CGT on foreign venture.

[Matthew P]

I started a web venture abroad in 2004. I became resident in the UK in 2011, and am now selling it. It is a sole trader business. The accounting currency is $.

The venture was funded in dribs and drabs over these 12 years. I assume that I should:
- value any investment made in £ equivalent at the date of investment
- deduct any profits made (in £ equivalent) at the date of taking them out
= work out total gains in £ terms, and pay my tax!

This is quite a complex task, involving 2 foreign currencies. I do hope that HMRC will accept a calculation of total profit/loss for each complete year, i.e., a slightly rough working, without insisting on minute-by-minute conversion of every sum injected or withdrawn from the business. This is not a big business, after all - total gains are unlikely to be more than £100,000 over 12 years.

[LozaACCS]

You are correct in the first assumption, ie the initial investment is converted at the rate applicable at that time.
The other assumptions are not correct, the calculation is not as complex as you fear.
Any capital expenditure eg buildings/plant etc are additional investments and should be converted on the same basis, revenue expenditure, ie current assets/liabilities/profits/drawings are completely ignored.
So your gain is the proceeds of sale less any capital costs,effectively the difference is goodwill which carries no cost since it was internally generated.
If you include any current assets (less liabilities) in the sale then the premium on these assets is chargeable to income tax,not capital gains tax,there are tax elections available which could be of benefit to you.
You should consider instructing a local adviser in order to achieve the most tax efficient route for your intended disposal

[Matthew P]

As this is a web site, through are few physical things - no buildings, etc. The purchase of a few PCs aside, all my investment went into staff costs, and some of it in office rent, to create the site. Profits came only after 7 years, as is typical of such businesses - think of Amazon.

All of this was funded by me. I am hoping that I can treat most of the sale receipt as if it were repayment of a loan (to me). After all, if I invest $330,000 and get out $330,000 on sale, I do not expect to be slapped with a bill for CGT on $300,000.

[LozaACCS]

You are confusing income tax with capital gains tax.
The sale proceeds cannot be the repayment of a loan because you have not made a loan to any one, they are in fact the price paid for the goodwill of the business which is a chargeable asset for CGT, since you have indicated that there is virtually no capital cost involved, the scenario you envisage is correct.
Think it through, the annual profits have been charged to income tax and the profits after tax are sitting in your capital account and can be drawn at your convenience without further tax issues.
When you sell the business you dispose of a capital asset the proceeds being 330K, the cost is nil since all the costs have been allowed for income tax, had they not then your annual tax liabilities would have been pretty horrific,so you have suffered no injustice.
There are a number of opportunities available to mitigate the overall liability, I would again recommend that you instruct a local adviser.

[Matthew P]

Well this is all very puzzling to me. I have had 8 years of losses, which since I was abroad, have not been accounted for in any way to anyone. Then I had a few years of profit, similarly not accounted to anyone. But what I have spent is much more than what I got back, until the sale, which gives me back more or less exactly what I spent. Surely, if I have had 300,000 of outgoings and receive 300,000, I shouldn't be paying tax on it? It doesn't seem to make any sense. My overall profit, call it income or capital gains, but in fact an aggregate of both elements, is zero. So why tax?

[LozaACCS]

It has been suggested by others that my skills in communication are less than excellent, unfortunately I cannot find another way to explain the position.
You need to understand that a capital asset can (and in this case) will be subject to both income tax and CGT.
You indicate that you have overall made no taxable profits from trading, indeed you suggest that you have lost money, those losses can be carried forward indefinitely against future trading profits, if you decide to cease trading those losses are likely to be wasted, there is no facility to say that those losses should be set against your capital gains, other than through a claim for limited relief under S261B TCGA 1992 (not available in this case).
Perhaps someone else might be able to explain the rules more clearly, at the end of the day however what you are suggesting or hoping for is not possible.

[Matthew P]

OK. I am just trying to get my head around it, because it seems mad. Why penalize people who put money into a business by taxing them on not making a profit?

[David Geordie]

Matthew, here's a suggestion from a non-expert given what I've heard of your issue in this thread.

How did you account for the money you put into the business over the years? If the business was a registered legal entity, and you (as an individual) made capital contributions to the business which then used the capital for operations, then there are two separate tax issues here. One is the business legal entity corporate tax liability......which sounds minimal as the business has years of losses.....the other is your personal tax position arising from the disposition of the asset. If you treat your injection of money into the business as capital contributions then you have established a cost basis for your ownership of the asset. If you then sell the asset, you should deduct your capital contributions from the proceeds of the sale in order to calculate your capital gain.

If you lived in one country over the course of these events this would be simple.....as you've moved around you will have to factor in FX and timing of investments to your calculations, but shouldn't be too complicated.

Now, as I said, this is the view of a non expert so take with caution.

[Matthew P]

Dear David,

Yes, thank you very much for this, this is what I reckoned. There was a legal entity for at least 3-4 years. In the Philippines you need a legal entity to open a physical office, you have to display the Securities and Exchange Commission (SEC) registration outside the door. You also then (not sure if it still like this) go monthly to pay your company taxes to inland revenue and get a hand-written notebook entry stamped, the notebook being displayed in the office. Legal obligation! So we should have those notebooks somewhere. In later years we closed the physical office and operated online and stopped paying annual renewals to the SEC, so there is an issue about whether the company still existed. Maybe we could argue that it still did, but had not complied with all obligations.

I think the answer is to create contracts selling the original company and the IP to a newly-created company, with the debts of the original company transferred. Then sell the new company's assets to the buyers. They pay me, the payment covers the debts more or less exactly, so the new company can repay me my debts, the creation of which is evidenced by the original company's accounts, receipts and email trail of salary payments.

I'll consult an accountant to see whether this is legit from HMRC's perspective.

[LozaACCS]

I think you should re consider your post, you clearly stated that you were a sole trader, no reference has been made to any other entity, only now do you make reference to a separate legal entity (a limited company ), you should decide who or what is selling the business.
With regard to the post by David Geordie.
How did you account for money you put into the business ? - you invested it into your sole trader business - remember you said you did.
If the investment was into a limited company (despite what you have previously stated) then the calculation of the gain is not on the basis that Mr Geordie suggests;
If you sell the shares, the gain is the difference between the market value of the company,s assets (or the sale proceeds if higher) less what you paid for the share eg £1, if you loaned the company money to carry out its operations in addition to the original cost of the shares then these will be sitting in your directors loan account and will obviously be recorded in the company,s accounts as a debt due to you.
The gain on the shares is chargeable to CGT, you are liable for the tax, entrepreneurs relief may well be in point.
If instead the company sold its own assets, then it would pay corporation tax on the gain, which will be the market value of those assets less the cost, which presumably would be financed by money borrowed from you, (but remember that you said that there were no such costs).
In neither case will your capital contributions form part of the CGT computation as Mr Geordie suggests, unless the investments were share subscriptions which you have stated they were not.