Sole trader becomes Ltd Company and transfers 15k of assets into the Ltd Co, this is put to his DLA giving it a credit balance.
Takes regular payments out to cover living expenses and lets say its 8k on the year, thus reducing the DLA to 7k.
Company makes net profit of 10k which leaves 8k after CT.
or no assets and director takes the 8k profit after tax.
This means that the Director hasn't benefited from getting his money back out and has paid the same tax either way. In effect being taxed on something he has put into the Company.
I kind of understand it because the DLA doesn't hit the profit and loss account and I was trying to explain it to my client today, but I had already had the same thoughts he had that he's somehow lost out, although I appreciate that's not the case.
And finally, on the first scenario, theres 8k sat in reserves that is tecnically his, but he can't extract it because he's already taken against the dla, so what happens to that figure?
__________________
John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
They haven't been taxed on the money put into the company. They've been taxed on the profits from trading. Money has been lent to the company in order to start trading.
Sole trader becomes Ltd Company and transfers 15k of assets into the Ltd Co, this is put to his DLA giving it a credit balance.
Don't forget that the sole trader sold the assets to the company, and so the sole trader is taxed on the sale, which should be at market value.Because the transaction is related, only 18% can be claimed in the company (That's how I understand it, I don't know why this is the case, if the sole trader gets taxed in full!) If they are not sold to the company, they would deemed to be sold to the sole trader anyway. Is the NBV of the assets actually £15k in the ST balance sheet? What is the tax written down value? What is the market value? An election can be made to transfer at TWDV. You have to consider what's going to give the best outcome to the client.
Takes regular payments out to cover living expenses and lets say its 8k on the year, thus reducing the DLA to 7k.
Company makes net profit of 10k which leaves 8k after CT.
If you transfer the assets into the limited Co, the £15k can be taken there and then, if there is a bank balance to allow for this.
Depending on when you stage the sale, and what ST profits are, after sale of assets, there may be scope, if basic rate band left, for an £8k dividend (tax free at the moment, £3k taxed at 7.5% next year) to bump his DLA back up to £15k. But either way, the £7k is still his to draw, tax free, as and when he can. Its repayment of a loan.
or no assets and director takes the 8k profit after tax.
ST assets taken by sole trader, still taxed personally.
This means that the Director hasn't benefited from getting his money back out and has paid the same tax either way. In effect being taxed on something he has put into the Company.
He isnt getting the benefit because he hasnt taken the money. That could be because the bank doesn't allow for it just yet. He wont get tax on the draw of the £15k, regardless of when its taken. Its a loan. Its more a case of when he has the money there, to be able to pay it to himself.
I kind of understand it because the DLA doesn't hit the profit and loss account and I was trying to explain it to my client today, but I had already had the same thoughts he had that he's somehow lost out, although I appreciate that's not the case.
Capital allowances will reduce his profits, so he will get tax relief. Just over a number of years.
And finally, on the first scenario, there's 8k sat in reserves that is technically his, but he can't extract it because he's already taken against the dla, so what happens to that figure?
You vote it as a dividend when its most tax efficient to do so.
Sole trader becomes Ltd Company and transfers 15k of assets into the Ltd Co, this is put to his DLA giving it a credit balance.
Don't forget that the sole trader sold the assets to the company, and so the sole trader is taxed on the sale, which should be at market value.Because the transaction is related, only 18% can be claimed in the company (That's how I understand it, I don't know why this is the case, if the sole trader gets taxed in full!) If they are not sold to the company, they would deemed to be sold to the sole trader anyway. Is the NBV of the assets actually £15k in the ST balance sheet? What is the tax written down value? What is the market value? An election can be made to transfer at TWDV. You have to consider what's going to give the best outcome to the client.
Yes, the assets were in the ST accounts, 15k non tangible, reduced to 12k on sale to Ltd Co as being the correct market value (taxi plate) Two vehicles purchased at circa 6/7k showing TWDV circa £2410/£2668.. Sold to Ltd Co at £1100/£1600 to reflect current value based on high mileage due to being taxis. (I have checked this with Parkers) Losses on these reflected in ST accounts, based on TWDV. NBV would be 0 for car 1 and 1240 for car 2.
Takes regular payments out to cover living expenses and lets say its 8k on the year, thus reducing the DLA to 7k.
Company makes net profit of 10k which leaves 8k after CT.
If you transfer the assets into the limited Co, the £15k can be taken there and then, if there is a bank balance to allow for this.
Depending on when you stage the sale, and what ST profits are, after sale of assets, there may be scope, if basic rate band left, for an £8k dividend (tax free at the moment, £3k taxed at 7.5% next year) to bump his DLA back up to £15k. But either way, the £7k is still his to draw, tax free, as and when he can. Its repayment of a loan.
Thats the crux of the matter. Any money used to repay the loan is taxed under CT.
or no assets and director takes the 8k profit after tax.
ST assets taken by sole trader, still taxed personally.
Oh, I hope not. Does this mean that the £12k is taxable? Although they didn't materialise a profit, I assumed this would come under CGT not income.
This means that the Director hasn't benefited from getting his money back out and has paid the same tax either way. In effect being taxed on something he has put into the Company.
He isnt getting the benefit because he hasnt taken the money. That could be because the bank doesn't allow for it just yet. He wont get tax on the draw of the £15k, regardless of when its taken. Its a loan. Its more a case of when he has the money there, to be able to pay it to himself.
But again (and I apologise for failing to see it because I know your understanding is better than mine) the money will only be there when a profit has been made, which is taxed.
I kind of understand it because the DLA doesn't hit the profit and loss account and I was trying to explain it to my client today, but I had already had the same thoughts he had that he's somehow lost out, although I appreciate that's not the case.
Capital allowances will reduce his profits, so he will get tax relief. Just over a number of years.
Right, and is this how he gets his money back tax free as per your comment above? Will that also means he can retrieve the 2.7k on the reducing balance over n years but only on the 12k if the market value of the asset reduces, and it can be amortised, or the business sold? In that case it becomes a bit clearer
And finally, on the first scenario, there's 8k sat in reserves that is technically his, but he can't extract it because he's already taken against the dla, so what happens to that figure?
You vote it as a dividend when its most tax efficient to do so.
I may be getting it (I hope) Take the dividends as they are made and leave the 15k as is. Extract the money slowly from the DLA using the tax relief on the 2.7k then but the non tangible will need to wait as there isn't tax relief available, only amortisation.
Michelle, once again thanks for your detailed explanation.
__________________
John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Yes, the assets were in the ST accounts, 15k non tangible, reduced to 12k on sale to Ltd Co as being the correct market value (taxi plate) Two vehicles purchased at circa 6/7k showing TWDV circa £2410/£2668.. Sold to Ltd Co at £1100/£1600 to reflect current value based on high mileage due to being taxis. (I have checked this with Parkers) Losses on these reflected in ST accounts, based on TWDV. NBV would be 0 for car 1 and 1240 for car 2.
Cost of vehicles is £13k, what's accumulated depreciation?
Cost of taxi plate is £15k, what's the amortisation to date?
(depn/amortisation in the accounts, not on the CA computation... as you know depreciation is different to CA's so just want to have full picture)
Takes regular payments out to cover living expenses and lets say its 8k on the year, thus reducing the DLA to 7k.
Company makes net profit of 10k which leaves 8k after CT.
If you transfer the assets into the limited Co, the £15k can be taken there and then, if there is a bank balance to allow for this.
Depending on when you stage the sale, and what ST profits are, after sale of assets, there may be scope, if basic rate band left, for an £8k dividend (tax free at the moment, £3k taxed at 7.5% next year) to bump his DLA back up to £15k. But either way, the £7k is still his to draw, tax free, as and when he can. Its repayment of a loan.
Thats the crux of the matter. Any money used to repay the loan is taxed under CT.
No amount to pay loan is taxed. It goes in as a credit to DLA and when taken from the bank, its debits the DLA. Only any dividends are taxed, as they are profit after tax. And you may get dividend tax, but dividends are extra money, not part of the loan. You'll get tax relief on the assets introduced, over a period of time. Which I think is a ridiculous rule, as the sole trader would get taxed on the sale in one go.
or no assets and director takes the 8k profit after tax.
ST assets taken by sole trader, still taxed personally.
Oh, I hope not. Does this mean that the £12k is taxable? Although they didn't materialise a profit, I assumed this would come under CGT not income.
Let me know the accumulated amortisation on the £15k (remember NBV and TWDv are different, I need to understand both)
This means that the Director hasn't benefited from getting his money back out and has paid the same tax either way. In effect being taxed on something he has put into the Company.
He isnt getting the benefit because he hasnt taken the money. That could be because the bank doesn't allow for it just yet. He wont get tax on the draw of the £15k, regardless of when its taken. Its a loan. Its more a case of when he has the money there, to be able to pay it to himself.
But again (and I apologise for failing to see it because I know your understanding is better than mine) the money will only be there when a profit has been made, which is taxed.
I totally get where you are coming from John. Its a timing issue. Any assets will gain tax relief via CA's so reduce the tax to pay on profit. So each year his tax is lower than it should be, had he not introduced the assets. So over time, he doesnt pay tax on what he's introduced.
I kind of understand it because the DLA doesn't hit the profit and loss account and I was trying to explain it to my client today, but I had already had the same thoughts he had that he's somehow lost out, although I appreciate that's not the case.
Capital allowances will reduce his profits, so he will get tax relief. Just over a number of years.
Right, and is this how he gets his money back tax free as per your comment above? Will that also means he can retrieve the 2.7k on the reducing balance over n years but only on the 12k if the market value of the asset reduces, and it can be amortised, or the business sold? In that case it becomes a bit clearer
Goodwill amortisation cant be claimed on related party transfers after 08.07.15 (and soon, will not be allowed for anyone). If the transfer was made prior to 08.07.15, he can claim goodwill, but not get entrepreneurs relief. If the transfer happened on or after 08.07.15, no amortisation can be claimed. No doubt your date to work to, will be the incorporation date). If this is on or after 08.07.15, if he sells the taxi plate, only at that point, will any difference between cost and sale proceeds be allowed as a "non trading debit" (which I think means a chargeable gain for CT purposes - I am still getting my head round it, to be honest!)
And finally, on the first scenario, there's 8k sat in reserves that is technically his, but he can't extract it because he's already taken against the dla, so what happens to that figure?
You vote it as a dividend when its most tax efficient to do so.
I may be getting it (I hope) Take the dividends as they are made and leave the 15k as is. Extract the money slowly from the DLA using the tax relief on the 2.7k then but the non tangible will need to wait as there isn't tax relief available, only amortisation.
Lets be ridiculous with numbers, but try and keep it simple to put it into context...
say he did a £15k job on his first day as a limited company, and £15k on the second day. He would have £30k in the bank. On the third day he pays his costs, which are £5000. He has £25000 in the bank. He could then take £15k loan repayment in one go, and leave £10k in to cover tax and future costs.. and the bank balance would increase as more sales were introduced. Lets be silly and say day 3 is the period end...
The £25k less some CAs would be taxed at 20% - lets say CAs are £1000.. £24000 taxable at £4800 and paid from the bank. £19000 could be voted as dividend, but as the bank would only have £5200 (£10000 less tax paid of £4800), he can only take that for now.. but would have £13800 to draw once funds became available.. He's only been taxed on his income less costs, and a small allowance for CA's, but he's already got his cash back, and had some tax relief on the assets he introduced.
In a perfect world, that's how it would go..
Dividends are a paper exercise - they get lumped into the DLA with all the other bits, and the director has the right to draw the balance.
I hope that makes some sense! Its a complicated issue to explain in writing when I cant draw pictures, and point to things! LOL
Michelle, once again thanks for your detailed explanation.
You're very welcome John
-- Edited by FoxAccountancyServices on Tuesday 24th of November 2015 09:49:55 PM
I can't colour code this now, because when I change one colour, it knocks out the other colours, hope you can still follow it.
Michelle: Cost of vehicles is £13k, what's accumulated depreciation?
Cost of taxi plate is £15k, what's the amortisation to date?
(depn/amortisation in the accounts, not on the CA computation... as you know depreciation is different to CA's so just want to have full picture)
John: Ahem, confession to make. The depreciation was in line with the CA. This was my very first client and I didn't fully understand depreciation at the time, so followed the CA line. Attached is the spredsheet showing what I did. Strictly speaking it should have been 20% straight line. The 15k for the plate I bunged into non tangible assets and promptly forgot about it, as I knew CA wasn't available for it. Purchased August 2009. I asked the client what the value was last year, and he's advised 12k. Looking briefly at amortisation it looks like this should have been amortised year on year?
Michelle:No amount to pay loan is taxed. It goes in as a credit to DLA and when taken from the bank, its debits the DLA. Only any dividends are taxed, as they are profit after tax. And you may get dividend tax, but dividends are extra money, not part of the loan. You'll get tax relief on the assets introduced, over a period of time. Which I think is a ridiculous rule, as the sole trader would get taxed on the sale in one go.
John: I think I'm looking at this the wrong way. The money used to repay the loan is taxed, because it is from the profits of the Ltd Co. Without generating the profits, the money couldn't be repaid. However, the CA relief isn't taxed, so he gets it back tax free, albeit slowly.
Michelle: ST assets taken by sole trader, still taxed personally.
John: Oh, I hope not. Does this mean that the £12k is taxable? Although they didn't materialise a profit, I assumed this would come under CGT not income.
Michelle: Let me know the accumulated amortisation on the £15k (remember NBV and TWDv are different, I need to understand both)
John: I haven't yet completed the ST accounts, but given that the value of the plate has decreased by 3k, is this classed as a taxable loss or not? Just to explain, it's the plate itself that holds the value. This area doesn't issue new taxi plates, so they have to be bought from an existing business. If the council decided to start issuing new plates, the value would drop to zero. At the time (2009) I read the rules relating to CA and you couldn't claim for intangilble assests. I should have read further to understand amortisation. Say, I did that over 20 years, presumably the amortisation after 5 years would be £3750.
OK, assuming this isn't a taxable loss, but the value of the plate should be 11,250, is this taxable to the sole trader? The ST in essence has put 15k in to buy the plate so I don't understand why it should be.
Regarding the vehicles. My incorrect NBV is the same as write down balance 2410 and 2668, vehicles sold to Ltd Co at £1100 and £1600. NBV should be 0 and 1240. You did say I could take the TWDV as the figure, so can I assume a loss of 1310 and 1068 on sale via a balancing payment, or is that there will be tax to pay on £2700?
John: But again (and I apologise for failing to see it because I know your understanding is better than mine) the money will only be there when a profit has been made, which is taxed.
Michelle: I totally get where you are coming from John. Its a timing issue. Any assets will gain tax relief via CA's so reduce the tax to pay on profit. So each year his tax is lower than it should be, had he not introduced the assets. So over time, he doesnt pay tax on what he's introduced.
John: Yes, I have now grasped the concept. He gets the money back dripfed from the CA relief.
John: Will that also means he can retrieve the 2.7k on the reducing balance over n years but only on the 12k if the market value of the asset reduces, and it can be amortised, or the business sold? In that case it becomes a bit clearer
Michelle: Goodwill amortisation cant be claimed on related party transfers after 08.07.15 (and soon, will not be allowed for anyone). If the transfer was made prior to 08.07.15, he can claim goodwill, but not get entrepreneurs relief. If the transfer happened on or after 08.07.15, no amortisation can be claimed. No doubt your date to work to, will be the incorporation date). If this is on or after 08.07.15, if he sells the taxi plate, only at that point, will any difference between cost and sale proceeds be allowed as a "non trading debit" (which I think means a chargeable gain for CT purposes - I am still getting my head round it, to be honest!)
John: The Ltd Co was incorporated in 2012, but only began trading on 1st September 2014. Date of transfer is 1st September 2014. So, if say the plate is worth 6k on sale, there would be a 6k loss to CT, and if the plate was worth 18k, there would be a 6k charge to CT, or is it amortised each year, and the difference a charge or loss to CT?
Michelle:Lets be ridiculous with numbers, but try and keep it simple to put it into context...
say he did a £15k job on his first day as a limited company, and £15k on the second day. He would have £30k in the bank. On the third day he pays his costs, which are £5000. He has £25000 in the bank. He could then take £15k loan repayment in one go, and leave £10k in to cover tax and future costs.. and the bank balance would increase as more sales were introduced. Lets be silly and say day 3 is the period end...
The £25k less some CAs would be taxed at 20% - lets say CAs are £1000.. £24000 taxable at £4800 and paid from the bank. £19000 could be voted as dividend, but as the bank would only have £5200 (£10000 less tax paid of £4800), he can only take that for now.. but would have £13800 to draw once funds became available.. He's only been taxed on his income less costs, and a small allowance for CA's, but he's already got his cash back, and had some tax relief on the assets he introduced.
In a perfect world, that's how it would go..
Dividends are a paper exercise - they get lumped into the DLA with all the other bits, and the director has the right to draw the balance.
I hope that makes some sense! Its a complicated issue to explain in writing when I cant draw pictures, and point to things! LOL
John:I think so, using your (not so) silly example, I think my client assumed that it would be 30k less expenses and CA = 24k, less loan put in 15k = 9k, taxed on 9k. I knew it didn't work like that but couldn't explain as to how it worked. AIUI, he now gets it back free over a period of time based on CA's. And the value of the plate when sold.
__________________
John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Yes, the assets were in the ST accounts, 15k non tangible, reduced to 12k on sale to Ltd Co as being the correct market value (taxi plate)
Two vehicles purchased at circa 6/7k showing TWDV circa £2410/£2668.. Sold to Ltd Co at £1100/£1600 to reflect current value based on high mileage due to being taxis. (I have checked this with Parkers) Losses on these reflected in ST accounts, based on TWDV. NBV would be 0 for car 1 and 1240 for car 2.
OK, firstly, NBV would both be NIL, as both sold.
Accounting treatment: Credit Motor disposal account with £13,200 (BS) Debit Motor depn on disposal with £8,122 (BS) Debit "profit/loss on disposal of fixed assets" (PL) with proceeds to sales with £5,078 (which is the £2410+2668) Debit drawings with £2,700 (£1100+1600) Credit "profit/loss on disposal of fixed assets" with sales proceeds of £2,700 This gives a £2378 loss on disposal on the PL.
For the tax comp: Add back the £2378 to profit, and presuming that you have £5,078 brought forward TWDV, you show disposal of £2700 and then a balancing allowance of £2378
In the company you have a credit to DLA of £2700 and a debit to motor of £2700 - depreciation will be added back and CA's at 18% claimed in the company.
I haven't had time to look into the plate, but if its a CGT issue, transferring it to the Ltd Co would lose the CGT exemption an individual would get. If its soon to lose its value, due to the deregulation of taxis, then consider what is the best thing to do. Leave that with me a little while longer, its not something I know of the to f my head, but am at christmas meal with tax guru on thursday :)
I haven't had time to look into the plate, but if its a CGT issue, transferring it to the Ltd Co would lose the CGT exemption an individual would get. If its soon to lose its value, due to the deregulation of taxis, then consider what is the best thing to do. Leave that with me a little while longer, its not something I know of the to f my head, but am at christmas meal with tax guru on thursday :)
Many thanks for your help Michelle. The cars were as I expected, but nice to have it verified Just for reference the capital allowances are now 8%, HMRC have lowered the emission level. It now kicks in at 130g not 160g
I don't fully understand how amortisation works, but I understand that I should have amortised straight line every year. Apparently, the maximum I can amortise over is 20 years, which I've opted for as unless the council de-regulate, will forever hold some substantial value. This gives me £750 a year which is 3k. Can I still claim this or is it now lost (ST accounts)
The second thing I don't understand is why it is liable for tax. Ignoring depreciation to make the example simpler, if I buy an asset for 12k and sell it for 15k I pay tax on the 3k. Vice versa I claim tax back on a 3k loss. Does it not work the same way with an intangible asset?
I look forward (or possibly not!) to the response from the Tax Guru.
I hope the office refurb went well. It seems to be the rage because Joannes's just done hers apparently. The Landlord recently removed some kind of damp/dry rot or whatever so when I get round to repainting it that'll be my office refurb done as well, heck I might treat myself to a new desk at the same time
__________________
John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Sorry I was thinking of a black cab, which I understand can be considered plant at 18% (I know there's been much debate on this one!) - but of course your client has normal cars! DOH! So yes, 8% if over 130g
The only thing I have found on hackney plates, is probably what you have seen already...
You may get a capital allowance claim on a Hackney carriage (taxi) licence plate either on its own or, more usually, as part of the cost of the taxicab to which it is attached. The cost or value of the taxi licence plate represents both the actual licence plate itself, which is plant, and the right to trade, which is not. It is only the part of the cost that is attributable to the actual licence plate that qualifies for capital allowances as expenditure on the provision of plant or machinery. This will be a nominal amount.
Most forum posts I've looked at seem to be very old!
I'll speak to tax guru on Thursday evening and see if I can get a definite answer.
The only thing I have found on hackney plates, is probably what you have seen already...
You may get a capital allowance claim on a Hackney carriage (taxi) licence plate either on its own or, more usually, as part of the cost of the taxicab to which it is attached. The cost or value of the taxi licence plate represents both the actual licence plate itself, which is plant, and the right to trade, which is not. It is only the part of the cost that is attributable to the actual licence plate that qualifies for capital allowances as expenditure on the provision of plant or machinery. This will be a nominal amount.
Most forum posts I've looked at seem to be very old!
I'll speak to tax guru on Thursday evening and see if I can get a definite answer.
Thank you very much.
__________________
John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Say, I did that over 20 years, presumably the amortisation after 5 years would be £3750.
Just for reference the capital allowances are now 8%, HMRC have lowered the emission level. It now kicks in at 130g not 160g 
