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Incorporation niggle

Incorporation niggle

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I just want to clarify my thinking on this subject as I appear to be getting conflicting advice.

A self-employed client of ours incorporated in March and all assets were deemed to be transferred to the new limited company.

We have recently discovered that at that point there was £11k in outstanding debtors, he since received these amounts into his personal account.

Now i'm pretty sure this can be sorted out via a director's loan but what's confusing me is the differing advice about the taxation of this amount - I believe  it could be in one of three ways:

  1. This was part of the value of the business transferred therefore it is taxable as a capital gain at 10% (with entrepreneur's relief). It is not taxable as an income of the self-employed business as it was received after the sale and cessation of said business (cash basis) it is not income of the ltd company as these are purchased assets
  2. It is income 'deemed' to have been recieved by the self-employed business before it ceased and is taxable at 42% (income tax and NI), therefore they are not assets transferred to Ltd Co and will not be included in the capital gains tax calculation.
  3. It is income of the Ltd Co and therefore subject to corporation tax at 20%, again the £11k will not be included in the capital gains tax calculation.

Whilst I lean towards answer 1 I have had all three given to me and so far have found nothing definitive at HMRC's website (too many links talking about VAT)

Any ideas?

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By blok
01st Sep 2011 14:37

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"We have recently discovered that at that point there was £11k in outstanding debtors, he since received these amounts into his personal account". 

These amounts belonged to the business owner and have no relevance for tax.

The debtors are as a result of the income declared in the final period of account for the sole trader, so he will have been assessed to tax on that income. 

This has nothing at all to do with the company.

The capital gain is on the disposal of the goodwill, not the debtors.

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By thisistibi
01st Sep 2011 14:45

You're confused

As Blok has said.... basically you're confused.

The trade debtors can only be created by recognising turnover at the same time - the double entry when the invoices were raised is Dr Debtors, Cr Turnover.  So the income should already have been taxed prior to incorporation.

I have come across exactly the same scenario where trade debtors pre-incorporation are paid to a personal bank account.  I treated that as drawings from the Director's loan account and I believe that to be the correct treatment.  Of course, you need to ensure ideally that the Director's loan account doesn't become overdrawn.  The correcting entries in the Ltd company are therefore Dr Director's loan account, Cr Debtors.

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Replying to stevepipehome:
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By Old Greying Accountant
01st Sep 2011 14:54

Eh!

thisistibi wrote:

I have come across exactly the same scenario where trade debtors pre-incorporation are paid to a personal bank account.  I treated that as drawings from the Director's loan account and I believe that to be the correct treatment.  Of course, you need to ensure ideally that the Director's loan account doesn't become overdrawn.  The correcting entries in the Ltd company are therefore Dr Director's loan account, Cr Debtors.

Surely pre-incorporation debtors should be paid to the personal account and don't form any part of the company's accounts?

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Replying to Anonymous:
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By thisistibi
01st Sep 2011 14:59

Hmm

Old Greying Accountant wrote:

thisistibi wrote:

I have come across exactly the same scenario where trade debtors pre-incorporation are paid to a personal bank account.  I treated that as drawings from the Director's loan account and I believe that to be the correct treatment.  Of course, you need to ensure ideally that the Director's loan account doesn't become overdrawn.  The correcting entries in the Ltd company are therefore Dr Director's loan account, Cr Debtors.

Surely pre-incorporation debtors should be paid to the personal account and don't form any part of the company's accounts?

I suppose that depends what the company buys upon incorporation.  If the company buys all assets & liabilities, including the trade debtors, then it does form part of the company's accounts.  I assume what you normally do is to have the company not buy the trade debtors?  However I don't think one or other treatment is wrong.

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Replying to stevepipehome:
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By Old Greying Accountant
01st Sep 2011 15:05

Ah ...

... I see what you mean now, been a long week and still got a long day tomorrow to look forward to! :o)

Most I deal with don't buy the debts as the hassle of trying to get the customers to pay the right account not worth it, just tell them to pay the name at the top of the invoice, a lot less hassle!

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By Old Greying Accountant
01st Sep 2011 14:50

Agreed ...

... and if any money is paid to the company for old debts (customers get confused) then it gets credited to the directors loan account and repaid.

Conversely, if, as more likely, the customers keep sending cheques for company sales to the sole trader these need to be debited to the directors loan account.

Sometimes the company is allowed to collect the debts but this is purely for cash flow, and as above would be creedited to teh directors loan.

Similarly though, any suppliers still outstanding should be paid out of the money from the sole trade debtors and are not a liablility of the company.

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By Jekyll and Hyde
01st Sep 2011 14:51

point 2

I would have thought point 2 were correct for the debtors (assuming trade debtors) senerio.

For me the debtors would have been invoiced by the sole trader and therefore would form part of the income within which the sole trader is taxed. The debtor may have been transferred onto the Limited company (ie. DR trader debtors CR DLA), but if this is the case then the sole trader would have received the money for the debt (credit to DLA). For me the income is still that of the sole trader and taxed on the sole trader.

In connection to ent relief. Current assets are not chargeable assets so I cannot see why they would attract any CGT and therefore relief. I accept that under a S162 incorporation they must be transferred and their value will reduce the base value of the shares. But I am assuming you are not talking about a S162 incorporation, but more of a S165 incorporation (ie. transferring some of the assets and not all).

For me debtors is not goodwill. They are 2 different things.

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By Discountants
01st Sep 2011 15:05

Yes I had become confused - thanks all

This just goes to show how important it is to have differing points of view!

Thanks to all who responded but especially to chesterfield accountancy with your description of how the sole trader has actually recieved the money for these debts - this was what confused me most!

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By blok
01st Sep 2011 16:07

.

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