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MIP Incorporating!

imeldabyeimeldabye Well-KnownRegistered Posts: 147
Hello everyone, I have a very small practice dealing mainly sole traders and partnerships so little experience with company accounts and incorporation. (I might add here, that I am a qualified MIP however severely lacking in experience: (I would love to work in practice but for personal reasons am unable) Anyhow I am going to incorporate myself and am drawing up a checklist:
1. Register with Companies House Q: Is it advisable to use a formation agent?
2. De-register as self-employed with HMRC and register the company for Corp Tax Q: Is it sensible to register the company after 1/4/2011 to avoid making the first accounting period longer than 12 months?
3. Register for PAYE in order to pay myself min wage with a view to paying dividends mid Financial Year.
Couple more questions:
Would there realistically be any Goodwill?
Home Office expenses; should I use the £3 a week rule or "rent" the company some of my study where I work?
Would someone mind giving this list the once over and see if I've missed anything? thanks :001_smile:
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Comments

  • imeldabyeimeldabye Well-Known Registered Posts: 147
    Gosh No-One?
  • burgburg Experienced Mentor GloucesterModerator, FMAAT, AAT Licensed Accountant Posts: 1,441
    1 - yes and yes
    2 - yes de-reg and put not in white space on perosnal ITR - copmany will auto reg for CT with HMRC when formed - as for waiting it depends on your circustances - LTD Co year will always run from date of reg to end of month reg'd the next year (i.e. reg today 24 Feb and 28 Feb 13 will eb Y/E)
    3 - not nec min wage - should be between the LEL for NI and the PA so for 2012/13 between £107 - £156 per week (£463 - £675 per month).
    Goodwill - depends but potentially yes
    Use of Home - for LTD £3 usually too low so look at a proportion of expenses to create a rental charge.
    Regards,

    Burg
  • imeldabyeimeldabye Well-Known Registered Posts: 147
    burg wrote: »
    1 - yes and yes
    2 - yes de-reg and put not in white space on perosnal ITR - copmany will auto reg for CT with HMRC when formed - as for waiting it depends on your circustances - LTD Co year will always run from date of reg to end of month reg'd the next year (i.e. reg today 24 Feb and 28 Feb 13 will eb Y/E)
    3 - not nec min wage - should be between the LEL for NI and the PA so for 2012/13 between £107 - £156 per week (£463 - £675 per month).
    Goodwill - depends but potentially yes
    Use of Home - for LTD £3 usually too low so look at a proportion of expenses to create a rental charge.

    Ian, many thanks for posting your advice- can I just double check on a couple of things:
    Do you have a recommendation of any particular agent?
    Does the rental charge have to be officially invoices etc as an income stream?
    Goodwill- any idea where I can get advice on how to calculate: all I have is office equipment and turnover of less than £25k! Do any formation agents advise re Goodwill? Can't believe I will have to go to an accountant for advice!!
    thanks again for bothering.
  • burgburg Experienced Mentor GloucesterModerator, FMAAT, AAT Licensed Accountant Posts: 1,441
    I use www.companiesmadesimple.co.uk and am happy with them
    No invoices needed but a rental contract is usually a good idea - see these http://www.accountingweb.co.uk/anyanswers/question/lease-agreement-home-office, http://tips.hrbs.biz/limited-company/charge-rent-for-use-of-your-home-office/
    Goodwill can be difficult to prove if challenged but I would say anything up to around £10k which is less likely to be challenged. Needs to be sensible and arguable though.
    Regards,

    Burg
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    imeldabye wrote: »
    Ian, many thanks for posting your advice- can I just double check on a couple of things:
    Do you have a recommendation of any particular agent?
    I've used www.4business.com in the past and found them very good.
    imeldabye wrote: »
    Does the rental charge have to be officially invoices etc as an income stream?

    No you don't need to invoice the business specifically, but if you're going to claim an apportionment of your home expenses then you need to be able to demonstrate that a. that he proportion you're claiming is reasonable and b. the base costs are genuine.
    imeldabye wrote: »
    Goodwill- any idea where I can get advice on how to calculate: all I have is office equipment and turnover of less than £25k! Do any formation agents advise re Goodwill? Can't believe I will have to go to an accountant for advice!!
    thanks again for bothering.

    Not my forte I must admit. There are lots of different ways to value a business, usually involving an average of the previous three year's profits. That said, if your turnover is less than £25k then the average of profits will be less, and HMRC will also want to strip out a nominal amount to represent the salary that would be required to employ someone to manage such a business... might you be better off simply selling the block of fees (which, presumably, has a value of £25k at 1 x GRF) to the new company?
  • jamesm96jamesm96 Experienced Mentor Registered Posts: 523
    Sorry, just one other thought; if the turnover is £25k then, depending on your costs, is it worth incorporating?
  • TreadStoneTreadStone Feels At Home AAT Licensed Accountant Posts: 280
    imeldabye wrote: »
    1. Register with Companies House Q: Is it advisable to use a formation agent?

    Personally, I'd just use Companies House. I would imagine you just want straight-forward memo & articles ?

    If yes, it will take you 5mins & £18.
  • BobJollyBobJolly New Member Registered Posts: 10
    Sorry, but I do not agree with using just ANY formation agents. Use a well known one like Waterlows. Reason = The cheap ones do not give you all the documentation you need such as preparing share certificates, Minutes, providing even a Minute Book and putting the initial entries in for you. They will even get you a brass plate. OK, there are not so many onerous tasks of recent, but why save just a few pennies and not know if you are fully compliant. This applies to your clients too.

    Bob
  • stevo5678stevo5678 Well-Known Cheltenham Registered Posts: 325
    Re the goodwill. I have to say having worked for 8 years in Chartered Accountants (incidentally I'm ACCA and AAT) I have never seen a specific calculation / thought process be used for incorporation of a S/T in practice when considering goodwill in this context.

    Every single instance (bear in mind the current partner of my firm used to be a partner at a top 15 accounting firm so knows his stuff) where i have done the job for this we have simply brought in the equipment etc into the B/S at the start of the year nothing for good will. You are simply bringing in this as capital introduced into the new company.

    If however you over value your assets EG NRV of computer equipment is £1000 and you introduce it as £10,000 then that is a different matter. For goodwill to be created the company will need to pay your old business a price for its assets (including intangible such as customer loyalty/brand value) above and beyond the net realisable value (NRV). So as long as your trying nothing fancy you need to do a simple journal to bring in your assets DR FA's etc CR Directors loan (cap introduced).

    Goodwill is only created through cost in this context ( I assume you haven't created and recognised internally generated good will on your old balance sheet)

    This is the practical way this is dealt with in a firm of Chartered accountants.
  • imeldabyeimeldabye Well-Known Registered Posts: 147
    Stevo5678 I am pleased you posted, as I was of this opininion also. The reason I doubted myself was that recently my sister-in-law who is a life coach/out placement training manager with her own very successful sole trader business incorporated, and she told me her accountants had brought in a significant amount of Goodwill. In my mind, aside from assets such as office equipment there would be no internally generated goodwill, as no manager brought in to do her job would be able to do her job as she does, in that she, and only she, has built up the businesss. Am I making sense?
    So yes, my instinct would be simply to CR DLA in the new business (ie mine- when I incorporate) and DR fixed assets.
    Haven't had BS in Sole trader a/cs- just simple p&l
    and burg- very very useful links for rental contract- many thanks
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    Re: Goodwill.

    Since the dawn of time, accountancy practices have generally been valued at 1 x GRF (Gross Recurring Fees). Use that and any inspector will find it difficult to argue with, particularly as there is such an active market of buying and selling blocks of fees.
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    stevo5678 wrote: »
    Every single instance where i have done the job for this we have simply brought in the equipment etc into the B/S at the start of the year nothing for good will.

    Wow. Sounds like a LOT of tax relief has gone begging.
    (bear in mind the current partner of my firm used to be a partner at a top 15 accounting firm so knows his stuff)

    I'm sure that will make the client feel better having paid too much tax.
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    Wow. Sounds like a LOT of tax relief has gone begging.



    I'm sure that will make the client feel better having paid too much tax.

    <devilsadvocate>

    If the goodwill was attached to the proprietor and not free goodwill, surely there will have been no tax consequences? :)

    </devilsadvocate>
  • imeldabyeimeldabye Well-Known Registered Posts: 147
    Dean, I would accept this 100% if my practice were larger and established in "its own right", with more than my handful of clients but I am concerned that the goodwill is not seperable from me.
    If I decided to to go the 1 x Gross income route would I then DR Dividends CR Goodwill to slowly amortise the Goodwill- can Goodwill be eliminated from the accounts or does it have to stay on the BS as a zero NRV?
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    Monsoon wrote: »
    <devilsadvocate>

    If the goodwill was attached to the proprietor and not free goodwill, surely there will have been no tax consequences? :)

    </devilsadvocate>

    That's a big IF when he says "Every single instance" has no goodwill.
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    imeldabye wrote: »
    Dean, I would accept this 100% if my practice were larger and established in "its own right", with more than my handful of clients but I am concerned that the goodwill is not seperable from me.
    If I decided to to go the 1 x Gross income route would I then DR Dividends CR Goodwill to slowly amortise the Goodwill- can Goodwill be eliminated from the accounts or does it have to stay on the BS as a zero NRV?

    It is separable from you. The value of most accounting practices is in the engagement letters e.g. an ongoing contract for services. It is that ongoing contract that you would be selling.

    You would DR Goodwill and CR DLA. Amortisation is allowable (assuming you were not trading prior to 1st April 2002) and should be written off over useful economic life. I think I wrote mine off over 7 years, or was it 5.. can't remember now!
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    That's a big IF when he says "Every single instance" has no goodwill.

    I know ;) Was just DA'ing :lol:
    It is separable from you. The value of most accounting practices is in the engagement letters e.g. an ongoing contract for services. It is that ongoing contract that you would be selling.

    You would DR Goodwill and CR DLA. Amortisation is allowable (assuming you were not trading prior to 1st April 2002) and should be written off over useful economic life. I think I wrote mine off over 7 years, or was it 5.. can't remember now!

    Fully agreed here. I did the same when I incorporated. 1x GRF for the accounting fees, over 5 years, thank you very much. Imelda, don't let the size of your business put you off - my goodwill/GRF was under £10k when I did it. I chose not to recognise goodwill on bookkeeping contracts as I had to personally deliver them. With hindsight, bookkeeping fees are also often sold at 1x GRF so I probably missed a trick there, but never mind.

    While your clients chose you and therefore there is an argument that the goodwill is not free, as Dean says, there is a ready market in blocks of fees, and if you actually chose to sell those to a third party now, you would get money for them, so I would include it like Dean says.
  • imeldabyeimeldabye Well-Known Registered Posts: 147
    Right then I'm going to do that. Just one last question (promise) on the Goodwill. When I amortise it out I DR DLA and CR Goodwill. How do Dividends come into play then? I was thinking that DR Dividends would reduce the DLA, or is it simply CR bank?? Still don't understand how I would be using Divis to reduce DLA and therefore reduce CT liabiblity? Or have I gone badly astray?
  • TreadStoneTreadStone Feels At Home AAT Licensed Accountant Posts: 280
    When you "amortise it out" you don't touch the DLA. It's an Intangible Asset so treat it as any other fixed asset. If, say, you end up with a valuation of £5k for your GRF's, why not write this this off over 5yrs @ £1k pa - DR goodwill amortisation and CR goodwill amortisation charge for the year.

    Dividends don't reduce the DLA, it's an entirely different entry, which in turn don't affect the CT liabilty.

    Either that or I've been going badly astray :lol:
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    Don't worry treadstone, you're fine :)

    Imelda, the good thing about goodwill is twofold: 1: as long as you started trading after 2002, the amortisation (read: depreciation) on the goodwill IS tax deductible (unlike regular depn) so reduces corporation tax. 2. The amount you recognise as goodwill is a debt to you and therefore the company can pay you this money tax free. Remember you have to declare this income as a capital gain, though, so depending on the amount, there may be CGT to pay (10% with entrepreneurs relief for any amounts over £10k ish).

    Dividends are DR Divs and CR Dla - they are OTHER monies that the company owes you and are a separate issue to goodwill. It's just that both amounts get credited to your DLA as they are both monies owed to you.
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    Monsoon wrote: »
    I know ;) Was just DA'ing :lol:

    I'm in full pedant mode today.. be warned!

    images?q=tbn:ANd9GcTPmfEfQ-NOhHyXSjNkqZuvnuXyq5MB9bW7YjPhanjFAdi0k5XZ
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    I'm in full pedant mode today.. be warned!

    I am my father's daughter. I can cope :lol:
  • imeldabyeimeldabye Well-Known Registered Posts: 147
    Monsoon, thanks. So if I were to repay this Goodwill debt to myself over 5 years, with £25k total Goodwill recognised then I would have no tax to pay as it would be under my CGT allowance? PLEASE say yes!! :crying:
  • stevo5678stevo5678 Well-Known Cheltenham Registered Posts: 325
    No goodwill LOL

    Yes there are ways to value goodwill when you sell your business. This post is not about selling your business it is about incorporating.

    Goodwill is only created when the price paid is above the 'tangible' assets.

    Dean I get your point with tax relief. Paying yourself from the company for the goodwill is a good way of taking out income below the CGT exemption limit. I agree this a very useful and sensible thing to do ( I am no tax expert but can see very clearly the logic in this)

    HMRC challenge people you overvalue their goodwill for this sole purpose, but I also agree with the 1 x fees in this instance is not extravagant.

    The original intention of this thread as far as I understand was to be compliant in the corporation process, not to gain a tax advantage which is a different debate all together? Now it has moved onto this I can't disagree with Dean.

    But I go back to my original post in that you do not have to legally create the goodwill when incorporating.
  • stevo5678stevo5678 Well-Known Cheltenham Registered Posts: 325
    Re: Good will sale, I understand that the gain in created when the contract of entitlement takes place not when you receive the cash.
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    rough figures:

    £25k goodwill

    Less £10k allowance

    Taxable gain £15k

    10% tax at entrepreneurs relief rate = £1500

    It's assessed in the year of disposal, not when it's paid.

    Overall it's a good tax saving but you have to pay the CGT bill in the first year. Sorry!
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    imeldabye wrote: »
    So if I were to repay this Goodwill debt to myself over 5 years, with £25k total Goodwill recognised then I would have no tax to pay as it would be under my CGT allowance? PLEASE say yes!! :crying:

    Actually, once you are a company you will probably want to preserve that debt owed to you for when you are a higher rate taxpayer. In the meantime, use up your personal allowance with salary/rent and take dividends to cover the basic rate band.
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    stevo5678 wrote: »
    The original intention of this thread as far as I understand was to be compliant in the corporation process, not to gain a tax advantage which is a different debate all together?

    The OP asked "Would there realistically be any Goodwill?" We answered yes.
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    The OP asked "Would there realistically be any Goodwill?" We answered yes.

    We did indeed :D

    Furthermore goodwill should always be a consideration on incorporation. It's not just about tax savings, it's about showing a true and fair view in the accounts.
  • stevo5678stevo5678 Well-Known Cheltenham Registered Posts: 325
    Hi guys I take on board everything that has been said, but in this particular context I don't think true and fair is very relevant. There is no requirement per the standards to create goodwill in this instance. It would either be for a tax advantage or to build up your balance sheet in day one.

    In this context It is artificially created goodwill in accounting terms as we are talking about a shuffle of papers between the same person (not entity).

    Plus true and fair is only specifially referred to in audit terms :)

    Whether or not you should create/recognise the goodwill is another thing.
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