Sale of Accountancy Fees - Tax Advice

Crunch

Hi

I am selling my fees and I was advised by the broker to selll the fees not the business. as it's easier.

Now I am no expert on capital gains tax and it's been year's since my exams so apologise for my stupidity but here we go:

My business is a limited company and VAT registered.

Questions
a) would I raise an invoice for the consideration plus VAT?
b) will the consideration fall into the P&L and be subject to Corp Tax or be treated as CGT?

There are no assets for sale so can this all be classed as goodwill?
Remember this is a ltd company.

What I would like, is to treat it somehow as a capital gain. My wife and I are the only shareholders so our exempt CGT would cover the entire proceeds.

c) In order to be a capital gain, would our business had to be a partnership and not a limited company?
d) If we treated the sale as a sale of the limited company (ie selling our 2 shares) would that then be a capital gain and able us to utilise the exempt allowances for CGT? If yes what is invovled in this as the purchasers only wants our fees and not the debtors, creditors, bank, etc?

I know I should know this but I don't, so if anyone can advise me on the most tax efficient way of selling the fees I would be very grateful.

Thanks.

Monsoon

If you are selling the whole business then you would be selling your shares in the business, and that would be subject to CGT. This is better from a tax persepctive for you.

If you are selling a block of fees, then the limited company is selling the block of fees, and will pay corporation tax on it. This is better from a tax perspective for the buyer, and is less risky for them. You would then need to extract the profit from the Ltd Co and close it down.

I don't know of any middle way, though I understand there are clever ways to structure the sale in order to benefit both parties.

Crunch

Thanks for your comments.

The sale has been positioned by the broker as a sale of fees and not the company, which I guess is done to attract the buyers which is less hassle for them. I agree from my findings that this will be a chargeable gain for the company subjected to corporation tax.

If I was selling the shares of the company it would then become a personal capital gain where we could use our exempt CGT allowances. Also entrepeneurs relief could be the way to go if it made sense. I could persuade the buyer to do this maybe to save me £4k but not sure of the implications to this and also do not wish to put him off. The bank balance, debtors and corporation tax creditor etc. Not sure how this is calculated in the purchase cash consideration?

I am guessing the buyer is keen as it not complicated for them just buying the fees. Although I may be paying the C.tax which is a shame this way has produced a buyer which I should be thankful.

Maybe i should have set up a partnership a month ago, took over the ltd company fees. The ltd company becomes dormant and then sold the fees as a partnership. This way the sale of goodwill would be a capital gain which my wife and I could have used our exempt CGT allowances. Therefore saving the £4k.

If this is true, it's most annoying I did not look into this earlier.

Anyone else know a way around this?

K H

I have recently come across this issue.

Did you originally sell the goodwill to the company? In which case the capital gain (from the sale of the fees)will be reduced.
The gain in the company will betaxed at CT rates and at the end you should have a company with just cash in the bank and revenue reserves.

Then the idea is to wind the company up (under Extra Statutory Concession C16) then the cash left can be treated as a capital distribution rather than dividends and subject to personal CGT and then your annual exemptions and entreprenuers relief kicks in.

I hope this helps.

Crunch

Thanks.

Sounds like we still have to pay CTax which is what I am trying to avoid.

Monsoon

K H wrote: »

Did you originally sell the goodwill to the company? In which case the capital gain (from the sale of the fees)will be reduced.

Not necessarily - it depends how the goodwill was accounted for on incorporation.

Crunch - you're probably going to end up with the same in your pocket either way, give or take.

Either you get more money for the fees and pay more CTax, or you get less money for the shares (though as I trype this I realise that the exempt amounts plus ent's relief means you'd have to get paid signinficantly less for the shares vs the fees. Do the maths and offer that to the broker).

You couldn't have transferred out to a partnership to save that much tax as the company would still have to pay tax on the disposal.

Crunch

The ltd company started with no goodwill. We have built the fees up from nothing to 25k. So there is nothing to reduce the goodwill gain.

deanshepherd

Just thinking out loud for a moment..

What you are selling is your letters of engagement. i.e. ongoing contracts with your clients. Although not recognised on the balance sheet these are an asset of the company. The only way to get CGT treatment (ignoring the share sale which no buyer will go for unless you hive off into a clean company) is to transfer these assets into personal hands prior to onward sale.

Switching scenarios for the moment.. if an employee who uses a company car leaves the company and the employer allows them to keep the car, they are subject to employment income rules as an asset transferred. There is then nil proceeds in the CA comp because the transfer has been subject to tax elsewhere.

Bearing that in mind.. would it be possible to distribute the ongoing contracts as payment in lieu of a cash dividend? If so, would that distribution be assessed on you only as a dividend and have 'nil proceeds on disposal' in the corporation tax comp of the company?

If you are a basic rate taxpayer, or can at least manage to be when the distribution is made, then perhaps that could minimise your tax.

Obviously needs looking into properly. Just thinking up ideas..

K H

Again, just thinking out loud.

Assuming that the company is going to cease to trade how about paying a golden handshake to the directors equivalent to the gain?

deanshepherd

K H wrote: »

how about paying a golden handshake to the directors equivalent to the gain?

That would move the gain from corporation tax to income tax (and NI) but not to capital gains tax.

Jmann

K H wrote: »

Again, just thinking out loud.

Assuming that the company is going to cease to trade how about paying a golden handshake to the directors equivalent to the gain?

Just adding to Dean's comment, that as the business is closing down, not whole amount will qualify as an allowable expense. I think 3 x statutory redundancy amount qualify as an allowable expense. So it may not work.

Crunch

All this sounds very good. Thanks to everyone for your comments.

Question
Is it possible to transfer the clients into a newly formed partnership at NIL or minimal value? just as if we wish to trade as a partnership and no longer trade under a limited company.

Then we as a partnership sell the fees which would then fall as a personal capital gain split between us? Therefore our capital gains exemption/allowance would cover the gain?

Anyone think this is possible?

Got to move quick as about to sign a contract end of week/next week.

AS06

Intrested to purchase the fees

Hello Crunch,
I am member in practice in Manchester and i am also intrested to
purchase a block of fees.

If your practice is base in Manchester area please contact me.

Tel: 0161 8326422
Email: admin@gbaccountants.co.uk

Thanks