is recognised? If you disposed to a third party there would be no doubt as to the double entry. If a third party value can be determined, then it would be both material for accounts purposes and relevant for tax purposes too.
Unusual to take assets out before a final sale and lose ER etc?

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Replying to accountantccole:
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By paul.benny
14th Aug 2019 13:27

accountantccole wrote:

Surely at the point of sale it is recognised?

No.

IAS38, para48 wrote:
Internally generated goodwill shall not be recognised as an asset

I couldn't quickly find the equivalent provision in FRS

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Replying to paul.benny:
Caroline
By accountantccole
14th Aug 2019 14:58

If it were sold to a third party the sale would take account of the market value. I'm not suggesting putting it on the balance sheet. My point is, it has a value.

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By paul.benny
14th Aug 2019 15:56

Agree that there is a value. But not in accounting terms - just like, say a fully written down asset. If you give away your fax machine and typewriter, you wouldn't book any accounting entries for the disposal.

That's distinct from the tax charge that may arise.

As for ER -the OP hasn't given enough information to understand the rationale for the transaction. And to be fair, that wasn't the question.

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Replying to paul.benny:
By Duggimon
14th Aug 2019 16:09

paul.benny wrote:

If you give away your fax machine and typewriter, you wouldn't book any accounting entries for the disposal.

The accounting entries for disposing of a fully written down asset are Cr Cost, Dr accumulated depreciation.

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Replying to Duggimon:
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By paul.benny
14th Aug 2019 17:27

You're right of course. Badly chosen example to try to illustrate the point.

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Replying to paul.benny:
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By unearned luck
14th Aug 2019 22:49

You are saying that a company can provide a £100K BIK to a director and that it does not form part of the measurement of his remuneration in the accounts. And that a £100k dividend in specie does not have to be recorded at fair value. Where in the accounting standards does it say such practices are legit?

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Replying to unearned luck:
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By claire spurrell
15th Aug 2019 08:45

Thank you.

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Replying to unearned luck:
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By paul.benny
15th Aug 2019 09:16

I agree that both should be disclosed. But neither would result in an entry in the accounting records (aside from any resultant tax charges).

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Replying to accountantccole:
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By claire spurrell
15th Aug 2019 08:46

Thank you

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Replying to paul.benny:
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By claire spurrell
15th Aug 2019 08:47

Thank you.

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