Sole trader (cash basis) asset transfer to LTD

2nd hand book seller unsure how to account for transfer assets from Sole Trader to LTD on Self [***]

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Hi 

I have been asked to help a friend of a friend last minute to fill in his self assessment and what I thought would be pretty quick seems a bit more complicated as he didn't seek professional help earlier...

Scenario: He was a sole trader (cash basis) incorporated into a Ltd and transferred over the stock assets (value of ~£32k) and cash assets (~£4,000) to the business. He moved over from being a sole trader to a Ltd in Feb '23 just before hitting VAT registration amount. The LTD has now hit the VAT registration amount and has registered to pay VAT from Jan '24. Company resells second hand books on eBay if useful.

My initial thought was for the sole trader to transfer the goods at cost to the Ltd, with director getting a DLA for the value of stock but doing this would take his sole trader SA over the VAT threshold (from £70k -> £102k). Further research says if the business is transferred as a going concern (TOGC), which essentially this has, it will be outside the scope of VAT so may still be possible?

I've also been reviewing whether this scenario fits under CGT / incorporation relief. If so, I'm a bit unclear about how to account for this on the self assessment form under CGT.

Is my thinking correct? Apologies if I'm being a bit dumb................it's early !

And thanks for any responses received.

Thanks!

Replies (24)

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By Matrix
28th Jan 2024 11:56

I don’t understand the resistance to the VAT registration.

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Replying to Matrix:
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By stevensmith1
28th Jan 2024 12:04

Thanks Matrix. It's that the transfer was done last year in Feb '23 and the VAT registration wasn't done at the time.

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Replying to stevensmith1:
VAT
By Jason Croke
28th Jan 2024 12:22

stevensmith1 wrote:

Thanks Matrix. It's that the transfer was done last year in Feb '23 and the VAT registration wasn't done at the time.


Why not? Things are done or not done for a reason.

Sounds more like the 'hey, I read on Google that if I incorporate a sole trader, I reset the VAT threshold I can avoid VAT registration" and yet what they sell is zero rated and so makes no difference whatsoever to the bottom line and indeed, probably losing out on a little input tax.

Sounds like your friend of a friend is devoted to doing tax planning by themselves, maybe let them carry on DIYing and avoid breaking up a friendship.

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By David Ex
28th Jan 2024 12:02

Assuming this isn’t a late January joke, I suggest you stop now before you get yourself and your friend’s friend’s friend’s friend, or whatever, into deep s**t.

My assumption is that you’re not a practising accountant. If that’s so and you’re a member of a professional body, you’re almost certainly at risk of breaching their rules. You’re also likely failing to comply with MLR law.

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Danny Kent
By Viciuno
28th Jan 2024 12:05

I'd probably say to friend of friend that it's more complex than you first anticipated and that you wont meet the January deadline. They will just have to suck up the £100 late filing penalty.

If you are just "helping out" - don't. Get them to engage an accountant with PI that they can fall back on if it all goes [***]'s up.

If this is your intention (and you are said accountant), then my initial thoughts would be:

Stock isn't sold to Ltd, just transferred at cost.
Laptop, although transferred at NBV should probably be transferred with a S226 claim.
Cash is the sole traders already
Incorporation relief will almost certainly not be appropriate (however if they did the Ltd set up themselves god know what they have actually done)
Assume VAT is the SHMS?

I'm sure others will probably have more helpful advice off hand, sounds like a nightmare to untangle. I certainly wouldn't be offering to do so at this time of year!

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Replying to Viciuno:
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By I'msorryIhaven'taclue
28th Jan 2024 12:10

Does "He was a sole trader (cash basis)..." sit well with a NBV on the laptop?

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By I'msorryIhaven'taclue
28th Jan 2024 12:18

Op, if you're filling in a 2022/23 SA return and recording a transfer that took place between 6th April 2022 and 5th April 2023:

(i) That doesn't align with "He moved over from being a sole trader to a Ltd in Feb '22 just before hitting VAT registration amount.". Are you filling in a 2021/22 SA return?

(ii) If Feb '22 was "just before he hit the VAT registration amount [threshold]" then the transfer was made prior to VAT registration and I'm struggling to see why you think VAT would be a TOGC factor.

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Replying to I'msorryIhaven'taclue:
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By stevensmith1
28th Jan 2024 12:22

Thanks for the reply. Apologies, it was a late one last night and I've updated the information in the original post.

He was about to hit VAT registration limit in Feb '23 in the sole trader business and this coincided with him registrating the LTD business in Jan '23 and moving across to trade from it in Feb '23.

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Replying to stevensmith1:
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By I'msorryIhaven'taclue
28th Jan 2024 12:29

Ahha, so "[Newco Ltd] registered to pay VAT from '24" should be "[Newco Ltd] registered to pay VAT in/from January 2023 [prior to the transfer from sole trader to Newco Ltd]."

Amendment: Disregard the above - the penny's dropped that he registered the new company in Jan 2023 means he incorporated it in January 2023; not he registered it for VAT in Jan 2023.

Let's just accept that he registered NewCo Ltd for VAT in/from early 2024.

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VAT
By Jason Croke
28th Jan 2024 12:35

If sole trader was over VAT threshold at the time it ceased and then incorporated, it can't just pretend that didnt happen, sole trader had to register for VAT but failed to do so (accepting it's all zero rated anyway) but then brings back as to ehy incorporate and njt register for VAT?

I'd leave this one well alone if you are just trying to help a friend, could end up falling out.

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Replying to Jason Croke:
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By I'msorryIhaven'taclue
28th Jan 2024 12:48

Other than the date should be Feb '23, have we had any change on:
"He moved over from being a sole trader to a Ltd in Feb '22 just before hitting VAT registration amount."

We also have: "The LTD has..... registered to pay VAT from '24"

We can't be certain whether that's Newco Ltd hit the £85k t/o threshold including the sole trader's b/f sales figures, or solely on its own account. Would anyone at HMRC care too badly about a late VAT registration from a "zero-rated sales" company that's always going to be claiming repayments?

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Replying to I'msorryIhaven'taclue:
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By stevensmith1
28th Jan 2024 12:54

Yes.

Feb '23 - Sole Trader business hit £70k sales and moved to LTD for reasons other. than VAT
Dec '24 - LTD hit £85k sales (exclusive of sole trader business sales) and was immediately registered for VAT
Jan 24 - began paying VAT

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Replying to stevensmith1:
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By FactChecker
28th Jan 2024 14:00

We still don't know what your role or qualifications are for 'helping your friend', but (deep breath) your attention to detail isn't looking too promising for that friend.

After all your previous corrections/clarifications, you're still playing fast & loose with the time machine - else how are you certain what happened (past tense) 11 months into the future?

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Replying to Jason Croke:
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By stevensmith1
28th Jan 2024 12:50

Hi Jason,

Thanks for the response. I've spoken to my friend and essentially he said:

- I didn't believe the sole trader business was over the VAT threshold at the time of incorporation as I didn't think the cost value of the transfer of assets would be included.
- I incorporated for reasons outside of VAT and transferred the business across. Once the LTD reached the VAT threshold I registered straight away

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Replying to stevensmith1:
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By I'msorryIhaven'taclue
28th Jan 2024 13:03

I guess your friend must read a lot of the old second hand books he stocks.

Advise him to stay away from the Finance section.

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By rmillaree
28th Jan 2024 13:31

can i check the elephant in the room herr

" and transferred over the stock assets (value of ~£32k) "

you are aware that you rules state need to add this 32k to profits on cessation of sole trader? presuming all stock has previously been paid for which i would imagine is the case.

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Replying to rmillaree:
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By I'msorryIhaven'taclue
28th Jan 2024 13:47

Ahha, good call RM. The OP alluded to that (t/o £70k up to £102k) regarding VAT but was silent on the matter of adding assets' values to cash basis accounts profits.

And the way that £32k is added to profits is it's "brought into account as a receipt"

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim70025

Oh dear, are we back to breaching the VAT registration threshold back in Feb 2023? Hopefully not, as it looks like a TOGC.

OP, you are opening a can of worms! Be aware that your client will have researched all this, and doesn't much like the outcome. That's why he's getting you to fill in his return... so he can protest his innocence at anything you overlook, and point the finger of blame your way.

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Replying to I'msorryIhaven'taclue:
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By rmillaree
28th Jan 2024 14:14

the vat may be an elephant - not the big one tahnkfully - (funny how its always an elephant if it matters (material large ) or irrelevant if it makes little difference)

If its all zero rated book sales vat registration could benefit as Jason has highlighted or they may be eligible for exception from registration on the basis most sales are zero rated.

Hey ho knowing our luck here is probably site selling technical manual books :) les hopw its more baba papa than manual of technical detail of how to build yourself giant wooden elephant.

ref togc both parties have to be vat registered for that to be the case

as ever a sketchy question open up a multitude of items that possibly need adressing - perfect fodder for last week of january.

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Replying to I'msorryIhaven'taclue:
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By rmillaree
28th Jan 2024 14:14

the vat may be an elephant - not the big one tahnkfully - (funny how its always an elephant if it matters (material large ) or irrelevant if it makes little difference)

If its all zero rated book sales vat registration could benefit as Jason has highlighted or they may be eligible for exception from registration on the basis most sales are zero rated.

Hey ho knowing our luck here is probably site selling technical manual books :) les hopw its more baba papa than manual of technical detail of how to build yourself giant wooden elephant.

ref togc both parties have to be vat registered for that to be the case

as ever a sketchy question open up a multitude of items that possibly need adressing - perfect fodder for last week of january.

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Replying to rmillaree:
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By I'msorryIhaven'taclue
28th Jan 2024 14:35

Heh heh! Let's settle on a mouse and an elephant

rmillaree wrote:

ref togc both parties have to be vat registered for that to be the case

Thanks, I was attempting to refer to a transfer of VAT registration but have been on the sauce! I wonder if I'll see an elephant in the room.

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Replying to I'msorryIhaven'taclue:
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By rmillaree
28th Jan 2024 15:36

I wonder if I'll see an elephant in the room.

is it pink and fluffy? - if it is the sauce is working

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Replying to rmillaree:
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By I'msorryIhaven'taclue
28th Jan 2024 15:56

No elephants yet, although I had an epiphany in which in which the seller in a TOGC is VAT registered and the purchasing entity becomes VAT registered as a result. VAT 68 or VAT 69... the latter might be a drink, not a form.

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Replying to rmillaree:
By Ruddles
28th Jan 2024 15:21

rmillaree wrote:

can i check the elephant in the room herr

" and transferred over the stock assets (value of ~£32k) "

you are aware that you rules state need to add this 32k to profits on cessation of sole trader? presuming all stock has previously been paid for which i would imagine is the case.


Possibly - may depend on how much was paid by the individual for the stock.
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VAT
By Jason Croke
28th Jan 2024 15:42

If it's not a ToGC then the sale of the business is plus VAT and potentially put the business over the threshold (depending on the precise turnover at time business was sold and how much it was sold for, etc).

If it is just the sale of stock, that wouldn't be a ToGC anyway and would also potentially push business over VAT threshold.

This is now beyond the realm of this forum, too many details missing, full picture not clear, friend is best served by getting proper advice to ensure things are right present and past.

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