Until the 3rd December 2014 individuals trading as sole traders or partnerships were allowed a significant tax incentive on incorporation. Goodwill created by the individual could be sold at market value to their new company and the capital gain made by the individual would be taxed at 10% entrepreneurs’ relief. The added bonus was that if the unincorporated business started after April 2002 this goodwill could be amortised in the company and would receive corporation tax relief in line with the accounting treatment! In effect tax was paid at 10% by the individual and then tax relief was claimed at 20% by the company.
In the autumn statement it was announced that these rules will be changed. The legislation has been amended to remove the ability to do this. Now any capital gains on goodwill sold to a close and connected company will be taxed at the standard CGT rate 18%/28%. The subsequent amortisation will no longer receive tax relief. Teamed with this new accounting standards will make it necessary to write the goodwill down over its useful economic life, so the accounting and the tax treatment will differ.
There are then two options with regards to the goodwill present at the date of incorporation.
1/ If it is separable from the trade then it can be retained by the individual and used by the company. With a subsequent disposal of the company and the trade it may be possible to tax any gain on this personal goodwill at 10% Entrepreneurs Relief.
2/ The goodwill can still be transferred to the company. As the parties are connected this transaction will be at open market value. The gain would be taxed at the normal capital gains rates 18/28% and a Directors Loan Account credit would be created. If there is no appetite or ability to pay the capital gains tax then the owner may wish to claim gift relief to hold over the gain until a subsequent disposal.
The pre December 2014 rules gave more incentives to incorporation and the change of rules will remove the benefit for some individuals. However incorporation is still a very attractive opportunity for many individuals or partnerships especially if there is borrowing to be repaid.
If you would like to discuss the potential benefits of incorporation then please contact Peter for an appointment.
HM Revenue and Customs are under pressure. There are large political pressures to increase the level of tax collection to help the government with its plan to reduce the country’s fiscal deficit. In addition there is a large amount of public and media anger at the perceived prevalence of tax avoidance and evasion.
Large public cases of multinationals and their tax affairs are extensively reported in all forms of the media and have produced the feeling the HM Revenue and Customs should be more aggressive when challenging tax returns.
Although publicised cases are of large corporations and high earning individuals, in practice we are witnessing not only an increase in the number of tax investigations or compliance checks, but also a recent change in the methodology.
No longer are HM Revenue and Customs using a soft approach towards the tax payer when opening investigations. Their new rational seems to be to challenge individuals more aggressively and require more substantive information during their checks.
This makes it all the more important to make sure that you engage with a knowledgeable advisor to ensure all of your returns are submitted correctly and on time.
To tie in with the EU VAT directive, the long standing VAT rule regarding early settlement discounts is changing from the 1st April 2015.
The current method is to calculate the VAT assuming that the customer pays within the agreed time and, therefore, receives a discount. If the customer fails to receive the discount the VAT is not recalculated and is still charged on the discounted price.
The new legislation will require the supplier to calculate the VAT on the full price and then, if the customer qualifies with the terms for the suppliers discount, the VAT can be adjusted. This will add an extra level of paperwork to suppliers who offer the early settlement discounts and will make them less common.
For many small employers the administration of payroll is about to become more complicated and time consuming. Auto Enrolment will require any qualifying employees to be enrolled in to a qualifying company pension scheme. Once enrolled the employee and the employer will make contributions based on a percentage of their salary. By 2018 this will be a combined 7% deduction which after tax relief will contribute 8% of the salary to the employee’s pension.
The criteria for your employees is descriptive, however, in some cases employees outside of the automatically enrolled group have the right to join the pension scheme.
Your number of employees will determine the date when you will be required to comply with the new legislation. This staging date for your company is available from The Pension Regulator using your PAYE reference number.
Our advice is to prepare in advance for the new rules and use a qualified Independent Financial Advisor to help you set up a pension scheme.
To assist you with your obligations our Payroll Service will automatically calculate your deductions for qualifying employees.
Our existing clients will know that I have recently taken over the day-to-day running of the firm and my father has taken a big step back from the business.
Having worked at Franklins for over 8 years I am confident that I know what has made our firm so successful over the past 30 years.
Accountancy publications continue to predict the demise of the small firm. I think that they miss a number of very important points.
The smaller firms tend to attract small to medium size clients who they are inherently better to work with. We understand the intricacies of running a business in its entirety and can give more practical advice.
We pride ourselves on the relationships we have developed. We have worked with some clients for over 30 years and continue to advise them, their children and their grandchildren.
My father was very conscious that the success of an accountancy business was down to the staff. Not just their skills and knowledge, but also their ability to interact with each other and our clients. We value our staff and our clients appreciate the continuity of service from our team.
If you are unhappy with the current level of service you receive and would like to discuss becoming one of our clients, then please contact the office to book an appointment.
– Peter Franklin