Share this content

Transfer of sole-trader bus. - tax planning

Does this treatment of the transfer seem realistic and compliant?

Didn't find your answer?

Perhaps an overly long question - my intent is too give enough information to enable meaningful comment.  I'm trying to assist my wife in getting some value from the sale of her sole-trader business and to achieve this in a tax efficient and compliant manner for her and the buyer. 

  • Her one-person healthcare business which she operates mainly from rented treatment rooms at GP surgeries and by home visit. 
  • The business is below the VAT threshold. 
  • I've read a number of threads on here about such situations, franchising issues and the linked HMRC manual sections (ca71000 and ca72300) on goodwill and know-how. 

Following this, I understand that it would not be sensible for the transaction to involve purchase of goodwill or know-how.  The route we were thinking of going down would therefore be as follows...

  • Both parties would be happy with an early lump sum payment and then a percentage of revenues for one year. 
  • Lump sum is being split due to uncertainty on revenue for the buyer due to Covid/lockdowns.

1st half of the lump sum up front

  1. Creation and delivery of a direct mailshot campaign to clients
  2. Arranging use of the treatment rooms
  3. Design and supply of business cards and related branded materials. 
  4. Another option I believe is training.  The buyer has been operating in the same trade for a few years so this would be upgrading of skills rather than learning a new trade.

2nd half of the lump sum in 3 months

  1. Updating of the existing business web-site.  The web-site does not generate revenue directly, it's a shop-front but the update would be extensive.  
  2. Updating of all other marketing materials (includes things like Yell listings, Facebook, local magazine advert etc)

Note on the above - I am able to build the website and could invoice either my wife or the buyer separately for this if it helped. That would be either as self-employed - or through an existing VAT-registered limited.

Ongoing payments

  1. Advisory support related to client care
  2. Operation and update of the website etc (writing new blog articles, Facebook posts and other search engine optimisation work)
  3. Website hosting and related costs (domain, email).

For the avoidance of doubt, all of the things above which I am proposing to put in the agreement are real.  We would enter into a formal agreement covering all the above and would then act as agreed (i.e. no intention of this being a sham).  My thinking was that we have some limited flexibility to plan what is being paid for and what is thrown in for nowt. 

This is because I think we could justify a higher value for everything than the cost to the buyer.  i.e. It's not a totally commercial transaction as my wife is keen to see the business persist and for her clients to receive a high quality of care from someone she trusts. 

Would this permit the buyer to expense the full cost of the purchase and ongoing payments? 

We do plan to run this by an acocuntant and advise buyer that they need to do the same.  I was hoping however to get the bones of the approach down and then let my accountant check over a plan rather than start from scratch.  This is also because I always want to ensure I understand as much as possible what approach we're taking whilst recognising that expertise is needed to ensure we don't make a misstep. 

Thanks - Stuart

Replies (25)

Please login or register to join the discussion.

avatar
By Anonymous.
13th Nov 2020 13:00

stuartb wrote:

Perhaps an overly long question - my intent is too give enough information to enable meaningful comment.  I'm trying to assist my wife in getting some value from the sale of her sole-trader business and to achieve this in a tax efficient and compliant manner for her and the buyer. 

With respect, I don't think this is reasonable use of the site by a non-accountant. I would also suggest that you do not get involved in offering tax advice to a potential purchaser. There is a clear conflict between what the seller and purchaser want.

If the business turnover isn't even at the VAT threshold, I'd be surprised if the sums involved were that huge and legal fees documenting complex transactions and agreements about future business support will take a pretty big slice of money.

https://www.accountingweb.co.uk/any-answers/how-to-use-any-answers

“If you intend to plan a course of action based on what you read in here, you should instead be taking professional advice.”

Thanks (0)
Replying to Anonymous.:
avatar
By stuartb
13th Nov 2020 13:24

I did read the Any Answers rules again in full before posting. As I say in the post, my interest is in having half a clue as to what's going on before speaking to my accountant. Not planning on acting without. This has served me well for many years and meant that I have at least one ex-accountant who could not get tax treatment right and a much better one now :-) . The buyer will also be consulting their accountant.

I respect your view on whether or not this an appropriate question (though I'm not sure why or how you posted the comment as Anonymous).

However, there are a number of similar questions on handlng of goodwill etc. on here and the site is open to those with an interest in accountancy.

Given the technical issues involved I thought it might be of some interest and a break from furlough questions :-).

Thanks anyway for taking the time and trouble to respond.

Thanks (0)
Replying to stuartb:
avatar
By paul.benny
13th Nov 2020 14:31

A user has taken the name "Anonymous", in part, I assume, in response to the many who needlessly post their questions as anonymous.

I rather agree with his/her view - if revenue is below the VAT registration threshold, it's unlikely to be worth the time and cost of the solution you describe.

I note you are suggesting a earn out. I would always counsel sellers against such payments: the actual earnings are entirely outside the control of the seller and are open to manipulation by the buyer. Sellers invariably end up with less than anticipated.

As for a deferred element - you might want to consider with your lawyer how this will be secured should the buyer be unable or unwilling to pay.

Finally, wanting the best for the clients is laudable and may well inform your choice of buyer. But once the business is sold, it's sold, and you no longer have any say. You have to let go.

Thanks (2)
Replying to stuartb:
avatar
By Paul Crowley
14th Nov 2020 07:31

To be blunt
Your responder is using the ID Anon, he is not posting Anon
He is an expert and regular unpaid responder as mentioned by Paul

Concur with Anon and Paul

Thanks (1)
avatar
By frankfx
13th Nov 2020 13:37

'my interest is in having half a clue as to what's going on before speaking to my accountant'

my dear accountant

we are considering the following.

please kindly direct us to some resources to enable us get clued up , even half way , before a formal discussion. Which I am sure will be a more fruitful and cheaper meeting when we arrive armed with some bullet points.

thankyou in anticipation

yours

Thanks (1)
avatar
By Tax Dragon
13th Nov 2020 14:09

Why? Why any of that?

(And does the B stand for Baldrick?)

Thanks (0)
paddle steamer
By DJKL
13th Nov 2020 14:25

The deal seems far too complex, there are far too many future actions that require done and the complexity of drafting what happens if some of these fail to happen or if the purchaser disputes the quality of performance of these future actions will create an absolute monster of a sale agreement. KISS is a good maxim when constructing contracts.

Thanks (2)
avatar
By stuartb
13th Nov 2020 16:25

OK - fair cop. Too complex (and cunning? :-) ) and I should ask my accountant for some guidance before asking for some guidance (?) :-) Points taken.

FWIW...

Also some good points about the deal structure. I completely agree with these in abstract, but in this case, in a rare ray of light for humanity, both parties have already demonstrated over quite some time that they can behave honestly with each other.

The deal also has specific protections in place for the quality of care to the clients as it doesn't fully transfer for a year and there are bars to be met during that time (client satisfaction etc). After that, you're absolutely right and I'm counselling my wife the same.

Thanks to all who took the time to reply.

Thanks (0)
Replying to stuartb:
avatar
By Tax Dragon
13th Nov 2020 16:57

OK, FWIW, serious answer: what you have throughout your suggestion looks to me like payment for services. That's presumably deliberate, because you say you want to make the expense allowable for the purchaser. It may or may not do that, but, by the same token, why does it not make the receipt taxable as income (and within scope of VAT) for your wife?

Thanks (0)
Replying to Tax Dragon:
Jason Croke
By Jason Croke
13th Nov 2020 17:14

Its not clear to me if the wife provides taxable or medically exempt services.

What is a "one person medical service"? renting rooms and home visits could be an exempt supply like chiropody or could be someone who just clips the toe nails of old folks.

Medical exemption is driven by the person being on a medical register and performing medical services of which they are registered for, so it might be that turnover is £50m but all exempt or could be £25,000 taxable income but under the VAT threshold.

Thanks (1)
Replying to Jason Croke:
avatar
By stuartb
14th Nov 2020 07:37

Good point, but a whole 'nother can of cucumbers... She's well under the threshold anyway for now, but it was something we looked at a while back and took some initial advice on.

Our understanding then was that most of her services are medically exempt, but some are not and there are some grey areas. Certainly something we'd need to get planned properly by our accountant if it became relevant. I won't expand further as it's a (interesting) tangent and I've already stretched patience here :-)

Thanks (0)
Replying to stuartb:
avatar
By Tax Dragon
14th Nov 2020 08:17

I very much doubt that "Creation and delivery of a direct mailshot campaign to clients" etc is covered by any exemption, medical or otherwise. But TBH I haven't thought about that, nor do I want to. My point was simply that these supplies would be within scope. Sale of a business as a going concern is not. Whether that had any consequence for you, you wife or the purchaser should be on the list of things for each of you to discuss with your respective advisors.

Thanks (0)
Replying to Tax Dragon:
avatar
By stuartb
14th Nov 2020 11:40

Sorry - I had misunderstood your point. You meant the services proposed as part of the sale. Got it.

Thanks (0)
Replying to Tax Dragon:
avatar
By stuartb
14th Nov 2020 07:23

Yes, the intent was to avoid buyer having to pay for intangibles. This was meant to be the crux of what I was asking but I guess got lost in my overly long question. Thats for picking it out. The question was really whether this was a reasonable approach to take and that we weren't taking the Michael.

The income would be taxable for my wife. We're OK with that. I could and would deliver some of this (all the techie bits). My work has been wiped out this year so that works out quite well. VAT not an issue for my wife.

Thanks very much for commenting.

Thanks (0)
Replying to stuartb:
avatar
By Tax Dragon
14th Nov 2020 08:50

stuartb wrote:

Yes, the intent was to avoid buyer having to pay for intangibles. This was meant to be the crux of what I was asking but I guess got lost in my overly long question. Thats for picking it out. The question was really whether this was a reasonable approach to take and that we weren't taking the Michael.

So (just to make sure we're all clear on this) you are/your wife is knowingly overcharging for services and then selling capital assets at undervalue/nil. The purchasers must take advice before they buy on such unusual terms, as they could lose out. But here we are concerned with your wife, not the purchasers.

Your wife's tax position may well depend on the documentation for the deal. So she too must take advice to 'get it right', so to speak. There'll be legal, as well as tax advisor, fees here. And, while some of those might've been deductible for CGT in the normal course of events, be aware that they might not be allowable for income tax.

However in principle the cunning plan could probably be made to work (from your wife's perspective - I remain concerned for the purchasers). While there are reams of anti-avoidance rules that catch attempts to convert gains to income (which attempts were once rife because gains have historically attracted no tax or lower tax), there's not so much that goes the other way. However there are definitely trip-wires. One obvious one that you've probably already got on your list is that the gains on transfers of assets at undervalue may have to be calculated as if the sale was at open market value. But I reckon that good documentation could circumvent that issue.

It's high time for all parties to take advice.

Thanks (0)
Replying to Tax Dragon:
avatar
By Tax Dragon
14th Nov 2020 09:03

One quick additional point.

Tax Dragon wrote:

gains on transfers of assets at undervalue may have to be calculated as if the sale was at open market value.

It would be in the purchasers' interest for that to happen, because it gives them a base cost for those assets that they might not otherwise have. So if they are well advised, they might endeavour to achieve that outcome. So your advisors must then be as good as theirs to avoid it.

This is why wiser, older respondents have counselled against this road. They know about these conflicts of the interests of the parties.

Thanks (1)
Replying to Tax Dragon:
avatar
By stuartb
14th Nov 2020 11:42

Thank-you. Message received from all very clearly. I have overthought it and also could unwittingly stray into something totally artificial. Wasn't the intent.

FWIW - I don't think we would be overcharging for services - I think we could easily justify the costs.

But I guess the key is whether we are selling capital assets undervalue/nil. The website upgrade is (probably) a capital asset and we'd charge for that.

So it's really goodwill which is the intangible in the room.

Spoke to buyer this morning and indicated that we need to get advisors to suggest simple and compliant approach rather than me continuing to confuse matters.

Thanks again all. I'm happy to respond to anything further (least I can do), but I do feel I've taken up enough of your time. I hope that the thread can be of some value to those searching in the future. Perhaps it will help others not to repeat my potential mistake of overcomplicating something.

Thanks (0)
Replying to stuartb:
avatar
By paul.benny
13th Nov 2020 17:16

The amounts of money involved are probably significant to the parties, not to mention the emotional investment on both sides.

However good you believe the relationships to be now, once ownership and control change, relationships change. A complex agreement with deferred and conditional payment and with continuing services is a recipe for trouble. As DJKL said, KISS.

Thanks (1)
Replying to paul.benny:
avatar
By Paul Crowley
14th Nov 2020 07:36

Concur
I took over the practice (eventually) and found my former partners build a solid brick wall between me and them
We had been a 'partnership' for 30 years

Thanks (0)
Replying to paul.benny:
avatar
By stuartb
14th Nov 2020 08:04

I agree that we should be careful about judging what's a signficant amount of money to others. Thank-you for saying that.

Reality is that selling an owner operated business with no premises of its own and only a few fixed assets is pretty tricky. My wife has successfully grown the business and has several years of reliable profits to show. But it's still extremely tricky to persuade most potential buyers that they would be able to pick up where she leaves it.

She's only getting a small fraction of the real value out of this. We're fortunate that this is not financially significant for us. But she wanted to see what she'd built continue in safe hands and make sure that her clients were looked after (or at least give this a good start).

As small as this may be, we needed to find something which would not require significant payment up front and give confidence that by sharing risk my wife was also committed to helping the transition work.

The lump sum is still significant enough to the buyer that they need to take this seriously to make it work.

But I completely take your points on the complexity and risk to the seller of this type of arrangement. Wouldn't be first choice by any means. My wife does retain control throughout the one year transition and it's a clean break after that. She is also able to independently verify clients seen etc.

Thanks (0)
Replying to stuartb:
paddle steamer
By DJKL
16th Nov 2020 11:06

Notwithstanding goodwill amongst parties the deal needs to be properly documented- for instance what happens if Tweedledum and Tweedledee are not in control of the seller or purchaser three months from now, is this honesty transferable to others who may by then be in charge?

Never write a deal relying on trust and honesty.

Thanks (0)
avatar
By paul.benny
14th Nov 2020 12:16

Almost everyone responding to this thread has said this plan is a Bad Idea.

And every time, the OP says, "Yes, But..."

Thanks (0)
Replying to paul.benny:
avatar
By stuartb
16th Nov 2020 11:12

With (less) respect (than I've shown so far), that is not a fair reflection of my responses. You are of course welcome to your opinion.

Thankfully I can take the objective advice which is delicious and I'll just leave the attitude on the side as I find it a little bitter.

Thanks to everyone anyway - bye.

Thanks (0)
avatar
By Manchester_man
14th Nov 2020 13:08

Percentage of revenue, mail shots, after-sale updating of website, training, branded business cards and provision of other marketing materials - all sounds very much like a franchise agreement rather than a sale and purchase agreement.

Thanks (2)
Replying to Manchester_man:
avatar
By stuartb
16th Nov 2020 11:14

I think you're right with the slight difference that there was no ongoing commitment after a year. Anyway - academic now as we're asking the accountants to address having just given objectives rather than approach.

Thanks (0)
Share this content