'Substance Over Form' principle in accounting

To what extent 'Substance Over Form' principle can be used in accounting?

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If for example I am a self employed writer and have book rights and film rights under my name and all contracts are under my name. I want to open a limited company and place all those affairs under the company. I am happy to agree that all income from existing and future contracts to be considered a company income even though legally they are under my name. It is very expensive to novate the contracts as they are with publishers and productions compnaies around the world and therefore will not be sensible for the LTD to spend such money to obtain a legal ownership of the contracts. So, I wonder if Substace of Form principle can be use here for the income to be considered a company income?

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John Toon
By John Toon
22nd Mar 2021 16:32

I think unfortunately in the example you give the substance over form principle would not apply. Typically this concept is used to interpret a legal contract where two differing accounting treatments for the contracted entity may apply - typical examples tend to be leases.

I suspect what is needed is some legal advice over how best to achieve your aims, this isn't really an accounting question. In particular the treatment of rights from a tax point of view can be quite different between a company and an individual and this is where you will get the most value from an accountant.

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Stepurhan
By stepurhan
23rd Mar 2021 09:15

Unless you do something more than just saying that you are happy for the income to accrue to the company, then both the substance and the form leans towards it being your income.

There might be a cheaper way of achieving your aim than novating the contracts, but that is a legal question.

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By I'msorryIhaven'taclue
23rd Mar 2021 09:36

Para 1 of this article calls what you've described nicknaming.

https://www.hwfisher.co.uk/authors-tax-trap-incorporations-that-go-wrong/

Pay attention to Para 2, which describes the "tax trap" that is the subject matter of the article (broadly, liability to income tax at the open market value, upon assignation of rights to the limited company. The trap is that the company also becomes liable to [corporation] tax).

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Replying to I'msorryIhaven'taclue:
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By tamasv
23rd Mar 2021 13:51

Thanks! Massively helpful!
I did not realised there are such tax implications.

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Replying to tamasv:
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By I'msorryIhaven'taclue
23rd Mar 2021 14:08

No worries. Para 6 offers a damage limitation exercise whereby the self-employed person sells his rights to Newco at market value; so that at least Newco is over the long term able to claw back most of the income tax payable (by the sole trader) via corporation tax relief.

But even that is untidy and potentially expensive. Would you still need to novate the contracts? I suspect so (although you'd need to ask a lawyer) because otherwise the existing contracts would potentially die with you (I imagine form part of your estate) which presumably would defeat the whole object of the exercise.

I have no connection, incidentally, with the author of the article I signposted. I just thought it a good initial overview for your purpose.

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By Mr_awol
23rd Mar 2021 10:57

Substance over form doesn't mean pretending that something happened when it didn't, sadly (or thankfully, depending on your opinion of making up contrived situations to artificially lower taxes payable).

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