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Question 3c

Enid requires advice on the capital gains tax (CGT) and value added tax (VAT) implications of transferring her unincorporated sole trader business to a newly incorporated company, Niche Ltd. She also requires information on the tax implications of alternative ways of extracting profits from the new company.

Enid:
– Has been in business as an unincorporated sole trader for many years.

– Receives dividends from a portfolio of investments of £4,000 each year.

– Has no other source of income.

– Is a higher rate taxpayer for all relevant tax years.

– Will transfer all the assets and liabilities of her business to Niche Ltd on 1 October 2018.

– Will make no other disposals for CGT purposes in the tax year 2018/19.

– Will be the only director and shareholder of Niche Ltd.

Enid’s unincorporated business:
– At 1 October 2017 Enid had trading losses brought forward of £51,000.

– In the year ending 30 September 2018, Enid’s business will have a taxable trading profit of £42,000, prior to the transfer to Niche Ltd.

– Is registered for the purposes of value added tax (VAT).

The assets and liabilities to be transferred to Niche Ltd:

Cost Value at 1 October 2018
£ £
Goodwill 0 80,000
Workshop 55,000 122,000
Inventory 8,000 8,000
Liabilities n/a (10,000)

Consideration to be paid by Niche Ltd:
– 1,000 £1 ordinary shares in respect of 85% of the total value of the consideration for the business.
– The remainder of the consideration will be left on loan account payable by Niche Ltd to Enid.
– Enid will withdraw cash from the loan account to pay any CGT liability arising on the transfer of the business.

Niche Ltd:
– Will pay Enid a salary of £75,000 per year, and dividends of £15,000 on 31 March each year.
– Will not be regarded as a personal service company under the provisions of the IR35 legislation.

Required:
(c) Advise Enid of the impact on the total amount of tax payable by both herself and Niche Ltd if, instead of a dividend of £15,000, she (1) receives additional salary of £15,000, or alternatively (2) withdraws £15,000 from her loan account in the tax year 2019/20.

Note: You should assume that there will be sufficient funds in Enid’s loan account to permit this withdrawal. (6 marks)

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