Help...Goodwill

pinoyLiz

Hello guys,


1. How to get tax return allowance/relief for goodwill acquired when a business was purchased- (sole trader)? is this applicable?

2. Lease paid when you purchase a business (sandwich bar). How to treat this in the tax return. I can not treat the full amount as expenses right?

Please help me. many thanks.


Regards,
P

beverly hudson

The goodwill should be written off in the accounts using amortisation which is tax allowable.

The lease should be put in the accounts as capital and written off using amortisation.

Beverly

pinoyLiz

Thanks Beverly,

Correct me if I'm wrong is the goodwill can be amortize for 40 years?

Thanks a lot,
Regards
P

peugeot

Hi,

Amortisation is only allowable for tax if you are a company not a sole trader.

Regards
Steve

beverly hudson

I do not agree with Peugeot. I think you will find that sole traders can claim the relief from 1 April 2002.

pinoyLiz

Hi P,

Is it still allowed to amortise intangible assets? I've read on another forum that this is not acceptable now?

How would you treat the goodwill and lease in your balance sheet? If we can not amortise it as a sole trader how would get a tax relief for the money paid?

Thanks Peugot.


Regards,
PinoyLiz

pinoyLiz

Hi Beverly,

Do you have a link where I can find this in HMRC website?

Many thanks,
P

peugeot

Beverley,

Your citation of the April 2002 rules I suspect refer to where a sole trader incorporates. In these cases where a sole trader incorporates their business by selling goodwill to the new company then the company can only claim tax relief if the goodwill was created after 1 April 2002. If the business bought commenced before this date relief is not available (Finance Act 2002 Sch29 Para 118).

Pinoyliz,

Amortisation has not been abolished. I think whichever forum is saying you cannot amortise intangibles is getting mixed up between those intangibles that have an infinite life and those which don't. Generally if the intangible assets (say goodwill) has a lifespan of more than 20 years then you do not amortise - instead you test for impairment (FRS 10/IAS 38). Where goodwill (or other intangibles) have a lifespan of less than 20 years then you amortise.

Tax relief for the sole trader would be obtained on disposal of the business via CGT.

Kind wishes
Steve

pinoyLiz

Hi Steve,

This is getting clearer to me now.

How would I know the life span of the goodwill? is it up to the owner of the business?

What is your view when it comes to the Lease Steve? This can be amortise?

Thanks,
Liz

beverly hudson

Steve,

I am still not 100% on your answer. I have been on tax seminars where they say sole traders can claim amortisation from 1 April 2002. I think therefore I will get guidance from a third party to support my answer.

Beverly

peugeot

pinoyLiz wrote: »

How would I know the life span of the goodwill? is it up to the owner of the business?

What is your view when it comes to the Lease Steve? This can be amortise?

Thanks,
Liz

Goodwill:

Yes it is up to the business owner - I have seen goodwill written off over 5 years in one business but 20 in another.

The lease should be amortised over its lifetime, so if a 20 year lease write it off over 20 years.

Beverley,

Why get 3rd party confirmation of my answer - I have cited the area of legislation for you to check - just go to that area of the legislation for confirmation,

Kind regards
Steve

peugeot

I just noticed your previous post following Beverley Hudson's initial response.

If the owner wants to write it off over 40 years then you cannot amortise - you will have to do an impairment test. It's probably easier to write it off over 20 years or less to avoid this and just simply amortise the goodwill.

Regards
Steve

pinoyLiz

Hi Beverly and Steve,

Thank you very much for all your response.
Browsing through the HMRC website doesn't help (can't find anything).

Since goodwill was purchased by the sole trader, this can not be amortised as what Steve have just said and can amortised as what Beverley said. ( now I am confuse) Anyway, as I know I can not claim capital allowance for this, I am not sure how to treat this for income tax purposes.Pleas advise

ANy advise if I can account goodwill on the balance sheet?

Thank you guys.
Liz

peugeot

You need to account for goodwill on the balance sheet because that is where it belongs as an intangible fixed asset.

Tax relief cannot be claimed on the amortisation because it is a sole trader not a company.

Sole traders still have to prepare their accounts under UK GAAP for tax purposes so you still need to account for goodwill under FRS 10.

If the owner wants to write goodwill off more than 20 years - no amortisation instead do impairment tests. I have yet to see a sole trader that does impairment tests so I suggest writing it off less than 20 years to avoid this.

In terms of your clients self-assessment return, charge amortisation for the goodwill in the accounts to arrive at an accounting profit, then add it back to arrive at a D1 profit.

Kind regards
Steve

pinoyLiz

peugeot wrote: »

You need to account for goodwill on the balance sheet because that is where it belongs as an intangible fixed asset.

Tax relief cannot be claimed on the amortisation because it is a sole trader not a company.

Sole traders still have to prepare their accounts under UK GAAP for tax purposes so you still need to account for goodwill under FRS 10.

If the owner wants to write goodwill off more than 20 years - no amortisation instead do impairment tests. I have yet to see a sole trader that does impairment tests so I suggest writing it off less than 20 years to avoid this.

In terms of your clients self-assessment return, charge amortisation for the goodwill in the accounts to arrive at an accounting profit, then add it back to arrive at a D1 profit.

Kind regards
Steve

HI Steve,

Thank you vry much. Last one, can you please broaden the one colored in red? What do you mean by this? Charge amortisation in P/L ?

Regards,
Liz

peugeot

No problem.

Are you an AAT member in practice?

Schedule D1 is the reconciliation of accounting profit to taxable profit. Some expenses are allowable under UK GAAP but not for tax e.g. depreciation and amortisation (for sole traders). They are then added back to accounting profit to arrive at a taxable profit.

I just have some concerns about the work you are doing being slightly out of your remit. Are you ok with SA returns? The reason I ask is that it can be significantly costly if you prepare one without adequate knowledge and could also tarnish your reputation as an AAT MiP.


Kind wishes
Steve

pinoyLiz

I've just started

But still confusion made my head abit messy and unsure.

Thanks for your help

deanshepherd

I concur with everything Peugeot has said.

Amortisation, although should be provided for in the accounts, is categorically NOT an allowable deduction for tax purposes for a sole-trader. Add it back in the tax comp.

Beverley is wrong.

Dean

Agreed with Steve - had this very conversation with a client of mine a few weeks ago.

Regards

Dean

Poodle

Hi

I agree with Steve as well....except the phrase 'Schedule D 1' isn't that the old phrase?:001_smile:
Poodle

Dean

Poodle wrote: »

....except the phrase 'Schedule D 1' isn't that the old phrase?:001_smile:

Actually, for companies, that is still the correct terminology - however, it's now different for the sole-trader! :001_rolleyes:

Regards

Dean

Poodle

:laugh::laugh::laugh:

lgarside

Hello, I was just wondering with regard to the lease if this was rent then am I right in thinking this would be written off to the P&L?
What are the main differences between a rent agreement and a lease agreement??

With this examaple would a lump sum have been paid for the lease, therefore no monthy payments will be going through the accounts??

Gill Gittings

An interesting discussion and also one where I also questioned Steve's advice (sorry steve!)

I do not see how amortization of goodwill can be allowed for a company but not for a sole trader hencewhy I was questioning Steve's reply. Surely it should be an allowable expense if allowed for a company.

Another reason for questioning the replies is how does Joe Bloggs sole trader claim tax relief on the goodwill?:001_unsure:

Gill

deanshepherd

It's the rules I'm afraid. (see Schedule 29 of Finance Act 2002).

Joe Bloggs gets no relief against income tax but will get relief against Capital Gains Tax when he eventually sells his business.

Dean

Gill, surely you know it's to 'create an even playing field for all tax payers'

Oh, and "tax doesn't have to be taxing!"

Regards

Dean

Gill Gittings

Dean I only asked a simple question to clarify Peugeot's advice. Sometimes it's quite scary posting in the members forums because a couple of the members jump down your throat if you so much as question someone's opinion!:mad2:

Dean

Gill

My comment was only an 'off the cuff' comment. Light-hearted some would say. I obviously didn't come across like that, I apologise.

Regards

Dean

Julia

Steve's advice is correct - no goodwill write off is allowable under the UK's tax legislation until the sole trader either incorporates, where this could well be a "deemed" disposal, or sells the business where relief will be given through capital gains tax as already covered by steve.

This sort of question rears its head quite a lot with students and it is always interesting to hear the views of others as to why a sole trader cannot claim amortisation as a relief whereas a company can.

Julia

Monsoon

deanshepherd wrote: »

I concur with everything Peugeot has said.

Amortisation, although should be provided for in the accounts, is categorically NOT an allowable deduction for tax purposes for a sole-trader. Add it back in the tax comp.

Beverley is wrong.

Also in agreement here. Sorry!

beverly hudson

admittedly the notes I had did contain a typo. Apologies for the slightly flawed advice.