Blog

Tax treatment of Goodwill for computing trading profits?

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 2002No deduction allowed.
Between 1 April 2002 to  3 Dec 2014Deduction 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 2015Amortisation allowed but only if goodwill purchased from unrelated party.
From 8 July 2015 to 31 March 2019No 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

Self employed – Car expenses

You must own the the car in your name.

For claiming expenses of the car , as you are self-employed you can either use either:

  1. Actual Method

2. Simplified Method

Actual Method

You could claim a proportion of all running actual costs of the car including repairs, restricted to the business use.

That is, suppose you spend £100 on your car in a month and business use is 70%. You can claim £70 as business expense.

Under this method you will need to keep all expense receipts for 6 years.

More details

Simplified Method

You can use the simplified method of 45p per mile for 10000 miles and 25p per mile thereafter which would also cover all running costs. You do not need to keep the expense receipts.

More details

Under both methods it’s advisable to maintain a log of your journeys – attached.

Which method to use  ?

You will need to ascertain which method is most beneficial to you.
Please use this calculator to make the decision – Calculator

Its usual to chose Simplified expenses as there is no need to keep expense receipts.

Whichever method once chosen will be used till that particular vehicle is disposed.

There is no need to take the decision when buying the car you may collect all the information and take the decision at year when filing tax return.

Leasing

Claim business proportion of monthly expenses plus actual monthly running costs. Example: Your leasing expenses are £200 per month and actual running expenses £100. Business use 50%. You can claim £150 as business expenses.

Please note if CO2 emission is over 100g/Km2 you reduce your lease by 15%.

Further information

Please also see a helpful HMRC Webinar , enter your details and webnair will start.

Premium on Lease assignment

When premium is paid to the old tenant for acquisition of restaurant site

 

1. General Principal

A distinction is made between:

a. a premium paid for the grant of a lease, and
b. a capital sum paid on the sale of a lease (an assignment)

A sale (or assignment) is a CGT matter (see PIM1204).


2.Calculation of lease expense for the new tenant

Step 1: Find out if the original tenant paid any premium for grant of lease. If no premium paid, go to step 2 otherwise continue.

Find out the income taxable in Landlord’s hand for grant of lease. Formula for this is:

P x (50-Y) / 50

Where P is Premium paid and Y is lease term in years minus 1.

See PIM1205 for an example

 

Step 2: Calculation of revenue expense for the old tenant

Landlord taxable Income/Lease term              x1
Plus: Annual Rent Payable                                  x
Total Revenue expense                                        x

1. This will be zero if no premium was paid by the original tenant as mentioned in Step 1

See BIM46255 for an example

 

Step 3: Calculation of revenue expense for the new tenant

New tenant steps in the shoes of old tenant and can deduct Total Revenue expense from his taxable profits as calculated in Step 2 i.e. new tenant can take trading deduction for premium paid by the old tenant.

Unfortunately, premium paid by the new tenant to old tenant on lease assignment is treated as capital payment and cannot be used as a trading deduction for the new tenant. See example BIM46265

 

 

 

 

Structure and building allowance (SBA) in Restaurant Trade

Structure and building allowance with an example incorporating transitional provisions.

1. Introduction

SBA is a new capital allowance for construction costs incurred on or after 29 October 2018, at an annual rate of 2 percent (flat rate) on a straight-line basis off their profits before they pay tax. Effectively written down over 50 years.

Rate changed from 2 percent per annum to 3 percent per annum from 1 April 2020 (corporation tax) and 6th April 2020 (Income Tax). As a result, the period over which expenditure may be relieved is reduced from 50 years to 33 and one third years. (see point 3 for example)

2. Leases

Expenditure on constructing a building may be incurred at different times or by different people. We need to apply SBA to each part of expenditure separately.

See an example on HMRC website – CA90350

2.1 Landlord Expenditure

In hospitality trade usually restaurants operate from leasehold premises. Landlord may have spent lot of money in construction or acquisition of the building and lessee maybe interested in knowing whether they can claim any SBA on this expenditure.

Short answer is no. Lessee cannot claim SBA on landlord’s expenditure; we will see the reasons for it below:

Right to claim SBA does not pass to lessee unless both of the following conditions are met:

  • the lease term granted is for 35 years or more
  • the market value of the lessor’s retained interest in the property is less than one third of the capital sum paid for the grant of the lease – see example (CA90600)

2.2 Leaseholder expenditure

Where leaseholder incurs expenditure usually in fit out of the restaurant, they are eligible to claim SBA on it.

2.3 What happens if lease is terminated?

We currently being in COVID crises will see lot of leases being terminated due to non-payment of rent. Can Landlord’s claim SBA on expenditure incurred by lessee ?

Answer – No (see CA90800)

2.4 What happens if restaurant is sold?

Purchase will step in Seller’s shoe and continue claiming SBA (see CA91010 and CA91400)
Purchase must collect SBA Allowance Statement from Seller.

3. Claiming SBA

Step 1: Identify qualifying expenditure?  (see CA93110 and CA93400 and CA94000)

We also need to retain evidence of construction expenditure, such as invoices. Plus retain relevant documents to support the date of earliest construction contract.

Step 2: Prepare Allowance Statement (see CA94610)

This a MUST before SBA is claimed. Where there is no allowance statement, the qualifying expenditure is nil.

Where the current owner incurred the qualifying expenditure in relation to the building, the current owner creates the allowance statement.

Where the current owner acquired the relevant interest in the building from another person, they must obtain the allowance statement from a previous owner.

Evidence requirement: HMRC example of Allowance Statement (CA94560)

Information to identify the building to which it relates Unit X
Date of first construction contract 1st January 2020
Total amount of qualifying expenditure £700,000
Date the building came into use (date from which we start claiming SBA) 1st March 2020

There is no requirement to record the amount of SBA claimed. Any unclaimed SBA cannot be carried forward and is lost, so it is assumed the full amount of SBA available in any period has been claimed.

The amount of the allowance is reduced if the building was brought into qualifying use part way through a year (CA91400).


Step 3
: Quantify SBA (CA91400)

Suppose it’s a Ltd company which did the expenditure in Step 2 and wishes to claim SBA. It closes its books on 30th June 2020. We calculate the SBA below:

Claim Period: 1st March 2020 to 30th June 2020.

SBA Example

4. Details of Transitional Provisions:

Adjustment for pre-April 2020 allowance: (section 270GD of CAA2001)

read subsection 2 and 3

Source:
HMRC Manual

STANDARD TERMS OF BUSINESS

28th July 2020 
The following terms of business apply to all engagements accepted by Notting hill Accountants Limited. All work is carried out under these terms except where changes are expressly agreed in writing.
1.  Applicable law
1.1     Our engagement letter, the schedules of services and our standard terms and conditions of business are governed by, and should be construed in accordance with English law. Each party agrees that the courts of England will have exclusive jurisdiction in relation to any claim, dispute or difference concerning this engagement letter and any matter arising from it on any basis. Each party irrevocably waives any right to object to any action being brought in those courts, to claim that the action has been brought in an inappropriate forum, or to claim that those courts do not have jurisdiction.
1.2     We will not accept responsibility if you act on advice previously given by us without first confirming with us that the advice is still valid in light of any change in the law or in your circumstances. We will accept no liability for losses arising from changes in the law, or the interpretation thereof that occur after the date on which the advice is given.
2      Clients’ money
2.1     We will not hold money on your behalf. 
3      Confidentiality
3.1     Unless we are authorised by you to disclose information on your behalf, we confirm that if you give us confidential information we will, at all times during and after this engagement, keep it confidential, except as required by law or as provided for in regulatory, ethical or other professional pronouncements applicable to us or our engagement. 
3.2     You agree that, if we act for other clients who are or who become your competitors, to comply with our duty of confidentiality it will be sufficient for us to take such steps as we think appropriate to preserve the confidentiality of information given to us by you, both during and after this engagement. These may include taking the same or similar steps as we take in respect of the confidentiality of our own information.
3.3     In addition, if we act for other clients whose interests are or may be adverse to yours, we will manage the conflict by implementing additional safeguards to preserve confidentiality. Safeguards may include measures such as separate teams, physical separation of teams, and separate arrangements for storage of, and access to, information. 
3.4     You agree that the effective implementation of such steps or safeguards as described above will provide adequate measures to avoid any real risk of confidentiality being impaired.
3.5     We may, on occasions, subcontract work on your affairs to other tax or accounting professionals. The subcontractors will be bound by our client confidentiality terms. 
4      Conflicts of interest
4.1     We will inform you if we become aware of any conflict of interest in our relationship with you or in our relationship with you and another client, unless we are unable to do so because of our confidentiality obligations. 
5 Disengagement Letter
5.1     If we resign or are asked to resign, we will normally issue a disengagement letter to ensure that our respective responsibilities are clear. 
6      Electronic and other communication
6.1     Unless you instruct us otherwise, we may, if appropriate, communicate with you and with third parties by email or other electronic means. The recipient is responsible for virus checking emails and any attachments.
6.2     With electronic communication, there is a risk of non-receipt, delayed receipt, inadvertent misdirection or interception by third parties. We use virus-scanning software to reduce the risk of viruses and similar damaging items being transmitted in emails or by electronic storage devices. Nevertheless, electronic communication is not totally secure and we cannot be held responsible for damage or loss caused by viruses or for communications which are corrupted or altered after despatch. Nor can we accept any liability for problems or accidental errors relating to this means of communication, especially in relation to commercially sensitive material. These are risks you must bear in return for greater efficiency and lower costs. If you do not wish to accept these risks, please let us know and we will communicate by paper mail, other than when electronic submission is mandatory.
7      Fees and payment terms
7.1     Our fees may depend, not only upon the time spent on your affairs, but also on the level of skill and responsibility and the importance and value of the advice we provide, as well as the level of risk.
7.2     We will bill monthly and our invoices will be due for payment upon presentation. Our fees are exclusive of VAT which will be added where it is chargeable. Any disbursements we incur on your behalf, and expenses incurred in the course of carrying out our work for you, will be added to our invoices where appropriate.
7.3     Unless otherwise agreed to the contrary, our fees do not include the costs of any third party, counsel or other professional fees. If these costs are incurred to fulfil our engagement, such necessary additional charges may be payable by you.
7.4     If you do not accept that an invoiced fee is fair and reasonable, you must notify us within 21 days of receipt, failing which, you will be deemed to have accepted that payment is due.
7.5     If a client company, trust or other entity is unable or unwilling to settle our fees, we reserve the right to seek payment from the individual (or parent company) giving us instructions on behalf of the client, and we shall be entitled to enforce any sums due against the group company or individual nominated to act for you.
8      Help us to give you the best service
8.1     We are committed to providing you with a high quality service that is both efficient and effective. If, at any point you would like to discuss with us how our service to you could be improved, or if you are dissatisfied with the service you are receiving, please let us know.
8.2     If we do not answer your complaint to your satisfaction, you may, of course, take up the matter with our professional body, ICAEW. 
9      Intellectual property rights and use of our name
9.1     We will retain all intellectual property rights in any document prepared by us during the course of carrying out the engagement except where the law specifically states otherwise.
9.2     You are not permitted to use our name in any statement or document you may issue unless our prior written consent has been obtained. The only exception to this restriction would be statements or documents that, in accordance with applicable law, are to be made public.
10    Interpretation
10.1  If any provision of our engagement letter or terms of business is held to be void, that provision will be deemed not to form part of this contract. In the event of any conflict between these terms of business and the engagement letter or appendices, the relevant provision in the engagement letter or schedules will take precedence.
11    Internal disputes within a client
11.1  If we become aware of a dispute between the parties who own the business or who are in some way involved in its ownership and management, it should be noted that our client is the business and we would not provide information or services to one party without the express knowledge and permission of all parties. Unless otherwise agreed by all parties, we will continue to supply information to the normal place of business for the attention of the directors. If conflicting advice, information or instructions are received from different directors in the business, we will refer the matter back to the board of directors and take no further action until the board has agreed the action to be taken.
12    Lien
12.1  Insofar as we are permitted to so by law or by professional guidelines, we reserve the right to exercise a lien over all funds, documents and records in our possession relating to all engagements for you until all outstanding fees and disbursements are paid in full.
13    Limitation of third party rights
13.1  The advice and information we provide to you as part of our service is for your sole use, and not for any third party to whom you may communicate it, unless we have expressly agreed in the engagement letter that a specified third party may rely on our work. We accept no responsibility to third parties, including any group company to whom the engagement letter is not addressed, for any advice, information or material produced as part of our work for you which you make available to them. A party to this agreement is the only person who has the right to enforce any of its terms, and no rights or benefits are conferred on any third party under the Contracts (Rights of Third Parties) Act 1999.
14    Period of engagement and termination 
14.1  Unless otherwise agreed in our engagement letter, our work will begin when we receive implicit or explicit acceptance of that letter. Except as stated in that letter, we will not be responsible for periods before that date.
14.2  Each of us may terminate our agreement by giving not less than 21 days’ notice in writing to the other party except if you fail to cooperate with us or we have reason to believe that you have provided us with misleading information, in which case we may terminate this agreement immediately. Termination will be without prejudice to any rights that may have accrued to either of us before termination.
14.3  We reserve the right to terminate the engagement between us with immediate effect in the event of: your insolvency, bankruptcy or other arrangement being reached with creditors; an independence issue or change in the law which means we can no longer act; failure to pay our fees by the due dates; or either party being in breach of their obligations if this is not corrected within 30 days of being asked to do so.
14.4  In the event of termination of our contract, we will endeavour to agree with you the arrangements for the completion of work in progress at that time, unless we are required for legal or regulatory reasons to cease work immediately. In that event, we will not be required to carry out further work and shall not be responsible or liable for any consequences arising from termination.
15    Professional rules and statutory obligations
15.1  We will observe and act in accordance with the Bye-laws, regulations and Code of Ethics of ICAEW and will accept instructions to act for you on this basis. We will not be liable for any loss, damage or cost arising from our compliance with statutory or regulatory obligations. You can see copies of these requirements in our offices. The requirements are also available online at icaew.com/en/membership/regulations-standards-and-guidance.
16    Quality control
16.1  As part of our ongoing commitment to provide a quality service, our files are periodically reviewed by an independent regulatory or quality control body. These reviewers are highly experienced professionals and are bound by the same rules of confidentiality as our principal.
16.2  When dealing with HMRC on your behalf we are required to be honest and to take reasonable care to ensure that your returns are correct. To enable us to do this, you are required to be honest with us and to provide us with all necessary information in a timely manner. For more information about ‘Your Charter’ for your dealings with HMRC, visit http://www.gov.uk/government/publications/your-charter. To the best of our abilities, we will ensure that HMRC meet their side of the Charter in their dealings with you.
17    Reliance on advice
17.1  We will endeavour to record all advice on important matters in writing. Advice given orally is not intended to be relied upon unless confirmed in writing. Therefore, if we provide oral advice (for example, during the course of a meeting or a telephone conversation) and you wish to be able to rely on that advice, you must ask for the advice to be confirmed by us in writing. Advice is valid as at the date it was given.
18    Retention of papers
18.1  You have a legal responsibility to retain documents and records relevant to your financial affairs. During the course of our work we may collect information from you and others relevant to your tax and financial affairs. We will return any original documents to you [if requested]. Documents and records relevant to your tax affairs are required by law to be retained as follows:
Individuals, trustees and partnerships:
a)     with trading or rental income: five years and 10 months after the end of the tax year
b)     otherwise: 22 months after the end of the tax year.
Companies, Limited Liability Partnerships, and other corporate entities:
c)     six years from the end of the accounting period.
18.2  Although certain documents may legally belong to you, we may destroy correspondence and other papers that we store electronically or otherwise that are more than seven years old, except documents we think may be of continuing significance. You must tell us if you wish us to keep any document for any longer period. 
19    Timing of our services 
19.1  If you provide us with all information and explanations on a timely basis in accordance with our requirements, we will plan to undertake the work within a reasonable period of time to meet any regulatory deadlines. However, failure to complete our services before any such regulatory deadline would not, of itself, mean that we are liable for any penalty or additional costs arising.