Can business be purchased as a TOGC without a VAT charge?
I have a client who is buying a training business from a VAT-registered company; most of the payment relates to goodwill, particularly the transfer of customer contracts and use of its trading name.
My client intends to work four days a week, rather than five, and it would benefit her business if she was not registered for VAT because not all her customers can claim input tax. The outcome of not registering seems achievable because her projected annual turnover is £80,000.
My question is simple: if she does not register for VAT, will the payment of £60,000 to the current owner for the goodwill be subject to VAT because a condition for the transfer of a going concern (TOGC) has failed? If so, should she register for, say, one month, and then deregister because her sales will be less than £88,000 a year, ie the deregistration threshold? Or would this be classed as avoidance?
Query 20,775– Transfer Tony.
No wrapper
My client inherited some investments when her father died in 2010. The investment adviser was not well organised and then died, and the nature of the investments has only recently been clarified. There were direct holdings in two specific companies, but my client believed they were within a ‘wrapper’ such as a unit trust, so that disposals within the wrapper would not have an immediate effect on her tax position. I have now discovered that one of the companies was disposed of at a modest gain in 2015, a year in which my client had used her annual exempt amount; the other company was liquidated at a massive loss in 2020, and my client has recently received some compensation from the financial services compensation scheme in relation to this (covering about one-third of her loss). Working backwards, I think that the compensation is probably taxable as a capital sum derived from an asset; she is out of time to report the 2020 loss, so it is not relievable; and, in the absence of dishonesty (but possibly with careless behaviour), the 2015 disposal is also ‘out of time’.
I would appreciate advice on the best way to sort this out. Overall, she has lost money, but the 2020 loss could not be set against the 2015 gain. In an ideal world, we could correct all aspects of her misunderstanding together – she would pay capital gains tax (CGT) for 2015 with interest, the 2020 loss would cover the 2026 compensation, and she would have a balance of loss to carry forward. But is that possible? Can I ask HMRC to give effect to that, in the interests of fairness?
In the worst case, it could disallow the loss using TCGA 1992, s 16(2A), charge CGT on the 2026 compensation and also impose penalties on the 2015 gain. I do not want to invite that.
Query 20,776– Hard Boiled.
A bonus issue
Our client recently reorganised its business to separate its property investment activities from its trading business. Holdco was inserted above an existing company, valued at approximately £700,000. Holdco issued 1,000 £1 shares at par with the balance of approximately £699,000 credited to a merger reserve under the merger relief provisions.
The Holdco shares were subsequently reorganised into A and B shares, with the B shares carrying all the rights attributable to the subsidiary. Newco was incorporated outside the group by the existing shareholders. Under a three-party agreement between the Holdco, Newco and B shareholders, the B shares were cancelled as part of a capital reduction demerger, the subsidiary was transferred to Newco, and Newco issued shares to the former B shareholders. The shareholders’ proportionate interests remained unchanged, there was no consideration other than shares, and HMRC clearance was obtained. On the demerger, the merger reserve attributable to the B shares was debited. No bonus issue was made to capitalise the merger reserve.
The view we have been given, backed by a big four accounting research tool, is that a bonus issue is not required in these circumstances due to an integrated transaction with a three-party agreement. The three-party agreement treats the cancellation of the B shares, transfer of the subsidiary and issue of Newco shares as one integrated transaction.
Is this analysis correct? In particular, is it appropriate to debit the merger reserve as part of the integrated demerger without first capitalising it by way of a bonus issue? Does the fact that the Newco shares constitute consideration under the three-party agreement support the conclusion that no bonus issue is required? Does the tax analysis change if there is no requirement for a bonus issue?
Query 20,777– Demerged.
It’s a dog’s life
My client has long had an interest in dog breeding. One family of corgi dogs is now in its third generation. Previously she has kept the dogs herself or given them to family and friends but, following a number of enquiries, she has sold some of the dogs – the going rate is about £4,000 per puppy. I am preparing her self-assessment return. She has argued that this was not a commercial arrangement and that the sale of the dogs was akin to somebody selling off surplus items from their wardrobe and therefore is not taxable. In any event, she says that once you take into account costs such as feeding, vets bills etc she wouldn’t have made much, if any, profit.
Given that HMRC is known to be targeting animal breeders I am a little uncomfortable with this approach. Do readers think that it is acceptable to treat this as a non-taxable activity? Should a white space disclosure be made?
Query 20,778– Barbara.
