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Sale of accountancy practice that may involve fraud.
A sole practitioner accountant is selling his practice and has received an offer that he is minded to accept.
I have pointed out that there appears to be a lack of clarity as to the tax treatment of the purchase price. And the deal may even involve an unintended attempt to fraudulently mislead HMRC.
The practice agent who sourced the purchaser is adamant that the arrangements are very common.
The heads of terms are clear that the practice is being sold for 1.1 times gross recurring fees. This much seems fine. 70% of the fee will be paid on completion and 30% after one year (subject to clawback if fees fall in the interim).
On this basis the full fee would be treated as a capital receipt and the sole practitioner would be subject to capital gains tax in the usual way. Equally the larger firm that is buying his practice would have a base cost equal to the aggregate sums paid.
However both parties anticipate that only 60% of the fee will be treated as capital. The purchaser will pay the balance of 40% as a consultancy fee to the sole practitioner for his services and support post-transfer. The expectation being that this will be disclosed, and taxed, as income. The purchaser will get an immediate write-off for this element of the fee (with a commensurate reduction in their base cost).
Even if the paperwork subsequently shows the goodwill as being sold/purchased for the lower amount this does not accord with the initial agreement. It also suggests a significant discount on the most common sale prices for accounting firms – typically between 85% and 120% of gross recurring fees.
Am I being overly cautious or are the parties at risk of committing a tax fraud?
Query 19,983 – Cor Shush.
Tax treatment of encashment of life insurance bond.
Peter died in 2017 leaving his entire estate to a trust of which his wife Clara was the life tenant and his two adult nephews, Fred and George, the beneficiaries. Clara died in January 2022, leaving no assets of her own. At her death the trust ceased and the assets are to be equally split by the nephews (based on the amounts involved no IHT liability is anticipated).
Peter and Clara were both UK resident and domiciled but Fred and George have always lived in France, where they are tax residents.
Peter’s estate solely comprised of £150,000 in cash, with which the trustees acquired a life insurance bond from a UK provider shortly after Peter’s death.
The bond, insured on the lives of Fred and George, was last month encashed for £185,000 and with the surrender being a ‘chargeable event’ (under TA 1988, s 552) the policy provider calculated a gain of some £35,000 crystalised on the surrender, with a notional tax at the basic rate of 20%.
The tax treatment on the beneficiaries in respect of the encashment of the bond is not clear to me. Will they benefit from the capital gains tax uplift now Clara has passed away (which would eliminate the gain almost in full)? Or are the nephews subject to income tax at their marginal rate on their full share of the gain?
As EU residents they qualify for a UK personal allowance/exempt amount which should mitigate any liability.
I would appreciate readers’ comments.
Query 19,984 – Sovereign.
Family partnership in nursery business.
A client owns a farmhouse and cottage in eight acres that has been used as a nursery for many years. She has two daughters who work in the nursery, one of whom lives in the cottage. The mother lives in the farmhouse. The whole lot is worth about £3m.
We have suggested that the daughters become partners while mum retains the freehold outside the partnership but charges no rent as has always been the case.
Will the estate of the mother be able to claim business property relief on her death? Or is there a better idea?
Can Taxation readers think of alternative solutions?
Query 19,985 – Elmfield.
Reverse charge problem for builder.
We are a firm of building contractors and have made a mistake with the new reverse charge rules in relation to invoices received from one of our subcontractors. We are not sure how to deal with the problem.
Basically, the subcontractor has charged us 20% VAT on all invoices issued since 1 March 2021 when the new rules were introduced and we now realise that they should have been invoiced without VAT (ie the reverse charge applies and we account for the VAT instead).
This is because we sell on the services as part of our own invoices issued to the final client and we are also registered for the construction industry scheme.
It seems that the contract with the subcontractor means we should have told him if we are not an ‘end user’ for any job.
As we did not do this, the subcontractor has charged 20% VAT as the default position, and we have paid this VAT and claimed input tax.
The subcontractor’s view is that we can now confirm our end user status but that will only be relevant for future invoices – the past cannot be untangled.
My concern is whether we still have a problem for the invoices raised between March and July 2021 – our total input tax claim on these invoices is £70,000.
Readers’ thoughts would be appreciated.
Query 19,986 – Reverse gear.
