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Where Taxpayers and Advisers Meet

Liquidation of sale or return goods from USA

Posts: 1
Joined: Sun Jul 17, 2016 1:37 pm

Liquidation of sale or return goods from USA

Postby Halcon » Sun Jul 17, 2016 3:38 pm

I operate a UK company which is an importer of used vehicles. The company's primary supplier is an American LLC, which has for some years provided stock on what is effectively a 'sale or return basis'. The US company issues invoices to the UK importer based upon cost price plus its anticipated profit. The UK company, as the importer of record, pays customs duty and VAT upon importation, hence there are no UK tax consequences to the American LLC. The agreement between the two companies is that goods remain the property of the US LLC until paid for in full. The UK company in turn makes its money by selling the goods (usually) at a higher price. The lion's share of the overall profit is therefore earned by the American company. There has always been some flexibility though in that, if a vehicle is sold by the UK company for less than the anticipated price, the US supplier has been happy to issue a credit note to allow the UK company a profit.

The US company is taxed in the USA on the cash accounting basis, in other words only on monies received. Therefore there exists at the moment a situation in which the UK company is holding a substantial quantity of stock for which payment will be due to the American LLC upon its eventual sale. This stock has been invoiced by the LLC (in US dollars) so as to include a generous profit. On paper therefore the US company is shown in the UK company's accounts as a substantial creditor.

This was all well and good until a) Sterling lost a fair proprtion of its value and b) the owners of the US LLC decided that their money would be better off invested in another business that they operate. In a traditional 'sale or return' arrangement, it would be a simple case of the UK company surrendering the remaining stock to the US supplier. However, with the UK company having imported the goods, it is not quite as simple as that. Additionally, because of the post-Brexit implications to Sterling, the cost to the UK company (because the goods were invoiced in dollars) is much higher now than at the time the goods were originally imported. So, something imported at the end of last year at an invoiced price of US $10,000 (let's say at a 1.50 exchange rate) and unsold until this week, will cost the UK company over £1000 more when the invoice from the US supplier is settled. On that basis, the UK company appears to me to be insolvent due to the Forex loss alone.

I should mention at this stage that the owners of the US company, who have been known to me personally for many years, are taking a very reasonable attitude. Both they and I accept that it is in neither their interests nor mine to continue with this venture, and they are seeking the most elegant solution by which to withdraw.

Since I have been spending less and less time in the UK during the past couple of years, and in fact would be considered non-resident in 2015 (as well as 2016 unless something alters drastically) under the Statutory Residence Test, I don't have any particular wish to work for, say, the next twelve months in order to liquidate the remaining stock for little or no gain, or even a loss. At the same time I do not want to place the US supplier in an even less enviable position than that in which they find themselves.

Yes, I could appoint an insolvency practitioner, but the US supplier does not like this idea, preferring to work out a solution between the two companies. The intention would be for the UK company to settle all of its obligations to employees, HMRC and the bank, leaving only the debt to the US supplier outstanding. I have explained, and the supplier fully understands, that it would be impossible to realise anything close to the invoiced value of the goods. The relationship is still sufficiently strong that the supplier will rely upon me to look after its interests as well as I can.

The US supplier acknowledges that it has made money from the venture over the past few years, and is happy to offer a substantial discount on the residual stock. The supplier will be taxed in the USA only on the amount remitted by the UK company, so from the US side of things the amount of the accounts receivable (ie the price at which the goods were invoiced ) is not really relevant.

So, what to do? Is there some way to make a clean break? Obviously it wouldn't be viable for the UK company to hand the remaining stock back to the US supplier and have them ship it back to the USA.

The solution I favour would be for the UK company to invoice the remaining goods back to the US supplier, either at 'cost' (the price invoiced originally by the supplier upon importation) or at something like their nett realisable value). Since it would cost many thousands to ship them back to the USA, the US supplier would then be faced with the issue of selling the goods in the UK. The UK company would then cease trading, having no stock and no assets. This would be a perfect solution for the UK company, of course, but I do not want to be responsible for recommending a course of action to the US supplier which might go on to cause them difficulties.

If the US supplier were to end up owning the goods, they would be looking to dispose of them in the UK. Unless they are extremedy lucky, the concept of profit would not enter into the equation. The US company would be happy with whatever it could generate. I believe the intention would be to dispose of the goods either outright or on a sale or return basis (again) via specialised car dealers within the UK. Alternatively the US company might consider taking on premises and an employee or two until such time as the goods are liquidated.

In the above scenario, the US supplier would have no further tax liability in the USA. There would be no branch profits tax as the goods would be sold at a loss. The question would therefore be: What would the US supplier's obligations be in the UK? If the express intention of this proposed exercise were simply to dispose of goods at cost or less, would this constitute 'doing business in the UK'? It seems unlikely that the resultant sales wouid pass the VAT registration threshold, so VAT would not be a consideration. Ordinarily I understand that a foreign company 'doing business in the UK' is required to register with Companies House and submit annual returns and accounts. Is this even necessary in this instance on what is effectively a damage limitation exercise? I would welcome any other constructive suggestions as to how to handle this problem...

This is my first post here, and I have to say that all of my previous requests for advice (to my own accountant and several others) have been met with blank stares and no constructive information . Having read through many of the intelligent answers to other questions posed here, I have high hopes that someone will provide a solution. Either way, thank you very much for considering what is quite a lengthy and complicated query. I've tried to make it as 'bare bones' as possible but will be happy to supply any further information.

Posts: 924
Joined: Wed Aug 06, 2008 3:28 pm
Location: Loughborough

Re: Liquidation of sale or return goods from USA

Postby jpcentral » Tue Jul 19, 2016 8:47 am

That is a long post. There are all sorts of questions which could be asked and a detailed fact find would probably take a couple of hours just to get to grips with the overall situation and the mechanics of the business but let me put forward some thoughts.

1. Your UK company holds (and presumably owns) stock for which the US company will ultimately invoice you

2. If you liquidate your company, the stock would be sold by the liquidator and the proceeds used to clear off debts which would include the US company. If the liquidator sells the stock it will likely be via an auction (forced sale) so the proceeds are going to be very low and there will be liquidator's costs to take into account too. This is your bottom line and anything above this is a bonus.

3. You want to be as fair and reasonable to the US company as you can but, ultimately, the goods are in the UK and will need to be sold in the UK (or EU?) and they have no real facility to do this.

4. Realistically the ideal situation would be to sell the goods for a higher price than the forced sale value and avoid paying liquidator's fees

5. I don't know the market you are in or the values involved but I would consider looking to your competitors (UK and EU) as potential buyers. If you offer the stock to them at an extremely good price, but above the expected forced sale price, someone might be able to take all (or most) of the stock off your hands.

6. Unfortunately, very little can be done about the exchange rate. Either you or your US supplier will have to take the hit.

This won't answer all of your queries but maybe it is a starting point.
John Perry
Central Business Services

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