Could business split to avoid MTD create a VAT problem?
One of my sole trader clients is a professional writer and is keen to avoid the need to submit quarterly making tax digital (MTD) returns to HMRC from June 2026. He hasn’t yet registered with HMRC for the MTD process.
He has six writing contracts with major publishers and earns about £100,000 a year, with very little input tax to claim. He could do more work but deliberately trades below the threshold where the personal allowance is taken away by £1 for every £2 of income.
He wants to retain two contracts as a sole trader, earning just under £20,000 per year, so that he won’t need to submit quarterly MTD returns until at least April 2029. He will carry out the balance of trading through a dormant limited company he owns for the four major contracts, earning about £80,000 a year, ie just below the compulsory VAT registration threshold of £90,000. Contracts with publishers will reflect the change in entity. The company will not register for VAT and the existing sole trader business will deregister.
My concerns are twofold: is the transfer of contracts from the sole trader to the company a transfer of a going concern, so the company must register from day one because the sole trader business has annual turnover of more than £90,000? Second, does the split risk a potential challenge from HMRC as both entities have the same activity? I don’t think so because the publishers are all fully taxable, so there is no tax leakage to HMRC.
Query 20,691– Agatha.
Goodwill hunting
I have a client who wants to incorporate his business. I am familiar with the arguments about transferable and ‘personal’ goodwill; in my opinion, this business has value that is not personal to the owner, so it could be transferred. I do not want to enter a difficult and technical negotiation with HMRC about valuation.
If a modest value is put on goodwill, so it is unlikely to be too great, and the tax return notes that a gifts relief claim would be made if necessary to cover any undervalue element, would that remove the risk of an argument? The company would recognise the asset at the value stated and the client would have a capital gain of that amount, because the value recognised in the accounts would be actual consideration received – the gifts relief claim would only reduce the chargeable gain to that amount.
Do readers foresee any problems with this approach?
Query 20,692– Affleck.
Where does a team meeting take place?
I’m advising a group of clients on a business venture. One of them lives in the UK but the other three live abroad in different countries. The thinking is currently that the business will be run through a company based in the Channel Islands where the day-to-day activity will take place. But the question of where the company will be tax resident is under discussion. The normal test for company residence is where its central management and control resides. The four individuals will be the sole directors and the board will manage the company. In the ‘old days’ we looked at where the board met to determine residence. But this board will meet monthly via Teams/zoom meetings where each person will be sitting in their own country. How does a fiscal authority go about determining residence in this situation? It must be an increasingly common way of doing business.
Query 20,693– Home Lover.
Excess cash
We are valuing, for inheritance tax purposes (IHT), a 5% shareholding in a trading company, and our query concerns the attribution of the company’s excess holding of cash to that 5% shareholding. The shareholding will, in all other respects, be eligible for business property relief (BPR).
We are content with our approach to valuing the ‘trading’ aspect of the shareholding, in terms of applying to the company’s trading profit, a price-earnings ratio in the typical range that reflects a 5% shareholding; and that value will be eligible for BPR.
Our dilemma concerns determining the ‘excess cash’ attributable to the shareholding that will not be eligible for BPR. If we assume the company is holding ‘excess cash’ of, say, £5m, should we simply take 5% of that £5m, being £250,000, as the amount chargeable to IHT?
Or should we discount the £5m by the typical 80–90% discount we might apply to net assets when valuing an investment company? Discounting the £5m by the 85% midpoint, down to £750,000 and then applying 5% to that reduced figure, would concede a significantly lower amount of £37,500 chargeable to IHT.
HMRC’s Shares and Assets Valuation Manual at SVM111250 comments on the calculation of ‘excess cash’, but indicates that due to the ‘diversity of circumstances of valuation’ it is not possible to provide detailed rules for calculating ‘excess cash’, concluding that ‘the answer lies in a fair and even-handed approach to the calculation of the difference between the value of the shares arrived at with the excepted asset included in the company and the value with the excepted asset excluded’.
Considering how the excess cash might be determined in our situation, we feel the ‘fair and even-handed approach’ might sit somewhere between the two approaches we have described, but readers’ thoughts on the approach to calculating the ‘excess cash’ in this situation would be greatly appreciated.
Query 20,694– Cashed Out.
