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Valuation of assets - sole trade to ltd

I'm looking for advice on reducing down a DLA after moving from sole trade to limited company

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I recently switched my business from sole trade to limited company. There were various debts that the sole trade business had (which could not be transferred to the limited company), and I have been paying off using income that the limited company received. This has resulted in very large directors loan balance.

I have been wondering if there are any ways I could legitimately reduce down the directors loan. For example, I believe that all the inventory transferred to the limited company was valued at the cost the sole trade business paid for it, rather than the actual market valuation. If I could value the inventory at a fair market price instead, that would reduce down my directors loan significantly. Is that an option?

I also read something about transferring goodwill online, and that this is would be valued using the sole trade profits. Is this something that could also help reduce down the directors loan? 

Ideally the accountant that handled the transfer and the first set of limited company accounts would have offered me advice on the above. But they didn't and I am now feeling stuck. I am moving to a new accountant shortly. I would appreciate any advice as to whether the above could be helpful in reducing my directors loan, but also if there are other things that my original accountant missed out on, which I could still take advantage. Finally, are there time limits I need to be aware of in taking forward any of these changes?

Thank you in advance!

Replies (15)

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By Bobbo
06th Jul 2022 21:34

Ways to reduce director's loan account that work:
- payroll a salary and credit the net pay to the DLA rather than withdrawing the money
- declaring dividends (if there are sufficient profits) and credit these to the DLA rather than withdrawing the money

Ways to reduce director's loan account that don't work:
- hoping someone will invent a time machine so you can rewrite history (the fact that you refer to the first set of limited company accounts suggests this transfer wasn't all that recent)

But to be serious:
- you say you 'believe' the stock was transferred at cost not 'market value'. But do you know this for sure?
- is there genuinely any goodwill? a goodwill valuation would likely deduct the market rate cost of someone to run the business from sole trade profits to determine genuine profitability.

Perhaps speak to your accountant about these before you leave them

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By Paul Crowley
06th Jul 2022 22:15

Increasing the stock just moves company profit to the sole trade
Have the accounts for sold trade been submitted?
More profit in sole trade costs tax at 20% and Class 4 NI at 9% of profit
More profit in company is taxed at 19% CT and divi tax on the divi, after deducting CT so 7.5% on a smaller figure

SO higher the stock, higher is the tax you pay

Goodwill should have been sorted if it existed when the trade moved
You give no clue on the trade so it is an unkown
You say the accountant did not advise
Well point one is that he saved you some tax by using (correctly) the cost figure, not the selling price.
It could be that he considered the goodwill point and judged the goodwill to be personal goodwill.
Would anyone really have paid you goodwill money if you tried to sell the business to some other person?
Per Bobbo above, the profit for an ordinary business needs to be reduced by the cost of wages for the self employed worker

Take any on line stuff with a pinch of salt.

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By Frod011
06th Jul 2022 22:12

Thank you both for your honest and prompt advice.

I guess I am stuck with the very big directors loan and will have to work on generating profits to put things right...

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By Justin Bryant
07th Jul 2022 09:17

Assuming the company acquired the entire assets & liabilities and you (for convenience) are merely paying the latter as (undisclosed) agent (effectively a nominee) on behalf of the company, can't you simply book those payments to DLA and hey presto, all is sorted? (The fact the creditors did not deal with the company should not affect things as far as the deal between you and the company is concerned.)

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Replying to Justin Bryant:
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By Paul Crowley
07th Jul 2022 10:00

The issue being that the liabilities massively exceeded the assets.
That is the only reason why the DLA would be negative
Hence DLA is the same whichever route is taken
Assets and liabilities would both be posted to DLA

This excess of liability probably contributes to why accountant 1 believes there is probably no goodwill
The company took on the insolvent sole trade?

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Replying to Paul Crowley:
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By Justin Bryant
07th Jul 2022 10:22

I'm not sure that's right, as the business would then presumably have been sold for a nominal £1 (assuming no goodwill), with the deal being as stated by me above re creditors.

Arguably the company would have benefited him by assuming his previous personal liabilities, but if it's all arm's length terms then it's hard for HMRC to challenge.

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Replying to Justin Bryant:
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By Paul Crowley
07th Jul 2022 10:59

If it was possible then surely that is the way any trader could avoid personal bankrupcy.
But not really as the sole trader still owes the money.
How the whotsit could this be arm's length?
Inherently in the company the balancing figure is fictional goodwill.
Disposed on on day of disposal and not declared or CGT paid by the seller

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Replying to Paul Crowley:
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By Justin Bryant
07th Jul 2022 11:07

Since the company is, as a matter of fact, generating cash, then it stands to reason that it can be arm's length i.e. by definition of the problem it can manifestly all be arm's length terms.

I'm not sure why this rather obvious potential solution has been overlooked by those commenting above.

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By bernard michael
07th Jul 2022 09:43

Ask your new accountant who will have access to ALL the information not just your summary

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By lesley.barnes
07th Jul 2022 10:50

Out of interest what were the debts from the sole trader that couldn't be transferred?

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Replying to lesley.barnes:
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By Hugo Fair
07th Jul 2022 11:12

And why was switching the business from sole trade to limited company seen as the solution to this problem? Or were there other reasons for the switch?

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Replying to Hugo Fair:
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By Frod011
07th Jul 2022 12:27

There was a bounce back loan and other credit card bills.

The reason for the switch was for limited liability for future borrowing.

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Replying to Frod011:
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By Hugo Fair
07th Jul 2022 13:01

Did the "credit card bills" relate to expenditure in the course of the sole trader business or were they just personal purchases?

But the biggest problem for sole traders to overcome if they can’t repay their bounce back (or other) loans, is that legally, there’s no difference between personal and business assets ... so any business debt is personally owed and therefore recoverable from personal assets.

Anyway the key word in your 2nd sentence is "future" - not the past borrowings that still need to be repaid and for which (it seems likely) you, and not your new company, remain liable.

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Replying to Hugo Fair:
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By Frod011
07th Jul 2022 13:13

The credit card bills were business expenditure, not personal.

Yes, I am very comfortable with the personal liability I have in the bounce back loan, I have every intention of paying it back. But what I have struggled with is that every payment I make towards is increasing my directors loan account. Is there no way it could be treated a legitimate expense of the limited company?

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Replying to Frod011:
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By Hugo Fair
07th Jul 2022 13:27

Anything that *could* have been done from that perspective *should* have been done at the time of incorporation and any transfers of assets/etc.

Otherwise everyone would, for instance, take out massive loans as a sole trader (for a big flash car or whatever) and then 'transfer' the repayments to a new limited company (in order to make those payments 'tax-free') ... wouldn't they?

An appointed accountant, with access to all your personal & business figures, just *might* be able to save you some tax - but that's not a guarantee.

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