|
This month's Tax Clinic looks at the circumstances in which a company may be able to claim a deduction for the cost of goodwill, where it is purchased from a related party, such as a sole trader or partnership following incorporation.
 Mark McLaughlin
Sole traders and partnerships sometimes transfer their business to a limited company that they own. Business incorporations can be driven by reasons such as potential tax advantages (consideration of which is outside the scope of this Tax Clinic) or commercial motives, or a combination of them. The process often involves transferring assets such as the business premises, trading stock, assets such as motor vehicles and fixtures and fittings, and goodwill. This month's query concerns the transfer of goodwill, and whether tax relief is available for the goodwill when it is acquired by the company. The transfer of goodwill by an individual constitutes a disposal, which in the case of a business incorporation is normally treated as taking place at market value for capital gains tax purposes. The business owner will sometimes sell the goodwill to the company, with the proceeds being left outstanding as a loan to the company, which is repaid to the individual as funds allow (nb the transaction must be valued and executed properly - professional advice is required on such issues). The potential attraction from a tax perspective is that the capital gains tax paid by the individual on the goodwill is potentially lower than the tax (and National Insurance contributions) if the company paid a salary or dividends to the owner instead of paying for the goodwill. However, can the company claim tax relief for the cost of the goodwill? This is the theme of the following query from 'ratnam'. Query from TaxationWeb visitor ('ratnam') Can someone please confirm. Can the goodwill be written off by the limited company when it was incorporated from self-employed to limited company. 100% ownership in the company. Some say it cannot be since connected party. Editor’s CommentsThe answer to the question, as with many other tax questions, is 'it depends'. As the following responses to the query indicate, in the case of goodwill acquired from a 'related party', the availability of tax relief for the company on the goodwill acquisition broadly depends on when and how the goodwill originated. The general rule is that relief is available for acquisitions of goodwill created on or after 1 April 2002, or for acquisitions from that date if acquired by the related party before that date from another party not connected to the company or the related party (Finance Act 2002, Schedule 29, paragraph 118). However, there are exceptions to this general rule, and anti-avoidance provisions which can have the effect of denying a deduction. Expert professional help should be obtained. Forum responses included those reproduced below.Simon Sweetman commented:I think what you are saying is that the goodwill has been sold by a sole trader to the limited company. The answer is that because they are connected parties, the goodwill can be written off but only to the extent that it has been created since April 2002. 'robbob' commented:There are two separate things to consider here - accounting policy and allowabilty for tax purposes. Presuming you mean allowability for tax purposes then it is as Simon says. 'ratnam' replied:Thank you Simon and Robbob. Yes, I meant for tax purposes. 'robbob' commented:In summary if the sole trader commenced before 1st april 2002 then goodwill will be disallowable, unless it is specifically purchased goodwill after this date. Eg window cleaner trading pre April 2002 spends £10k goodwill buying additional round in 2004 then goes limited, amortisation would be allowable on the 10k only. 'ratnam' replied:Hi robbob, thank you for that useful info. I thought we could put a value in 2002 and now. the difference can then be amortised. -------------------------------------------------------------------------------- To view this discussion online (including any possible updates), go to:
http://www.taxationweb.co.uk/forum/discuss.php?id=22145 To view other discussions in TaxationWeb's Tax Tips Forum, go to:
http://www.taxationweb.co.uk/forum -------------------------------------------------------------------------------- IMPORTANT:
Any advice given on the Tax Tips Forum is given as guidance only. Neither TaxationWeb Ltd. nor any of the contributors to the site can be held responsible for any loss or damage resulting from the action taken as a result of advice given on the site. Always contact the contributor directly by phone or email (if contact details are provided) for detailed advice.
|
