Tax Query on disposal of business

sjkrsjkr Feels At HomeMAAT, AAT Licensed Accountant Posts: 75
in Tax
Hi all,

I have a client (ltd company) who is selling his business. Unfortunately he cannot realise a very big price for it, and is selling it for £25k (he originally purchased it for over £70k). The company at the moment owes him and his wife (the only two shareholders) around £30k which they put into the business when they purchased it. He has asked me whether he should take money out before he sells it as drawdown of his capital, so that the business owes him less when he sells, or as wages to lessen his Corporation Tax.
I'm thinking wages would be the sensible solution, however it is then likely that the company will owe them money that it cannot repay them as they are selling at such a low price - what happens in this situation? Anyone any thoughts?

Regards,

Julie
RyanMIP

Comments

  • RyanMIPRyanMIP LincolnshireRegistered Posts: 55
    Errrr, what?
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    I know. They have had the business for sale for a long time and are desperate to sell it. £25k is the only offer they have had. Shockingly bad but they are going to accept it just to be able to move on.
  • douglasstrouddouglasstroud Registered Posts: 124
    I'm confused, you say the company owes them 30K but then talk about taken it out as wages, how is this money recognised in the accounts at the moment? How was it introduced? as a loan?
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    It was the shareholders own money which they used to purchase the business at the outset and is shown in the accounts as Capital Introduced. They were originally taking a salary from the business and paying PAYE, but then stopped paying the salaries and took money out as drawdown of their original investment instead, to avoid paying PAYE. This then impacted on the CT bill, as of course their salaries were expenses whereas taking out the capital is not. Now they are selling the business at a massively reduced price and have asked me whether they should class the money they take out in the meantime as drawdown of capital, or as salary. I should add that I have not been responsible for their payroll, they do their own, I only deal with year end and CT so have to deal with whatever they have done!
  • RyanMIPRyanMIP LincolnshireRegistered Posts: 55
    This makes no sense whatsoever.
    douglasstroud
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,436
    What are they selling? Their shares or the assets of the company?

  • douglasstrouddouglasstroud Registered Posts: 124
    Agree with above, I'm even more confused
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    They are selling the assets. Aren’t sure whether they will dissolve the limited company afterwards or use it for a new venture.
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,436
    And what did they buy for 70K and how is this showing on the balance sheet?
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    Only £8,700 of tangible assets were purchased, there is £61,700 recorded as goodwill
  • douglasstrouddouglasstroud Registered Posts: 124
    I am still lost,
    'Capital Introduced' do you mean it's in the DLA, a long term loan or share capital would be interesting if you could post a copy of the balance sheet, how was the original purchase financed, I know you say 30K was the owners but what about the other 40K? Is that paid up?
    Why would they want to take money owed to them by the Company as a salary, surely they can still take a salary up to N/I threshold without having to pay anything (unless they have other employment) and leave the 30K to be taken out tax free dependant on how it sits on the balance sheet
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    It’s not share capital, they intended it as a long term loan. It’s shown in the balance sheet as capital introduced, I should probably move it to loan. The owners bought the business with £70k of their own money, but have drawn around £40k back out already. They weren’t taking money owed to them as salary. They were taking salary and paying PAYE in the normal manner, leaving the £70k as owed to them. They then stopped paying salary, and started taking the money owed to them out instead. This is because one of the owners has other employment and is in the higher rate bracket already. As they are selling the business at a very low price, there will not be enough cash to pay them back the remaining £30k at the end, hence their question to me, should they take as much back as they can, or would it be beneficial to take salary to reduce corporation tax?
  • RyanMIPRyanMIP LincolnshireRegistered Posts: 55
    This is fascinating.
  • RyanMIPRyanMIP LincolnshireRegistered Posts: 55
    Please could you explain:

    1) how you have shown the money introduced by them as ‘capital introduced’, given that such a concept does not exist for companies?

    2) how it would have been possible for them to “take the money owed to them [a loan] as salary”?
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    1) An error. Should have been loan, as above.
    2)That’s not what I’m saying. While they were taking salary, the loan amount remained the same. Then they stopped taking salary, and started repaying themselves what they are owed. Of course they didn’t take the loan back as salary - that would be nonsensical!
  • douglasstrouddouglasstroud Registered Posts: 124
    So what is it you are actually asking?
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    Not to worry, my question has been answered on another forum (where I had worded it better!) Thank you all for your time, it is appreciated.
  • RyanMIPRyanMIP LincolnshireRegistered Posts: 55
    Which forum, out of interest?
  • douglasstrouddouglasstroud Registered Posts: 124

    But was the question answered correctly?
  • sjkrsjkr Feels At Home MAAT, AAT Licensed Accountant Posts: 75
    @RyanMIP it was a Facebook group. @douglasstroud the answer made sense although I was going to check it with HMRC. But after all that, it seems it’s no longer an issue for my client because the buyer of his business looks like he’s pulled out of the deal. Personally I think that’s not a bad thing, it was a terrible price
    MarieNoelle
  • RyanMIPRyanMIP LincolnshireRegistered Posts: 55
    I do feel sorry for your client.
Sign In or Register to comment.