Right, one of my clients has come to me today saying she's expanding her business! Good news I hear you ask!
Normally I'd say yeah... except this is the predicament she has posed:
'A1 Cleaning' (my client) has been approached for some time by 'Z9 Dodgy dealers' (also a clean co.)The person in charge of Z9 has been talking to my client A1 for some time about going into a merger... until this week. Owner of Z9 has now said she will HAND over her client books in exchange for a full time EMPLOYED job with A1.
The issue is, it later transpired in the conversation that Z9 was actually a partnership, that was NEVER formally registered with HMRC and neither of the partners had registered as self employed! This 'Z9' business has been in operation for just over 5 years...!!!!!! (it mainly dealt with domestic house cleaning so the fact they weren't registered has probably never caught the attention of HMRC).
Now, the owner of Z9 has asked A1 if there will be any comeback if they get found out, errrr CLEARLY YES!!!, (a1 knew this as well) but what MY client A1 is asking me is: as they're only taking the 'address book' of Z9 and isn't paying ANYTHING for it (other than giving Z9 ex-owner a job) would she be liable for anything...?
If I'm honest this has me stumped! Ethically speaking Z9 should be reported, but as there's no clear 'sale' of the old business I just cant think straight... well that and its clearly midnight! lol
Has anyone else come across this or that can offer a little advice for me to advise my client before I have to ask HMRC??
The address list is costing the contract term of the new employee..... but how one could possibly record that in a sensible way I don't know. Given the described nature of the Z9 business I would suggest that Z9 thinks full time employment equates to unofficial partnership, is A1 prepared to cope with that? - nothing here is clear cut.
What is happening regarding the other 'partner' from Z9? Is that person out of the picture? I ask as if they decide to make waves they might not realise it will come back and haunt both of them! Also your client, A1, doesn't need the hassle of a sulky ex-partner in the background. Or any other ramifications of taking on the list without formally paying for it to distinguish the A1 business from the Z9 business.
Ha. Next time that you say that you're a bookkeeper not an accountant Theresa I'm going to wheel your above answer out as exhibit A.
Morning Gary,
Up front I'll say I do not know the definitive answer to this question and I think that legal council should be sought before taking on the partner of Z9.
My thought patern on this is that the client list is an intangible asset of Z9 jointly owned by the two partners.
For one partner to pass the list to your client without specific permission of the remaining partner is tantumount to theft putting your client in the position of being in receipt of stolen goods.
There is nothing to stop your client from taking on the partner as an empoyee but I do not believe that they have a right to bargain their way into employment by purchasing the job in exchange for sojmething that does not belong to them.
But then, your client doesn't really want an employee do they. They are really looking to buy that client list (same as accountants do when they take over smaller firms).
That said, how could the remaining partner argue their case in a court of law where the partnership did not officially exist anyway?
Well, the existence of the list could be used to prove that the partnership existed and that would be of great interest to HMRC.
All in all I'm thinking that whilst other peoples opinions on here may help formulate idea's about all of the aspects of this arrangement that shout out that its wrong (you could already see that which is why you asked) really your client needs to seek professional legal council before proceeding with the arrangement.
Ok, Theresa started the ball rolling with the reality of the arrangement angle, I took the selling something that they have no right to sell angle. Whose up for taking partnership agreements and ability of one partner to bind all partners angle? (I can see Bill loving that one if he's around this morning).
Good luck with this one Gary but all in all definitely one where my main advice to the client would be to take legal advice from a solicitor.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I doubt that Z9 has any contracts in place with these domestic clients and therefore if they want to change from Z9 to A1 what's the problem, no sale incurred here. Also if A1 are happy to employ Z9's previous partner because there is extra work to do then that is up to them. At least this legitimises everything going forward. I don't think that A1 has a duty to report Z9 and I guess the question is 'do you( as an adviser) have a duty to report a firm who isn't a client of yours? I'm dubious but maybe you could send a letter in to cover yourself. Any fallout would obviously be with Z9 and they couldn't trace that back to A1.
I disagree rob (go on, tell me that you were surprised by that, lol).
The list itself is an intangible owned by the partnership.
Same as a telephone list. There may be no contract with any person on that list but the list itself is a sellable commodity.
The sale of the list is the exchange of the list in return for employment.
A sale does not have to be for money so long as there is some identifiable return.
Whats that line from contract law... A sale must be sufficient, it need not be adequate.
To me that sounds like the exchange of the intangible for employment if sufficient consideration to form a binding contract.
Think about it :
Offer : the intangible in exchange for regular financial return from employment
Consideration : the intangible itself
Acceptance : Down to Gary's client as to whether they accept or not.
Ooh, potential interesting debate about contract law... I like these ones.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
While your answer is probably technically correct, Shaun. From a more pragmatic view, I'd tend to go with what Rob says. Life isn't black and white and I think there is a grey area here to be exploited.
From the sounds of it Z9 have more to worry about than losing their clientbase. Anyway, who says the clients will want to transfer?
It sounds like a potentially costly thing for the remaining partner from Z9 to do much about anyway.
Just my view.
"Rules are for the obedience of fools and the guidance of wise men" - Douglas Bader
Hey we don't disagree too often Shaun, I just think to make business work you sometimes have to be a bit more pragmatic...
Well I can't see how the consideration is the intangible asset itself, you can't 'buy' the intangible asset with the intangible asset. But in any case I think this is being over thought, in effect what is happening is that Z9 is leaving the industry and A1 is picking up a surplus of clients. Z9 partner needs a job and (s)he knows these clients well so who better to employ!
Theresa raises an interesting point about employing someone who was the business owner before and whether that could create problems somewhere down the line.
lol. I knew that it would be there or thereabouts.
You two. I'd almost forgotten the old division of myself and Bill in one corner with our scribes hats on dotting i's and crossing t's whilst you boys were out getting all the clients.
I like the Douglas Bader quote.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I think it's Rachel from Penzance and Princess who seem to get all the new clients.....come on girls tell us how you do it!
Bet it involves morphine and duct tape
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
There can be an over reliance on these things too. There are a few quotes that guide my life. The above, "it's easier to ask forgiveness than seek permission" and "de minimis non curat lex." The third is more a hope than a mantra.
Here's my tuppence worth (and it really is only worth that amount), and they are just random thoughts
Assuming no formal partnership agreement. As a partner they can make a decision for the partnership which is binding on all partners, so giving away a client list will not come back to haunt A1
I would be concerned that parting with information that identifies an individual would cross paths with the data protection act, and Z9 is the data controller, therefore should have been registered.
Making a personal assumption here but I doubt the client list, has any value. If I were a customer, I would be weary of allowing someone out of the blue in to my home, that was not the person I was dealing with.
Personally, I would also be wary of inheriting an unknown reputation from Z9
How trustworthy is Z9? They have already shown that they are willing to break the rules.
What will they be like to employ? They may find it hard to be given instruction after running their own business for 5 years!
If I were A1 I wouldn't entertain it. Just too many uncertainties.
If Z9 is working for the wage, wouldn't, technically, A1 be getting the addresses for nothing? How could you quantify what was wage for working and what was wage for the addresses.
Could A1 fire Z9 at any point??
The partnership query is a good one, and I agree proper legal council should be taken. I don't think the addresses can be considered stolen property, as, one partner can take out a loan without another partners signature (or knowledge), but it is binding on them both. (Seen that one done - in an accountancy practice!) Surely, the unknown Z partner could only sue Z9 for the lost income for passing the addresses over?
-- Edited by FoxAccountancyServices on Thursday 15th of May 2014 03:42:12 PM
If Z9 is working for the wage, wouldn't, technically, A1 be getting the addresses for nothing? How could you quantify what was wage for working and what was wage for the addresses.
only if A1 would have hired Z9 regardless of the availablity to them of the list.
If such is not the case then the wage is immaterial as Z9 is effectively buying a job with the list
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
No, the wages are never an intangible asset. They are an expense of the business.
The list itself is an intangible that was exchanged for employment.
Value does not come into the definition of an intangible.
namely, an intangible asset is an identifiable non monetary asset without physical substance.
A transaction may be regarded as an exchange of resources, services or obligations regardless as to whether a price is charged (Taken from the definition of a related party transaction).
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
But there is no sale, I doubt that the offer of a job is even consideration and this isn't a related party transaction. Z9 wants out before they get caught and are hoping to salvage something by way of employment. In essence Z9 is packing up, A1 is going to mop up (possibly literally considering the industry). A1 needs someone to do the extra work so they employ someone, best person for the job is the person who used to do the work so there is a seamless transition. Everyones happy...possibly!
Agreed, makes perfect sense the way you put it Rob. case closed.
Just one minor thing. I wasn't saying it was a related party transaction just saying where the definition of a transaction that I used came from as that one's from memory where I cannot remember the exact phrase from the Revenue standards (either from IAS18, FRS5 application note G or FRS102).
Actually, I've not even read FRS102 yet! (Bad, Bad, naughty shamus). And it's not as if I'm not being bomberded with several companies a day trying to flog me FRS102 courses as CPD.
Have you done one on 102 yet? If so, are they worth the money?
I'm tempted to just print it and read it but you don't get any CPD points if you do it that way.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
