Taxation of goodwill on sale of a BnB business

Limited Company taxation on gain on disposal of goodwill and F&F

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A Limited Company with several interests in the travel industry purchased a BnB business in late 2014 paying 110,000 for the goodwill and 20,000 for the F&F. They added a further 30,000 of F&F after purchase.

They are now selling the BnB part of the business and hope to get 130,000 for the goodwill and 15,000 for the F&F.

Amortisation of the goodwill since purchase has been 100,000 and the F&F have been written down to NIL. AIA and CA have been claimed on all the F&F.

So the goodwill has a NBV and TWDV of 10,000 and the F&F have a NBV and TWDV of NIL.

Mu understanding is that the profit on the sale of the goodwill is 120,000 (130,000 proceeds less TWDV of 10,000) and the profit on the sale of the F&F is 15,000 (15,000 less NIL) and these amounts are included on the CT computation. The company have a large amount of brought forward tax losses which will reduce the CT payable

I do a lot more sole traders than Limited Companies so I just wanted to check I had the basics  for the CT600 right.

Also will VAT need to be charged on the sale of these assets?

Replies (10)

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By Accountant A
15th Jun 2020 20:18

[p9yf

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Psycho
By Wilson Philips
24th May 2020 13:23

There’s not really enough information in the post. Rather than tease it out, I agree with the initial response.

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By Openhouse
25th May 2020 16:32

Thank you for the responses and I'm glad I asked the question because I thought the numbers and calculations appeared quite straightforward. I was just checking I wasn't missing something obvious and maybe I am!
The sale of goodwill & F&F was not to a related or connected party.
With the goodwill this was purchased in late 2014 so before the critical 8th July 2015 date. Therefore the amortisation in the Accoiunts could be deducted for corporation tax purposes .. and was. So 110.000 of goodwill was purchased, 100,000 has been amortised in the accounts and claimed against corporation tax leaving a NBV and TWDV for goodwill of 10,000. If this is sold for 130,000 then I would calculate the taxable gain /profit on the disposal of the goodwill as 120,000. Are there some special rules on this that may be critical?
The sale of the F&F was also straightforward .. I thought!
20,000 was paid originally for F&F when the business was bought and a further 30,000 of F&F were added. AIA or capital allowance have been claimed on all the F&F (so a total of 50,000 of tax allowances have been claimed against corporation tax). So the TWDV of the F&F is NIL. The client expects to get 15,000 for the F&F so I believe as the gain on disposal is 15,000 then a balancing charge of 15,000 would be included on the tax comp.
I am interested to learn if I am missing something really fundamental here and if I am then I would be happy to suggest the client might seek alternative advice because as pointed out the numbers are not small.

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Replying to Openhouse:
By Ruddles
25th May 2020 18:56

Thank you for the further info. I’m happy to assist here. I don’t think you are missing anything, the only point to confirm for the avoidance of doubt being that the business was not purchased from a related party.

You mention VAT in your question- it depends on whether what is being sold is capable of being run as a continuing business. Most BnBs that I know of involve a property - what exactly is being sold here?

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Replying to Ruddles:
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By Tax Dragon
26th May 2020 06:47

Ruddles wrote:

....what exactly is being sold here?

OP, without this, we cannot answer the question and we cannot confirm whether you are missing anything. (Dreadful pun alert: it's the key piece of information - who sold the key to the door of the B+B?)

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Replying to Ruddles:
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By Rgab1947
01st Jun 2020 12:00

It depends on the sale contract. If purely an asset sale its VAT (not sure on the goodwill though). If as a "going concern" then if the VAT clause is in there and the buyer is registered no VAT.

Property is a different kettle of fish. Not sure how you sell a BnB business without property.

Agree with Taxdragon below.

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By Openhouse
26th May 2020 09:01

Many thanks gain. To clarify what is being sold.

The actual property that the BnB is being run from is owned personally by the Directors of the limited company. The goodwill and F&F of the BnB are owned by their Limited Company.

The BnB business was run through the Limited Company so income and expenses of the BnB flowed through the Limited Company. The Directors who owned the property charged the Limited Company a commercial rent for using the property as a BnB.

The Directors personally are selling the property from which the BnB is run and the Limited Company is selling the Goodwill and F&F relating to the BnB business. So the buyer will be buying both the property and the BnB business that is run from the property. They will NOT be buying the Limited Company however .. just the goodwill and F&F owned by the Limited Company that relates to the BnB.

There are no related or connected parties involved either in the sale now or the original purchase.

Re the sale of the actual property this is being treated as the sale of a commercial property by the Directors personally so no claim will be available for ER.

Hopefully this helps re double checking I've got the Corporation Tax right.

Re the VAT the property will continue to be used as a BnB; does this mean VAT will not need to be charged on the goodwill and F&F sold.

By the way this is a relatively new client; I was not invloved with the original purchase or set up 6 years ago.

Hope this helps and really appreciate the assistance

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Replying to Openhouse:
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By Tax Dragon
26th May 2020 17:48

IMHO, the planning based on separation of goodwill from the property (whenever that happened - could be that your current vendors bought that structure from the previous owner, could be they implemented it themselves) is built on sand. As has been implied in another current FHL thread, any 'goodwill' tends to depend primarily on the location - i.e. it attaches to the property, not the business operators. For similar reasons, I'm not convinced that the company has a viable business without the property, so VAT may well be chargeable.

But I'm not sure I would try to rewind it. To some extent, they are paying the price now anyway, with the loss of ER (as we all know it). (And a well advised purchaser, might worry about that on their own future sale.)

It's one of those difficult situations that often arise with new clients.

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Replying to Openhouse:
Psycho
By Wilson Philips
26th May 2020 21:06

I would say that this is one for the VAT experts - there are a couple on this site and if you are lucky one of them might happen to chance upon this thread.

I share Tax Dragon's uncertainty - while it appears that what the purchaser is acquiring is a going concern the components are coming from different vendors - neither component on its own able to be run as a business. But, I need to stop here because I really don't know the correct answer.

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By JD
01st Jun 2020 21:09

Can I throw in the possibility of a lease or licence for use of the business portion of the property to the company. It would make more sense than separation of the property from the Goodwill.

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