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Revaluation of Land - CT impact?

I want to know the CT impact of revaluing land purchased and owned by my company

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Hi, My Company purchased some land with no buildings for £40k in December 2019. We hugely overpaid for the land as it has high value to us, but has an open market value of aroud £5k. 

Question: Can we get the land professionally valued at £5k and therefore take a £35k charge on the income statement that will reduce against Corporation Tax?

(The company owns no other land or buildings, and we have no intention of selling the land in the future)  

Thanks in advance for your help

Replies (68)

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Psycho
By Wilson Philips
06th May 2020 13:18

No

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By NicoleM
06th May 2020 19:12

as far as I am aware you set capital losses against capital gains in the same tax year. excess losses will be carried forward and set against capital gains in future years... i.e. not against profit from trade.

also it would only apply when you sell the plot...

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Replying to NicoleM:
By JCresswellTax
06th May 2020 13:52

How has a capital loss arisen here?

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Replying to JCresswellTax:
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By Onlyonephil
06th May 2020 15:20

Hi JCresswell,
I am not sure a Capital Loss has arisen as it has not been realised yet as the land is not sold and wont be.
The reason for my original question to the group is that I read the article below and it included the statement "losses on revaluation should only be recognised in the revaluation reserve to the extent of a credit balance on the revaluation reserve. Any remaining loss is taken to the profit and loss account." which made me think that we don't have a credit balance on the revaluation reserve or indeed a reserve, so we could take the £35k revaluation loss to the P&L and therefore against Corp Tax??

https://www.accountingweb.co.uk/business/financial-reporting/frs-102-pro...

Regards
Phil

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Replying to Onlyonephil:
Hallerud at Easter
By DJKL
06th May 2020 15:26

Yes you take the debit to the P & L under FRS102 but you do not recognise it for tax purposes.

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Hallerud at Easter
By DJKL
06th May 2020 13:52

Is there a chance the land was acquired as trading stock for resale, sounds unlikely, from what you say ,but worth asking?

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Replying to DJKL:
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By Onlyonephil
06th May 2020 14:20

Hi DJKL,
Unfortunately no. The land is the shared green space/gardens for a street of houses. Our company is the Residents Association for those houses. Which is why we were keen to purchase the land even at a value we knew to be above market rate. Basically 40 residents made micro loans to the little Community Interest Company we formed to acquire the land to keep it safe.
The headache we now have is that we have income of around £20k per year (from charges to the residents) Maintenance costs of around £10k and annual repayments of the micro loans of £10k. However we cant recognise the loan repayments as an expense so it looks like our little company makes £10k profit per year that it needs to pay Corp Tax on.
I was hoping we could revalue the land (correctly) and recognise the loss on the on income statement, thus reducing the Corp Tax.
Sorry I know this is only a tiny company we are talking about and I am sure the members here normally work on much 'bigger fish', but your help is massively appreciated.
Regards
Phil

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Replying to Onlyonephil:
Hallerud at Easter
By DJKL
06th May 2020 15:38

Afraid not-it is unfortunate that the lenders are needing to pay in the money each year, suffer tax on it within the company only for it then to be repaid to them less CT, they might be better sorting out a share issue , if possible,and swap the debt into equity and thereafter each pay half of what they currently pay each year to the CIC (Only £10k rather than £20k)

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RLI
By lionofludesch
06th May 2020 15:33

I'm not convinced that there's even a trade here.

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Replying to lionofludesch:
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By Tax Dragon
06th May 2020 15:48

I'm not sure anyone suggested there was.

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Replying to Tax Dragon:
RLI
By lionofludesch
06th May 2020 16:03

Well, once folk start discussing tax effects, I suspect they have it in mind, whether or not expressly mentioned.

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Replying to lionofludesch:
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By Tax Dragon
06th May 2020 16:18

IMHO the tax position is as set out above irrespective of whether there's a trade.

Just saying, like.

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Replying to Tax Dragon:
RLI
By lionofludesch
06th May 2020 16:27

Tax Dragon wrote:

IMHO the tax position is as set out above irrespective of whether there's a trade.

Just saying, like.

Did I not copyright that at some point ?

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Replying to lionofludesch:
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By Tax Dragon
06th May 2020 16:39

That's how I knew you would understand.

Anyway it's worth the fee... send me your bill.

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Replying to Tax Dragon:
RLI
By lionofludesch
06th May 2020 16:43

[chuckle]

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By Tax Dragon
06th May 2020 16:23

I wonder what the market value of the land is (for tax purposes, if that makes any difference).

It was, after all, recently sold on the open market and fetched £40k.

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Replying to Tax Dragon:
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By Onlyonephil
06th May 2020 16:50

The open market value really is around £4 to £6k. The owner we purchased it from acquired it for £6k just six weeks before ransoming it to our company. Very similar land locally sold at public auction for £4k 6 months ago.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
06th May 2020 16:51

Indeed. If the open market value is £5,000 one has to wonder why they didn't offer £5,001 to secure it.

EDIT - or £6,001

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Replying to Wilson Philips:
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By Onlyonephil
06th May 2020 17:08

A perfectly good and reasonable question Wilson. Sadly we were not dealing with good or reasonable people on the other side....a long story for my memoirs one day.

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Replying to Onlyonephil:
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By Tax Dragon
06th May 2020 17:17

As I am in lockdown, I don't mind reading a long story, so do let us know when your memoirs are out as to my little mind, if it wasn't worth at least £30k to somebody... anybody... else, there's no way you should have paid £40k.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
06th May 2020 20:13

The catch for the buyers is it is likely the only land they are interested in and the sellers knows it, however chances are there are no other buyers but the group who bought it.

If the buyers had patience I suspect there might have been a better price for them by staring out the seller, however it is amazing how long some people will take to be persuaded to sell, especially if they do not need the money.

At work I finally managed to negotiate a buy out of a 25% stake in one of our companies, the process had started about fifteen years earlier, in another similar possible deal we tried to buy out a half share in some land (a pro indiviso interest- not sure if you have that down south), seller flirted but could not agree price, we would not bump up our offer, stalemate. Twenty years on and no deal has yet been done, we in effect stare at one another over the barricades letting go the odd salvo but the land is not worth enough for either of us to go for an action of division and sale.

The moral, if you want something, and there is only one of them, and the other side knows you want it and they are not in a rush to get the cash, then unless you are prepared to wait you need to blow them out of the water with your high offer.(Though maybe there was a lower high offer in this case, we do not know)

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Replying to DJKL:
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By Tax Dragon
06th May 2020 22:45

I have allowed the story swapping to distract from my query. Although I can't help but wonder why, if this land was worth £40k to the community in question, they didn't get their rears in gear six weeks earlier and make a generous offer of, oh I don't know, £10k to the previous owner, that wasn't really what I was musing about. It's not uncommon that property might be worth more to X than Y. And valuation rules recognise the influence on value of a special purchaser (albeit always hypothetical). In this case, there actually was a special purchaser. Does that have any effect when we move back to the hypotheticals and valuations?

(I appreciate I've wandered from the question asked, but Wilson answered that in the first reply.)

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By Onlyonephil
07th May 2020 09:55

As I said all the whys and wherefores of the transaction are a very long story, but it is a story with a happy ending. Upon being informed the land it had enjoyed for 50 years was being sold. A community came together had a whip round, formed a CIC company and hired specialist property lawyers in just five days. The whole transaction was a rubix cube of rights of access, legacy covenants, rights of first refusal, rights to charge maintenance, a mix of both leasehold and freehold law, reneged agreements and bait and switch. There were five parties and to the final transaction by the end, not just two. We even had to get two members of the House of Lords and and an MP to weigh in and apply pressure to a couple of the parties on our behalf. The net of the outcome is that a community of ordinary folk came together to fight for its interests and ultimately got what it wanted. We were very well advised on the legal side of a complex transaction and negotiation, and that is not the issue. We knew the final price was more than open market value, but pounds were not the only currency on the table, and we were OK to pay the money for security and control. Could we have used time or courts to force a lower price? Probably. Was it worth the aggro, cost and risk? Probably not.
The reason for my OP is that we completely missed the Corp tax issue on the finance side. We never planned to turn a profit and therefore did not even consider CT. We missed the implication of not being able to recognise the loan repayments as an expense. I am now in the process of trying to find a way to mitigate the CT and thought there might be a window with (corrected) revaluation to take a loss on the P&L, but it appears it would not count for CT. Close…but no cigar!!

Thanks to all for your help and inputs on this one, all are much appreciated.

Back to the drawing board I guess….If anybody has any bright ideas in the meantime then I am all ears.

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Replying to Onlyonephil:
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By Tax Dragon
07th May 2020 10:06

Presumably the people paying the £20k are not the same people who are receiving the loan repayments, otherwise that sounds daft - refer back to DJKL's comments.

Whatever the reason for the special purchase, my (secondary) question as to whether it informs the current value (for tax, at least) remains unanswered. At least, unanswered in my mind and in this thread.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
07th May 2020 11:06

Really not sure how the recent transaction price works re informing the current valuation.

I have by chance just finished a call with my work colleague who is a long in the tooth, experienced, commercial property agent/surveyor (An interesting question on land certificates and titles to brighten my morning),when I hopefully call him back later (awaiting call back now from our solicitors) I will ask him if he is aware of how an exceptional purchase from a special purchaser impacts market values and is there say a disregard when using such a transaction as evidence re adjudication, compulsory purchase valuation etc?

I certainly know rent review led evidence may discard connected party sale/leasebacks etc and wonder re property valuation approaches if there are similar type provisions re exceptional transactions?

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Replying to DJKL:
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By Onlyonephil
07th May 2020 12:07

Hi Tax Dragon & DJKL,

Re: Tax Dragons Question “Presumably the people paying the £20k are not the same people who are receiving the loan repayments, otherwise that sounds daft”
The answer is: Yes, they are some of the same people but not all the people.
It might help if I explained the business model:
Total of 100 houses in the street.
All 100 houses contribute an annual charge of £200 for maintenance of the land
40 of those houses kindly lent £1000 over four years interest free to enable the CIC to acquire the land for the benefit of ALL 100 houses who are members of the CIC.
Annual finances look like:
100 x £200 = £20k income
£10k Maint costs (Grass cutting / tree surgery etc.)
£10k loan repayments
Result:
19% on £10k = £1,900 per year of CT which is annoying

Re “Whatever the reason for the special purchase, my (secondary) question as to whether it informs the current value (for tax, at least) remains unanswered. At least, unanswered in my mind and in this thread”.
I don’t know either. I was hoping that a valuation report from a reputable and accredited professional valuer would provide appropriate evidence of the current value?
@DJKL -I would be fascinated to hear your colleagues view if you get chance to bring it up?
What I took away from your earlier comment was that, yes we could take a debit to the P&L under FRS102 but it would not count for tax purposes, so we are blocked there even if the revaluation was around £5k?

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Replying to Onlyonephil:
RLI
By lionofludesch
07th May 2020 12:33

This looks like a Flat Management model to me.

People contributing towards their own domestic expenditure.

I'd be putting that to HMRC. It's not the classic model and I wouldn't be certain of success but I wouldn't want to be wondering what would have happened if only I'd asked.

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Replying to Onlyonephil:
Hallerud at Easter
By DJKL
07th May 2020 13:30

Spoke to my colleague re the valuation.

His view was that unless there was directly comparable evidence in virtually the same the location and same configuration of say a £6k or £10k transaction then the actual purchase price paid would dominate the current valuation considerations.

Whilst comparables could mitigate the considered valuation they would only really be able to supplant it if they were for a land area very similar re size and aspect, with similar type access and in close geographic area to the site in question, in the absence of these his view was that the price paid more likely would stand as the dominant factor re determining its current market value.

All of course academic, but interesting.

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Replying to DJKL:
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By Onlyonephil
07th May 2020 14:19

Thanks DJKL,
I think we could demonstrate that very easily. Similar land sold at Public Auction for £4k in Sept 19, and by similar mean damn near identical:
15 miles away, created by the same house builder, in the same year, the homes are even the same plan and design, leases and freeholds and covenants are on the same boiler plate, same aspect and access. The land was even owned and sold by the same company in 2019.
So I am sure I could convincingly nail the valuation at £4-6k.
The challenge though as you have pointed out earlier is that we cant count that revaluation as a loss in the P&L for tax purposes.

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Replying to Onlyonephil:
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By Tax Dragon
07th May 2020 14:34

You silly billies. If the other land was so damn near identical, you should just have bought that.

Out of interest, what does the business plan look like in 10 years? Will everyone still be chipping in £200pa (and if so what happens with the surpluses?), or is it set at that level just while you raise the money to repay the loans?

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Replying to Tax Dragon:
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By Onlyonephil
07th May 2020 14:43

LOL! Yes we should have all just moved!
The plan is not to make any money in the future, once all the loans are paid off we just drop the charges down to the minimum needed to keep the grass cut and leaves raked.

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Replying to Onlyonephil:
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By Tax Dragon
07th May 2020 14:56

So there may be some mileage around the kind of points Lion has been making.

There's no mileage whatsoever in the valuation point. On which, by the way, the other land [unless the community there is also about to be held to ransom...] isn't worth £40k - because you weren't (and, I presume, no one [subject to that caveat] is) willing to pay £40k.

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Replying to Tax Dragon:
RLI
By lionofludesch
07th May 2020 16:15

Can't believe folk are thinking about paying tax on money they chip in to repay money they lent to the company in the first place.

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Replying to lionofludesch:
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By Onlyonephil
07th May 2020 15:35

I know its just plain nuts, hence my asking for help here. We most definitely don't want to pay it. We spoke with a couple of accountants who flagged the CT issue and said they couldn't see a way out of it as the loan repayments are not an expense. I have been turning over every rock to find a solution.

I think your idea of seeing if we can run a Flat Management Model to get exempt from CT is probably the best route forward.

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Replying to Onlyonephil:
RLI
By lionofludesch
07th May 2020 16:02

Onlyonephil wrote:

I know its just plain nuts, hence my asking for help here. We most definitely don't want to pay it. We spoke with a couple of accountants who flagged the CT issue and said they couldn't see a way out of it as the loan repayments are not an expense. I have been turning over every rock to find a solution.

I think your idea of seeing if we can run a Flat Management Model to get exempt from CT is probably the best route forward.

Let us know how you get on.

These subscriptions aren't trading, nor are they rent. They're maintenance of a property to enhance the personal enjoyment of the subscribers' homes.

Take it to Tribunal if they don't agree. HMRC might not want to bother and concede.

Get your MP involved. And the Lords if you can wake them up.

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Replying to lionofludesch:
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By Tax Dragon
07th May 2020 16:15

The differences include: the property being maintained is not the homeowners'; and the homeowners are (at a guess) freeholders.

However, the reality is that 100 folk have all agreed (with or without arm-twisting… I may have to await the memoires to read the full story) to pump £400 each into a company, with no profit motive. Such a motive could well be enough to make the £400s taxable; its absence might be enough to avoid that. The fact that 60 folk needed time to pay and were effectively subbed by loans from the other 40 is the only reason the question has arisen.

I'm wondering whether the draft accounts laid out above are wholly correct. This all sounds like balance sheet entries to me, not P&L.

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Replying to Tax Dragon:
RLI
By lionofludesch
07th May 2020 16:26

Your advice is to roll over and meekly pay the tax, then.

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Replying to lionofludesch:
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By Tax Dragon
07th May 2020 16:34

Why do you conclude that?

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By Bobbo
07th May 2020 16:28

Does LPRA CIC in your bio by any chance refer to Lincoln Park Residents Association Community Interest Company... or is that just a coincidental abbreviation?

If flat management/service charge arguments fail, could mutual trading be worth looking at?

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Replying to Bobbo:
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By Dib
07th May 2020 16:42

It certainly sounds like a mutual business. Per Croner-i: A mutual business is one where the persons entitled to any surplus arising from the business are the same as the persons who contributed to that surplus. In effect the members contribute to a fund which is extended for their benefit, and any surplus after deducting expenses is returned to the contributors. Such a surplus does not represent a profit and is not taxable. The surplus is not taxable only if everyone who contributes to the fund is entitled to participate in the surplus and everyone who participates in the surplus has contributed to the fund.

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Replying to Dib:
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By Tax Dragon
07th May 2020 16:48

It's a company.

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Replying to Tax Dragon:
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By Dib
12th May 2020 14:14

Tax Dragon wrote:

It's a company.

Yes, and the Croner-i extract was from the commentary on "Companies carrying on mutual business" so I don't quite see the relevance of your comment although you are, of course, correct - it is indeed a company!

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Replying to Dib:
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By Tax Dragon
12th May 2020 15:10

Focus on the "a".

You can't carry on a mutual business if there is only one of you. It's mutually exclusive (see what I did there?)

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Replying to Tax Dragon:
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By Tax Dragon
12th May 2020 15:22

That said, I have now read the rest of the extract and the point you are making is - as always - more nuanced than my simple mind would have me believe. Well worth the OP reading the extract too. (It's actually the suggestion I was trying to make - badly - previously... I just didn't realise it was mutual trading in a different context to the one I was familiar with! Or, rather, that in this context it was called mutual trading. Sorry.)

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Replying to Tax Dragon:
RLI
By lionofludesch
12th May 2020 15:44

Do we know who the shareholders/members of this company are ?

The lenders or the subscribers in toto ?

If just the lenders, the mutual trading case is weakened.

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Replying to lionofludesch:
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By Tax Dragon
12th May 2020 15:53

In toto wasn't it?

I'm not reading back through now (our job here is surely to provide ideas to investigate, not answers that [I suggest] require sight of the paperwork?)… but I am looking forward to the memoirs.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
12th May 2020 15:59

"Toto, I've a feeling we're not in Kansas anymore."

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Replying to Tax Dragon:
Psycho
By Wilson Philips
12th May 2020 15:51

Are you saying that a limited company cannot carry on a mutual business? Or are we getting bogged down in semantics here?

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Replying to Wilson Philips:
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By Tax Dragon
12th May 2020 15:54

Just me in the bog, I think.

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Replying to Tax Dragon:
RLI
By lionofludesch
12th May 2020 16:10

Tax Dragon wrote:

Just me in the bog, I think.

Jeez - if I were Phil, I'd just go for it and ignore you.

No offence intended.

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