Incorporation....goodwill or not?

Model500

Hi I have a client, a hairdresser with one part-time employee who rents a small salon with minimal assets and has no creditors.

Last year he was advised by a high street accountant (not his acting accountant - he didn't have one until I came along) to incorporate, which he did and was charged a nice fee accordingly. This was at the end of October 2015.

He approached me to take over his tax affairs in January 2016 and I duly compiled and completed his self-assessment for 14-15. He had a profit of just over £7k. It was while doing this that I discovered he had already started trading under a limited company.

I have now completed his sole trader accounts for 15-16 i.e. April to October 2015 and established a profit of £7k for that seven month period.

Up to end of Feb 16 his limited company profit was just over £4k and his Directors Loan account overdrawn by £5k. No basic pay included as yet.

So onto my queries:

1) Given the changes to entrepreneurs relief in Budget 2015, what is the best way of handling the transfer from sole trader to limited company accounts. Is it even worth calculating goodwill now?

2) As the sole trader business effectively ceased part way through the tax year, what tax issues should I be aware of?

Note: I haven't handled a change over from sole trader to limited company before please treat me kindly. Any help much appreciated.

Model500

Does anybody have any ideas on this?

KernowAccountant

I'll keep this brief.

I'm not entirely clear what you mean by "no basic pay included as yet". Either a salary has been paid, or it hasn't - history cannot be rewritten, otherwise that would be fraud.

It is never a case of whether it is "worth calculating goodwill" on incorporation. If freely transferable goodwill exists, it must be quantified. It is a chargeable asset which has been disposed.

There are only three routes to incorporation, namely via s.162, s.165 or for full consideration (claiming s.169H relief as appropriate). Once it is known what happened, the tax and accounting consequences will flow from that.

There are many things to consider on an incorporation, a brief (and non-exhaustive) list of items to consider follows:

- market value will be the default transfer values, subject to overriding claims/elections
- overlap relief
- NIC annual maxima
- no AIA, FYA or WDA available in the final period of account
- s.61, s.62, s.265 re: disposal proceeds (actual vs deemed)
- s.266 election
- s.178 election
- if there are losses: s.89/90
- and where s.162 is in point, s.86