Category: Accounting

Clear guidance given in HMRC agent toolkit Capital v Revenue – Page 18.

1. Sole Trader and partnership : No deduction allowed.
2. Company: treatment given below:

When was the goodwill acquired?	Tax deduction
Before 1 April 2002	No deduction allowed.
Between 1 April 2002 to  3 Dec 2014	Deduction allowed as per amortization in accounts – under Corporate intangible assets regime ; or At fixed rate of 4% WDA Deduction was also allowed for goodwill purchased from related parties.
3 Dec 2014 to 7 July 2015	Amortisation allowed but only if goodwill purchased from unrelated party.
From 8 July 2015 to 31 March 2019	No deduction allowed
From 1st April 2019	Relief  @ 6.5%  avaliable in certain cases – please see CIRD44050 Where no qualifying IP acquired, no relief. No relief for goodwill purchased from related parties.

Note:
1. Where deduction is not allowed for trading profits . Deduction should be taken for Capital Gains Tax calculation.
2. Please note rules only allow relief to be claimed when a company acquires a business directly rather than acquiring the shares in the target company. Purchased goodwill can only be recognized on a business acquisition but not on an acquisition of shares.

Moral of the story
HMRC has prepared fantastic tool kits, please use it regularly to avoid mistakes.

Link to tool kits

 

This is a simple topic for most of the businesses but has been presented by HMRC in a complex way.

Basically it’s about loans.

These rules covers the usual loans and also cases which are `deemed`. Whenever word `deemed` is used it means special cases specifically mentioned in legislation.

Recently I came across and very helpful webinar from BKL Tax (a tax consultancy), link below and I thought I should share it.

Some key points from the webinar:

• If a trade debt is released its taxable income. E.g. A Ltd sold £100 apples to B Ltd and later A Ltd forgave the trade debt for say bad debt. £100 will be taxable income for B Ltd.

• Interest expense deduction is taken on accrual basis not on paid basis. But there are some anti-avoidance rules around these – related parties beware!

• International accounting standard 23 and Loan relationships: Capitalised interest MUST be claimed in year interest arises (on accrual basis). CTA09 S 320

• Loan release not taxable in specific cases CTA09 S 322 :

1) Release is part of corporate insolvency

2) Consideration is inform of ordinary shares (debt re-structure in case lenders taking over a business)

3) Debtor company in insolvency/administration/liquidation etc.

• Pre trading LR rules also exist

 

Connected parties (CTA09 S466)

If companies are under the control of the same person – waivers among them are generally ignored for tax purposes i.e. for creditor company it will not be a tax deductible expenses and for debtor company it will not be a taxable income.

Webinar also mentions of a case where companies controlled by husband and wife are NOT connected. E.g. A ltd is 100% owned by Mr A and B Ltd is 100% owned by his wife Mrs B. A ltd and B Ltd are not connected. I think HMRC may challenge this.

Speakers also briefly mention Interpretation Act 1978 and its use in interpreting the term “same person”.

I recommend that you are interested please go to the webinar mentioned among above.

Another good thing that have come out of EU.

EU issued a directive no. 2012/6/EU as of 14 March 2012 to be implemented all over EU for micro entities.

 

UK government to comply with the above directive put in place: The Small Companies (Micro-Entities’ Accounts) Regulations 2013.

 

Main aim- To reduce administrative burden for small business to boost economy.

 

What is a micro entity?

If a company meets two of the following three conditions, it is classified as a micro entity:

• Turnover : not more than £632,000

• Balance sheet total : not more than £316,000

• Employees : not more than 10

 

What its use?

Mainly your accountant’s year end work is reduced thus the fee you pay is reduced.

 

How do we file annual accounts at Companies house ?

In the same way as you use to file, just select “Micro entity” while filing.

 

What is the impact for HMRC accounts and tax return?

HMRC accepts these accounts. There is no material impact on your corporation tax.

There are too many accounting framework around IFRS, IFRS for SMEs, FRSSE, FRS 102 and others,  all creating a confusing mess.

I have created below a simple table explaining the applicable frameworks:

Company type	Accounting framework
Micro company       ie. Turnover below £632,000 per annum1	FRS 105
Small Companies    ie.  Turnover below £10.20 million per annum1	Section 1A Small Entities of FRS 102
All others	FRS 102
Listed Companies	IFRS

Where an entity prepares its financial statements in accordance with an accounting framework , a statement of compliance needs to be included in the notes.

Notes :

1. Other criteria also apply like number of employees and balance sheet total.

Further reading:

1. ICAEW article with all resources.