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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I set up business as a sole trader in 2004 and sold my business

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I set up business as a sole trader in 2004 and sold my business as a going concern in December 2010.
I financed my business at outset and over the first 3 years using an interest - free loan to the business (KM trading as... 122property) using proceeds of my deceased wife's estate.
When I sold the business in Dec 2010 there was part of the original loan into the business remaining unrepaid.
The contract stated selling price was £138,500 and a sum 'x' was repaid to myself from the amount received as repayment of the outstanding loan amount.
On my tax return however my accountant on his intermediary's CGT summary entered the full amount received, £138,500 in the 'Proceeds' box showing no costs so net gains also showed £138,500... The amount 'x' was shown as 'losses brought forward' deducted with gains after losses showing £43,856 on which I paid entrepreneur's rate CGT on the due date.
HMRC have now examined my tax return and interviewed me etc and are saying that 'as presented' I should have paid entrepreneur's rate CGT on the whole of the £138,500.
Has my accountant filled out the CGT intermediary summary pages on my 2010-11 tax return incorrectly ??
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.

Hi.

Can you tell me what the nature oif your business was please.

Customer: replied 3 years ago.

The business was an Estate and Lettings Agency

Expert:  TonyTax replied 3 years ago.
Thanks.

Are you saying that the tax office is claiming that the gain is £138,500 and not the difference between £138,500 and the outstanding loan? Are they disputing the capital losses brought forward?
Customer: replied 3 years ago.

Yes... although there was clear accountancy of the investment (interest-free loan) and HMRC have acknowledged that the investment was made.. because my accountant in tax years 2007-08, 2008-09 and 2009-10 showed the outstanding amount of the loan as 'losses brought-forward' on each of those tax returns, HMRC has argued that the loan was in fact trading losses and have not allowed the offset against the capital proceeds of the sale based (it seems) on how my accountant has presented the facts in my tax return on the CGT Intermediary summary pages... HMRC have also seen my accounts for the years in question although they were only examining 2010-11 specifically having not examined any previous years.

Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I draft my answer.
Customer: replied 3 years ago.

OK... shall I stay logged on (no problem) or am I better looking for an email or whatever later ??

Expert:  TonyTax replied 3 years ago.
I'll need a little time to draft my answer which I am doing now. You can stay logged on or log off to do something else and wait for the next email. It doesn't affect what I do.
Expert:  TonyTax replied 3 years ago.

Hi again.

When you sell a business, the sale price is usually split between an agreed price for goodwill and a price for fixtures and fittings and equipment etc. There is deemed to be no gain on fixtures and fittings and equipment so the gain arises on the goodwill only. If you started the business from scratch, then you won't have had any goodwill to start with. Different businesses have different methods applied to determine the value of goodwill.

As a sole trader, you cannot really loan money to yourself as you are the business effectively, though I appreciate you may see it as a loan to a business separate from you. The loan is really a capital investment in your business which I assume was used to buy equipment and for start up costs. Your accountant should have claimed capital allowances for the equipment costs and they may or may not have claimed allowances for other expenditure financed by the "loan". If you withdrew money on occasion as repayment of the "loan", it would have made no difference to your taxable profit.

Your late accountant has clearly made an error in claiming the outstanding loan as capital losses and deducting them from the business sale proceeds so I'm afraid that HMRC are correct on that. Your new accountant should look to amend all the accounts to claim trading losses against any other sources of income you may have had as they arose. Trading losses carried forward can only be offset against trading profits of the same business. Trading losses (not losses brought forward) not relieved against other sources of income in the same tax year can be relieved against capital gains of the same tax year or against other sources of income or capital gains in the previous tax year as you will read in the HMRC helpsheet HS227 here.

You are probably technically out of date to make some loss claims due to HMRC time limits. However, your accountant should look to use the overpayment relief provisions which do have time limits or the overpayment relief special relief provisions which have no time limit which are set out here and here.

I hope this helps but let me know if you have any further questions.

Customer: replied 3 years ago.

Could you give me chapter and verse of the law where it is explicit that trading losses of current year (in 2010-11) can be offset against capital gains of the same tax year but NOT any business losses brought forward from preceding years ??


That would help me a lot


Thanks

Expert:  TonyTax replied 3 years ago.

See page 1 of HS227 here and here. Do you want the actual legislation?

Customer: replied 3 years ago.

Yes please...

Expert:  TonyTax replied 3 years ago.
Give me a few minutes.
Expert:  TonyTax replied 3 years ago.
See Sections 60 to 100 of Income Tax Act 2007 here. The sections you are interested in are shown here.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15847
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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