I had been at a client to incorporate for years and gave up trying. Now that I've lost the partner who specialised in this has left, the client's mate has told him that due to goodwill, he won't pay any tax for years if he incorporates. As I say, this isn't my area but I don't want to lose the client.
The self employment has been going for decades and the turnover is £250K.
I'd be interested in any suggestions. I'm not very good at asking for help, but I think I may need someone to hold my hand through this.
Oh, the old "my mate says.." - don't you love clients who would rather take the advice from someone who knows sweet FA about tax?
I would agree, if this is an area that you don't know much about, you would be as well getting someone to help you out (which is in no way meant to be condescending).
In the meantime, to get you going...
The goodwill must be genuine. It must be 'free' goodwill and have a value that someone else would be willing to purchase.
The value is variable and subjective, but as a rough guide, you can take 3 times net profit. So if net profit is £40k, goodwill could be £120k. NB you could reduce the NP in respect of a market wage for the owner.
The taxpayer would be looking at Entrepreneurs Relief under CGT, roughly @ 10%, due with their IT.
The company would get tax relief @ 20% on the goodwill amortised.
As a newco wouldn't have any cash, the journal would be dr goodwill, cr DLA. Any withdrawals aginst the DLA would be tax free.
You would be advised to get HMRC to agree the goodwill figure before you complete the personal tax return, just so they can't come back and disagree with the valuation.
There, a few things to think about. A lot of it depends upon how much the goodwill is.
Another point to note, if the sole trader has been 'running for decades' there may well be an issue, as goodwill will have been generated pre April 2002 and therefore not allowable for amortisation which will have an impact on the amount of corporation tax relief available.
Hi again. Thanks very much for your helpful replies and it's not in any way condescending. The business started in the 1960s but really took off in the 1990s. I'd thought that as there has been a slight decline since 2002 then there would not be much in the way of Goodwill. Shows you how much I know about it :o)
There should be over £100,000 of Goodwill to draw upon so I'm starting the process of getting an independent valuation and forming a new company.
So, if you have a sole trader who commenced before 2002, what are the tax advantages to the new Ltd/director co if they can't amortise the goodwill?
Although the company won't be able to get tax relief on the amortisation, the introduction of the goodwill will still result in the director's loan account being credited. The director can then withdraw this tax free, whilst (presumably) only paying 10% capital gains tax on the value of the goodwill.
The limited company may also benefit from having a stronger balance sheet, e.g. in terms of credit rating or when trying to raise finance.
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Pearce & Co - Chartered Accountant and Chartered Tax Adviser
The tax free benefit to the owner is only if they are a higher rate tax payer? They can take dividends to the higher rate threshold and then use the goodwill money after?
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
