Hi Lina, welcome to the forum

How about a bit of an intro first, we always ask newbies, are you self-employed or employed within bookkeeping and accountancy, what qualifications and experience do you have? that sort of thing

What do you mean by 3 years prior to incorporation income? How has this been declared before? Cannot be income of the Company if it did not exist, surely!

Lina, welcome to the madhouse.

I think it does need to be made ultra clear - based on the fact you mentioned there is 3 years pre trading income (as well as expenditure) - that the pre trading expenditure rule you are looking at is one that cannot be applied in this scenario. Anything expended on the (same trade) company has clearly been expended under the 'partnership' and should not be moved to the Company.

I think you need to take a step back a little.

When did they start trading, originally, when they were just 'playing at it'? When did they start earning ANY income? Have they completed tax returns for all these relevant years? Under what trading entity have they filed tax returns? Have they even registered as self employed? Do they have a partnership agreement? Do they have a shareholders agreement? What is the structure for the shareholding? Who owns the song royalties? What impact will all of this have on an eventual ER position?

Why are you looking at 7 years prior when it is clear they have been running a business earlier? As mentioned above - that rule does not cover this scenario, but is probably why, in fairness, some assumptions have been made about your background, because that quite honestly is a rookie error and lets face it assumptions wee the only thing available because no introduction had been provided before your initial post.

So perhaps you can give a bit more information. You say you are qualified and have been working in accounting for a while. But can I ask - what sort of experience you have? Have you been working in a practice? Or in industry? Do you have any tax experience? Do you have a licence from AAT? Or is this just a side job (albeit unpaid) to get you some experience towards your goal of setting up on your own? Just a better guage of your knowledge can aid people who are trying to help you.

Also - given you have done AAT, you will know their rules about helping friends. Its a no-no under their Professional Ethics code. Plus there is the professional competence and due care issue to consider. All AAT members are bound by this code. It begs the question why you are doing this.

Beside all that....

As Shaun has suggested - why are they not engaging a suitably qualified Accountant now   (plus one versed in the quirks of their industry, never mind the incorporation issues)?   I say this often to clients and to folk on here - tax planning - is all in the planning, ie BEFORE you do anything! So they have already made a fudge up of lots of opportunities, but do you really want them to miss out on any more?

This lot could have late registration fees for non registration of self employment? You clearly have late tax returns to complete. What fines/penalties need to be paid? What excuses can you use to reduce these (sir, ' I dont know about Accounting' is not a valid excuse).

Then you have the incorporation of an existing business to complete with all the legals and accounts that that will entail. As they are members of a band is that even the right structure? How are going to deal with existing royalty rights and transfer of royalty rights from the individuals to the limited company and the resultant legal and tax issues in this regard? Is that even the right way to go - who is advising them on this? If they dont transfer the royalties how will the company acquire the right to use them? It might be early days,but mess this one up and the ramifications will be huge and costly - to you as well as them. So do make sure you have some suitable PII in place If you are stilling to plow on regardless.They might be friends now, but I will guarantee they will not be when this gets messed up.

Why are they now running the Limited company books on the same xero package as the prior business? They need to be separated out, they are not the same legal entity. You need to draw a line on one before even looking to start the new one.

Whose name are the existing contracts in? Can any of the mess be unravelled easily?

You will perhaps/likely need HMRC clearance for the incorporation deal.

Sorry its in a bit of a disjointed order, too much time in the sun today. That said I have a million more questions that I can ask on structure/tax/accounts, never mind the royalty situation but think that if you have had no experience in this industry, you really should pass it on BEFORE the first batch of accounts have been completed.

Ive not even considered the record label issues.  

Nor optimising tax in the limited company.

Oh and dont forget you may need to consider setting up as an agent so you can have all these conversations with HMRC. 

What software are you going to use for their Accounts and CT submission, plus personal tax returns?   Plus beware - over disclosure in a set of accounts at companies house can be detrimental to the health and wellbeing of a limited company so choose carefully.   

-- Edited by Cheshire to correct typos

LinaKochanske wrote:

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Hi All,

Thank you for your participation in this conversation didn't expect that much assumptions tho .

So to clarity I am AAT qualified and working in accounting for the past 10 years. The company I am talking about is my friend's and him and another guy are musicians that have been playing in a band and building their own little record label as far as I can remember. No accounting knowledge, so they have just been going along and doing what they like without any understanding of legal requirements, after few years when their income and expenses got higher and they've decided to take it more seriously and got themselves a bookkeeper who I believe pointed out that there is no company registered and did that for them (which has happened at the beginning of 2019). My role here is to help them out to file their first accounts correctly and to find an accountant that will look after their company in the future. I am not paid for this and there is no need of certain financial verification as Casu mentions here as far as I am aware.

Hope that's a little more clear and please go ahead and shoot with more questions or advice.

Thanks
Lina

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The more I read, the more there is a need for what I suggested, Ive got to say.

Sometimes you have to admit that you are not capable of doing a role, we all do.  You can get out of this and save face with non paying client, by citing ethics. Do them a favour as well as yourself, pass it on.

or plow on and expect a huge claim on your PII in a few years. 

Thank you All,

You all helped me understand that this task is way out of my league and is best to pass it over for a more experienced accountant to deal with right away. I thought it would be good experience for me before passing on to an accountant but I guess is not worth doing it on my friends expense as well as good point about "AAT no nos'. Very helpful suggestion and I really appreciate that! Thanks again.

Lina