I have been approached by a potential new client that deals in buying vans from auction, spends a few quid making them fit for resale and then sells them on for a profit. He currently trades as a sole trader and has had a couple of legal issues with people complaining that the vans have not been fit for purpose after being sold and therefore he has approached us with a view to continue to act as a sole trader but forming a company which will act as an agent to sell the vans on his behalf. The company will advertise the sale of the vans and when one is sold he will sell the van to the company at a true market value to sell on to the end user. He will retain ownership of the stock as a sole trader and is obviously only wanting to use the company for the protection of limited liability.
I am unsure how to proceed as havent come across this scenario previously and fully understand there is a moral issue here but is there any accounting reason why he can't set up his business in this way?
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I've dealt with a two company scenario similar to this. Company A holding the stock and Company B selling the cars. No reason why it couldn't be done. You might expect the company doing the selling to make a small margin just to cover its running costs.
Two questions you need to ask.
1. Can he deal with the admin?
2. Can he deal with the bookkeeping?
After that, there is still a whole range of issues relating to, for example, VAT and legal terms and conditions.
It's possible - but most of my former clients just wouldn't have been up to it. They'd've taken short cuts.
The safer bet is to transfer the whole shebang (see what I did there?) to the company. But then - he'd only have protection from claims by liquidating the company, so is that a solution ?
… forming a company which will act as an agent to sell the vans on his behalf. The company will advertise the sale of the vans and when one is sold he will sell the van to the company at a true market value to sell on to the end user.
Not a legal opinion but an agent presumably is acting on behalf of the legal owner who surely remains liable as the seller. So maybe agent is the wrong word??
I know it's not an accounting issue, but isn't there a serious flaw in the concept:
"The company will advertise the sale of the vans and when one is sold he will sell the van to the company at a true market value to sell on to the end user."
So the company will be advertising vans for sale that it doesn't (at that point in time) actually have title for.
IANAL but I think that runs foul of quite a few trading laws ... unless, possibly, it is clearly stated in the advert that the company is not the owner but is acting as an agent (or whatever the correct term is) - in which case the liability will remain with the owner (sole trader)?
I know it's not an accounting issue, but isn't there a serious flaw in the concept:
"The company will advertise the sale of the vans and when one is sold he will sell the van to the company at a true market value to sell on to the end user."So the company will be advertising vans for sale that it doesn't (at that point in time) actually have title for.
IANAL but I think that runs foul of quite a few trading laws ... unless, possibly, it is clearly stated in the advert that the company is not the owner but is acting as an agent (or whatever the correct term is) - in which case the liability will remain with the owner (sole trader)?
Estate agents advertise goods they don't own all the time. But I take your point. The plan could be tweaked so that the vehicle is sold to the company as a dealer. More admin and it's another downside to the plan. Especially if the trader is a short-cutter.
Also, the company needs to at least cover its costs, otherwise it'll be stuck with unrelievable losses, whilst the sole trader pays more tax than he needs.
Estate agents advertise goods they don't own all the time.
Exactly. They act as agent and you buy the property from the owner not the agent.
Thank you for this. My gut feeling was it wasn't an accounting issue as no loss to HMRC, however it didn't sit right with me and want you describe makes perfect sense and therefore if he wants to pursue this line of business set up then he certainly needs to seek legal advice.
Happens all the time (aka consignment stock) and agency agreements as others have mentioned
https://www.larking-gowen.co.uk/insights/blog-vat-in-the-motor-trade-con...
I'd be more worried about having to do 2 x VAT returns....
Just tell him to fix the vans properly.
(sorry couldnt resist!)
I don’t think that’s an entirely unreasonable comment. It seems a little cart before horse to put in place some “structure” to protect yourself from (what you would expect) is a normal business risk - assuming the business is acting reasonably. How big can a claim be for a faulty vehicle? Are we talking people being killed or seriously injured? What about just insuring the risk?
As far as he's aware they are road worthy and certainly not dangerous. He has been unlucky with issues with engines on a couple of vans but only on ones were they have been sold without warranty and sold as seen with discounts. These are the ones that have come back demanding money back, threatening legal action and one even ended with armed police involved as a gun was mentioned during a threatening conversation.
As far as he's aware they are road worthy and certainly not dangerous. He has been unlucky with issues with engines on a couple of vans but only on ones were they have been sold without warranty and sold as seen with discounts. These are the ones that have come back demanding money back, threatening legal action and one even ended with armed police involved as a gun was mentioned during a threatening conversation.
A separate company won’t protect the client from threats of violence. Any claim for damages has to have some basis or it will fail. If the trader trades honestly and in good faith, he surely can’t successfully be sued for problems.
Based on the facts you’ve given, I’m not sure what the proposed structure is intended to achieve.
He will make a complete dog's breakfast of this. I have never had a single client who would be capable of managing the correct separation of the two businesses. Just advise him to transfer the entire business to the company.
Have the vans actually not been fit for purpose, or has he just had people claiming that?
I cannot help thinking if he is selling faulty vans to the company, then the structure is not going to protect him like he thinks it will. The veil of incorporation can be lifted if it can be shown the directors took actions that directly led to the financial issues for the company. I cannot help thinking that selling the company a faulty van that got the company sued is likely to fall into that category of action.
Thank you for the reply, he has never knowingly sold a vehicle not fit for purpose. He takes his time and spends what's required to sort any faults he finds after collecting from auction. There have been a couple that have been sold as seen (without warranty) with clear issues explained to the purchaser who seems happy to accept a substantial discount only to return when the vehicle has broken down.
An all too common misunderstanding of the terms of the Consumer Rights Act 2015.Thank you for the reply, he has never knowingly sold a vehicle not fit for purpose.
groundy wrote:
Thank you for the reply, he has never knowingly sold a vehicle not fit for purpose.
An all too common misunderstanding of the terms of the Consumer Rights Act 2015.
It’s a not unreasonable comment and, indeed, the consumer guru, Martin Lewis, and the Consumers Association both use the term “fit for purpose” in connection with the act.
It’s not clear whether the OP is dealing with commercial or retail customers, or both.
The point is that if the dealer honestly describes what he is selling, he is unlikely to have the kind of major disputes with customers that might justify setting up some corporate body to protect himself.
Jeeze, you now taking legal advice as well as tax advice from Martin Lewis?
Anyways "fit for particular purpose" & "fitness for all the purposes for which goods of that kind are usually supplied" ARE terms under the Act. But NOT in the way most people use it.
Have a look at Sections 9 & 10 of the CRA 2015. The majority of the time when people spout out "not fit for purpose" they mean "not of satisfactory quality".
Jeeze, you now taking legal advice as well as tax advice from Martin Lewis?
Anyways "fit for particular purpose" & "fitness for all the purposes for which goods of that kind are usually supplied" ARE terms under the Act. But NOT in the way most people use it.
Have a look at Sections 9 & 10 of the CRA 2015. The majority of the time when people spout out "not fit for purpose" they mean "not of satisfactory quality".
Don’t be so childish. Martin Lewis has made more money dispensing consumer advice than you’ve made from accountancy and the CA have been around for 60+ years so happy to take their summary in a context where the finer points of consumer legislation are, in any event, completely irrelevant to the question originally asked.
So throw around insults rather than argue your incorrect point?
What's the amount that Martin Lewis or I earn got to do with anything?
If vehicles are sold by a business (whether Ltd or sole trader) the buyer has rights under the Sale of Goods Act 2015. So the trader must refund or fix vehicles that become faulty within 30 days of purchase, and there is usually a 3 or 6 month warranty on top on that (depends on the problem).
This may be what the potential client is trying to circumvent by introducing a Ltd company as a buffer between him and the buyer.
OP's client's attention should be drawn to https://www.themotorombudsman.org/knowledge-base/what-is-the-consumer-ri...
Only if/when that has been absorbed should there be a discussion as to desirability or otherwise of the proposed limited company/structure - including all the drawbacks (many indicated in responses above).
Then you can possibly ignore all the Consumer Rights Act points:-
https://www.legislation.gov.uk/ukpga/2015/15/section/2
Almost certainly ... although why we have to guess at facts in order to force out extra basic information remains a puzzle to me.
As does exactly what it is that OP's client expects in the +ve column (to compare with all the -ve items) when considering the proposed structure.
In other words, what are the "couple of legal issues" he's experienced with clients - and, more importantly, why is it supposed that the proposed structure provides any protection against an occurrence of similar problems in the future?
As must be obvious from many earlier responses, the answer to OP's actual question is ... No, there's no obvious "accounting reason why he can't set up his business in this way" (based on the limited info provided).
However that's not to say it is an advisable course of action - and, from the little we've gleaned so far, is likely to cause some unexpected (to client) consequences.