Tax deduction for buying a salon

Accountant87

Hello MIP's!!

I work in management accounts and therefore don't deal much in tax at all.

My mother bought a hair salon last year as a sole trader. I am helping her to do her accounts.

I feel confident to do her SA100 but there is just one issue I am not sure of.

To buy the salon she had a loan of around £6000 from her partner. She makes monthly repayments with no interest being charged, just the principal being paid back.

Can the capital she paid for the Salon be a tax deduction? The assets in the salon have not been professionally calculated etc but I am confident they would all qualify for capital allowances bar stock.

If so, I imagine the treatment would be:

Cr Capital Introduced £x
Dr FFE £x
Dr Stock £x

And then the amounts which qualify for capital allowances can be offset in SA100???

And then the repayment of the loan to her partner would just touch the balance sheet and have nothing to do with tax as there is no interest being charged?

ANY help is VERY welcome!

T.C.

Surely purchase of the salon is a capital expense, but one which does not depreciate? I would suggest that is is held as a fixed asset with no reducing value.

Accountant87

Aye I would like something simple like that in the books but then what she bought on her purchase of the Salon were its assets - Salon Chairs, mirrors, reception FFE etc.

Guest

You need to establish what the £6k was for.
From your clients view they would prefer F&F, the seller however Goodwill, but the question is what was it for?
What was the seller’s interpretation of the deal, pound to a penny went on their return as a capital disposal, below threshold – no tax!

Monsoon

If they bought assets worth £6k for £6k then the double entry is Cr Loan, Dr Assets.

Whatever the asset value is, needs capitalising as a fixed asset; any money paid over and above this will be goodwill.

Surely the values were disclosed as part of the sale?

As to whether capital allowances are available on fixed assets (as presumably the original owner claimed them and then paid tax on the sale) I haven't a clue, never thought about it - I suppose so - definitely need to look that one up!

Accountant87

That's exactly what I'm getting at Monsoon.

Regarding the asset values - we have a very much abbreviated balance sheet but the values presented are NBV's and, well...... a bit useless.

So, then, how am I to claim capital allowances? And does it matter how I value the FFE for her own accounts? It's honestly just a small job really...

Monsoon

It bemuses me that people buy businesses without full accounts, or indeed that anyone can sell a business without full accounts!

The short answer is I don't know, I would have to look it up. Ordinarily I would assume the specifics would have been detailed in the sale agreement.

Sorry, can't be much more help on this one!!

Accountant87

Well I think you lack an appreciation of the fact that each circumstance is different.

Being a managing partner without actual ownership, for example, where you are well aware that the overall revenue streams year upon year is healthy and that the client base is satisfied and loyal - that sort of intimate knowledge is sometimes infinately more valuable than a set of full accounts, particularly when other investors are interested. Hindsight from the cosy seat of an accountant, as I know well myself, is a false philosophy to how the world of business ought to work.

Goodwill, at least for unincorporated entities, is not allowable for CA's. Without any professional valuation for the assets purchased the full sum paid for the salon, of which the loan forms part, I can't see how any claim for CA's would stand up.

Nevermind. Time to consult HMRC Manauls in a bit more depth.......

Monsoon

Accountant87 wrote: »

Well I think you lack an appreciation of the fact that each circumstance is different.

I take offence at that. I certainly wouldn't have been in business as long as I have if I didn't. I take pride in the fact that I am a business owner first and an accountant second, and I take great effort to not sit in a 'cosy seat of hindsight'.

I am well aware of course that many business deals are not done 'by the book', that accounts are not always viewed with the importance we accountants ascribe to them, and that sometimes things need deciphering afterwards. I'm still allowed to be bemused that a set of accounts - which any business needs to produce - isn't always factored in by either buyer or seller. That's a personal bemusement not a real-world-I'm-an-accountant-in-business bemusement and I apologise if I didn't make that clear in my previous post.

I think all of us on this thread would be interested to see what conclusion you come to with regards the asset values and any capital allowances claim. As well as the HMRC manuals, it may be worth asking on AWeb as well.

Good luck.

Accountant87

I certainly did not intend to offend you Monsoon. I work in an environment where you say what has to be said in a political manner. I suppose I can sometimes bring this "being a tit" attitude with me elsewhere. Apologies and big hugs.

Will let you know how my research goes.

Monsoon

Accountant87 wrote: »

I certainly did not intend to offend you Monsoon. I work in an environment where you say what has to be said in a political manner. I suppose I can sometimes bring this "being a tit" attitude with me elsewhere. Apologies and big hugs.

Will let you know how my research goes.

:-) Thanks, big hugs back! Please do keep us posted, I would be very interested to hear what the outcome is!

(I work in an environment where I can be my usual blunt and dizzy self, what you see on the forum is what you get in real life. Apart from the filing cabinet and suspenders. I don't do filing )

Accountant87

haha well it would be a big shame if you don't do the suspenders - it would simply destroy my mental image of the real Monsoon!

groundy

You mention abbreviated accounts, was the salon previously a limited company. IF so has she bought the shares or fix & fit, goodwill etc.

When I am unsure of the split I always insist that the client goes back to the seller to clarify how they have treated the disposal. HMRC manuals won't help with this one as the purchase needs to be treated as a mirror image of the sale.

I presume by the low sale value that solicitors were not used, however if they were they should have a breakdown of the sale.

I'm with you by the way Monsoon it never ceases to amaze me how many people purchase a business without consulting accounts. Not to offend the op who's mother purchased the business and I take your point that there may be an internal view of customer numbers and revenue streams, however this is only part of the picture and it is the overheads and salaries that can kill a business irrelevant of the level of turnover.

Accountant87

No, it was always an unincorporated business. I have sought the proper advice from an old friend who is considerably more conversant in these matters than myself. Abbrv accounts were only provided because the former owner never demanded a full set (now that is stupid - particularly when paying full market rate).

Stop brown nosing Monsoon groundy. Of course, revenue streams are only one facet of a much larger picture. You would have to be pretty naive to only see the money coming and make a decision on that basis.

burg

@Accountant87 - I understand your defence of your mother as that is only natural but I don't think there is 'brown nosing' going on just Groundy clarifying he agrees with Monsoons assessment.

As it was a S/T rather than limited company when you refer to an abbreviated balance sheet I believe you mean there was a profit an loss account and it was just a limited balance sheet possibly due to the size of the business??? In this case you may only have NBV's of assets as you described rather than a note showing original cost and depreciation.

If so then this will explain the loss of translation as I believe Monsoon and Groundy have taken it as abbreviated accounts i.e. balance sheet only which to buy a business on this basis would be potentially asking for problems.

Accountant87

There is no defence of a family member - I am debating the narrow view that a full set of accounts was of the highest priority in this instance.

I have made it perfectly clear from the outset that the basis on which a purchase was made was beyond the abbrv balance sheet.

I have encountered two broad types of tax accountants. Those who are dynamic and business minded and can actually give answers and then those who sit behind desks, tut, and can never actually give any answers. AAT seems to produce the latter.

burg

So if you didn't want the advice of us lowly AAT's then why ask?

On a forum the general consensus is you ask a question and people give their opinion!

The opinion was that a business shouldn't be bought on the basis of just details explained by the current owner and similarly shouldn't be bought by just seeing a set of accounts.

You need a combination of gathering intimate details about the business and it's inner workings and accounts to support the explanations.



So is the case of a full P&L and limited balance sheet or was there no P&L???

In terms of the loan no there would not be any P&L entries as there is no interest. It may not even be on the balance sheet as it may even get put as capital introduced and the loan arrangement remain private.

T.C.

What a lot of involved posts here. Back to basics. A simple business bought for a simple price with limited paperwork - it happens. I would still say that the business cost of £6,000 should be capitalised and not depreciated. I would then add any capital additions to this figure and then, one day, when it is sold, this figure will remain on the accounts to be used against the sale figure.
My opinion - keep it simple!

Monsoon

Accountant87 wrote: »

There is no defence of a family member - I am debating the narrow view that a full set of accounts was of the highest priority in this instance.

I have made it perfectly clear from the outset that the basis on which a purchase was made was beyond the abbrv balance sheet.

I have encountered two broad types of tax accountants. Those who are dynamic and business minded and can actually give answers and then those who sit behind desks, tut, and can never actually give any answers. AAT seems to produce the latter.

I don't believe anyone stated a full set of accounts was the highest priority - just surprised there wasn't one. That's a big difference. In terms of getting the business transfer accounting entries out, it would be the most helpful point but, as these are not available, everyone has tried to help as much as they can. We are entitled to our opinions as well as sharing our expertise. Nobody has said the business was bought with no knowledge, you appear to have inferred that all on your own.

This is a rare thread in that no concrete answer has been given. That's not because we are crap, it's because we don't know everything. It's certainly got nothing to do with being dynamic or not.

Considering this thread is your only post on this forum, which implies you don't know us and don't therefore know what type of advice is usually given from the very regular contributors on this thread, it's a darn cheek to come on here and then criticise all AAT members with a very sweeping statement. Au contraire, I find many non AAT accountants sat in their stuffy offices adding little or no value to their clients. There are good and bad in any profession and any qualification. Sweeping statements are nothing more than pointless and inflammatory.

Having been in a meeting for the last 3 hours and now only eating my lunch (I'm in jeans, by the way) I am slightly tetchy, but a little Dale Carnegie wouldn't go amiss - if you want something from someone, be nice.

groundy

I thought I had answered the question! The treatment of the purchase must mirror that of the sale. You MUST check with the vendor as to how they have treated the sale!

TC - you can not just keep it simple and capitalise with no depreciation. If the purchase includes stock this would be debited to P&L, if it includes Fix&Fit then CA's can be reclaimed remembering AIA may be available. If the purchase is pure goodwill then yes simple keep a note and this can be offset against any future sale to limit capital gains.

I certainly did not intend to offend and was certainly not "brown nosing" but backing up monsoons opinion and making a general comment about the type of people I have personally come across when buying existing businesses.

With regards to abbreviated yes I did think it may have been a company, again a simple mix up of terminology. In my dull sat at desk world with no life experience (just 13 years running my own succesful practice) abbreviated normally refers to abbreviated accounts (ie Limited abbreviated accounts).

As already mentioned if us AAT qualified are below your level why not just ask your expert friend in the first place as opposed to wasting our time which is given free of charge to try and assist you.

stefanboro

This might be what you're looking for:

http://www.hmrc.gov.uk/manuals/camanual/CA15100.htm

If the trade is treated as continuing when the succession takes place, capital allowances are calculated as if the successor had carried on the trade and owned the assets from the outset.

So probably no scope to claim capital allowances as they have already been claimed.

For sole trader:

Dr Salon FFE Investments - Cost of purchase of salon
Cr Capital Introduced

Dr Drawings - Amount of loan
Cr Loan

Dr Loan - Amount of loan repaid
Cr Capital Introuced

Answer. Simples. Might be a bit wrong, but mostly right.

groundy

Stefanboro - does the link not refer to carrying forward assets that have not been purchased, whereas the op mentions a sale value of £6000. Therefore this is not a succesion as the business has been acquired. Which means an agreed split of what has been sold should have been agreed at some point. However, if this has been overlooked you must refer to the vendor for their treatment of the sale.

For example if they have treated the sale as goodwill then you can not claim to have purchased the stock and fix & fit.

Apologies if I have misread the link

stefanboro

Sorry groundy you're right - was very busy at the time. Still, I imagine the principal is right. I am interested. Will research further. I thought the £6,000 loan only formed part of the purchase price paid for the salon?