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)