[Tosh]

Macmac asked:

My chartered accountant says a "bought round" is NOT tax deductable as you are only buying good will. Then I read others on here who have claimed the full amount of their "good will". So, who is right?

His accountant was wrong; here's the definitave answer taken from a tax book with regards to sole traders selling on their business:

From the book (Understanding Tax for Small Businesses: ISBN 978-0-340-92741-0)

you can however sell all the individual business assets such as land, buildings, equipment, goodwill (such as your client list) and stock.

Here's the reference in black and white:



Macmac, your chartered accountant was wrong, and this fellow window cleaner was right; I usually am as Ronnie Patton knows!

 

[Moderator David@stives]

Tosh you can buy good will and sell good will.

It is only deductable when you sell.

Ie if i buy a round for £10k I cannot claim that against tax until i sell, say i sell three years down the line at a loss of £5k i can claim £5k aginst my tax, however if i sold for £20k i would only pay tax on £10k

[AuRavelling79]

Tosh - that book is about selling the round and it says you could be liable for capital gains tax (as a s/e person) - if it makes sufficient gain.

But buying it? Does that count against income tax? I always thought so but from your quoted book it seems to be a personal asset upon which you can make or lose money.

So does that mean if I buy eg a £1000 worth of work off of you then I don't claim it as a business expense but then when I sell it on in 5 years for eg £2000 then I have £1K which would be a capital gain liability if it is part of gains over the threshold for that particular year?

On the rare occasions I've bought work (goodwill ?) I've put it against my expenses, When I've sold stuff I've counted it as profit. Maybe I shouldn't have done either ...

[Tosh]

Guys, it all seemed really simple to me till you started posting; and Dave, I think you're totally incorrect.

Look, it works like this:

You buy some work worth £100; then you class that as an expense; just as you would for fuel.

And in the same vein, you sell some work worth £100 then that's added to your turnover which you're taxed on.

Whether the work you first bought and then sold is the same or different work, that's irrelivant; it's classed as two totally different transactions.

Does that make sense?

----------------------------------------------------------------------------

Here's an example.

I buy some work from Squeaky for £100.  I get a receipt from Squeaks and put that down as an expense for 08/09 tax year.

Then one year  later I sell the same work, plus some other stuff, for £500, then that £500 is added to my turnover for 09/10 and taxed as such.

Does that help?

[AuRavelling79]

No - cuz that book talks about capital gains tax, not income tax ....

Anyway Squeaky hasn't got any work worth a £100, so it's academic.

[matt]

my accountant said i couldnt claim either

[Tosh]

Right, erm, er.... I'll be back ... I've got some reading to do I think!

 

[windowwashers]

my accountant said i couldnt claim either

Same here, and if they was wrong I will be well annoyed

[Tosh]

AAAAaaahhhrrrr, this isn't fair!  You're all ganging up on me and I've never bought a round in my life!

I know how Ronnie feels now; this is just so unfair!

I was only trying to help, and I don't believe I'm wrong either; you lot all are; and all of your accountants too!  I'm a Geordie, we're never wrong; well not usually anyway!  I've only ever been wrong once in my life and that was when I said it would rain and it didn't.

I remember that moment precisely.  It was a Tuesday!

So help me, Allah!

[Tosh]

!  I've only ever been wrong once in my life and that was when I said it would rain and it didn't.

what about when you got married 

Okay, twice then!

[mci services]

tosh my business advisor said it was fine from the business gateway, but he could be wrong i dont have an accountant so god knows, hope it is as i have £300 to put through even though the work was terrrible and i dumped it(leason learned) i still bought it and it should be an expense, i hope

[Moderator David@stives]

I think There is a way of putting goodwill through your accounts but only a tiny percentage each year, i forget the term, but you can put the servicable life of the goodwill, ie 20 years , then offset 5 % of it or something like that.

I think the term is amortization or similar. I think it works if you put the good will you already own into a company if you go limited, I think the goodwill is classed an intangible asset, I will have to research that bit.


All i can say is ask the hm revenue or an accountant.

[ronnie paton]

tosh ee me out of this im sure your big nose and big gob can sort things out on there own

[Steve B]

Tosh you could phone the Tax office and ask them directly this will clear it up once and for all.

[Moderator David@stives]

Tosh

Please stop having a dig at Ron it is uncalled for.

[Rob.Hall]

This is the law. I confirmed it with the tax office.

If  you buy a round it is not tax deductable.

The reason. It is a capital asset.

Just the same as buying a franchise or building....It has a value when sold.

If you did not sell the round when you give up then you can argue to differ.

I am building a workshop but it is classed as a capital asset so I cannot claim it as tax deductable.

[Sir Squeaky]

No - cuz that book talks about capital gains tax, not income tax ....

Anyway Squeaky hasn't got any work worth a £100, so it's academic.

I suppose you've got a better round than me then Malc? :
You know that for a fact do you?

[dai]

If it's classed as a capital asset, then it must surely fall into the same category as buying a van.
You claim a percentage, say 25% every year over four years.

[Ian_Giles]

How can it be called a capital asset when ultimately it is only good will, just a list of customers, I would certainly argue that the "round" is no more than a business expense.
That would be very different if as well as a list of customers you were also buying solid assets, van, equipment, poles, pumps, ladders, filtration systems and so on.

The "round" itself is not a fixed or tangible asset.

I would further imagine that it would depend on the individual tax inspector that looks at your accounts in depth, some might agree with the interpretation I have just outlined, others might lean towards the one that Dave and others have outlined.
That's the problem with tax...it  doesn't have to be complicated....but it is! 

Ian

[macmac]

Still waiting tosh!

Respect for the the research though.

I'm thinking of doing my tax return online this time. I've always used a large, respected chartered accountant company to date but last year was the first full year where ALL they had to do was fill in my return online, I sort all my stuff out neatly & present them with it. i.e. I didn't use them for advise or any other matters relating to tax. My bill was nearly 400 quid, personaly I think this is steep & this year I'm going to question this & offer them by books for 200 quid,(cheek I know) If they decline then I may just do it myself. I have gained enough knowlage from them up to now I think to do it myself.

BUT, everybody seems to have differing oppinions on tax issues & getting to the absolute truth can be a time consuming pain. I once phoned the tax office regarding an issue & I knew more than the person on the other end :

Is the 400 quid worth the time saving & satisfaction/ease of mind that all is in order?

Tony

[scud]

  Why not when buying a round is pay cash, they keep quiet, you keep quiet and earn your money back before adding it into your declared earnings.

  as a disclaimer - I have never bought anything in my life, including window cleaning work.

[Tosh]

Right, just a quick one here, but the page I posted up related to 'selling your business'; not buying a round; so it was the wrong reference to use.

And as someone said earlier, and after a bit more reading, I suspect buying a round could be counted as a Capital Asset, though this normally - I agree - is something that's a 'bit of kit', rather than something intangible like goodwill.

But 'goodwill' is definately recognised by the tax man, since when it comes to  selling your business, he'd be after the captial gains you've made on it.

If it is a Capital Asset; which I strongly suspect it is; then you'd be able to deduct a certain amount per year from your profit, thereby reducing your tax liabilty; till the amount you spent was used up as an expense.

But what I don't believe is that you can spend, for example, £3000 to purchase a round to start window cleaning, and that has no effect on the income tax you pay at the end of the year, and that you can only 'save' when you close your business down; say 20 years later; that just doesn't make any sense to me; and normally there's a method behind the madness of rules and regulations.

I'll do a bit more reading and come back with what I think is a definitive answer.

PS.

Sorry, Ronnie, Squeaky has stopped biting at my derogatory posts about him; so I've chosen you to fill his boots.  It means I like you really!  Honest!

PPS.  I still think I'm right on this matter!  

[Tosh]

How can it be called a capital asset when ultimately it is only good will, just a list of customers, I would certainly argue that the "round" is no more than a business expense.

Ian

Define a Capital Asset!  I bet you can't.  Why?  because:

From my tax book:

There are no hard and fast rules that define plant and machinery.  Machinery is usually fairly easy to identify but 'plant' is not and many cases end up in dispute ultimately to be considered by the courts.  To be eligible for capital allowances the asset must be necesssary to the functioning of your business... [etc]

So given that above paragraph, I reckon it could be strongly argued that buying a customer list (goodwill) is 'plant', because it's necessary to the functioning of your business.

Therefore should be treated as a Capital Allowance!

[Tosh]

Oh, and I suspect that Capital Allowances differ from expenses and overheads (which are both usually tax dedudctable) because Capital Allowances items can be high-cost; a lot more than your annual fuel or phone bill.

For example, the tax man doesn't want you buying a luxury car for your business to get out of paying tax for that year does he?

So he calls it a Capital Asset and says the most you can claim against your income tax is £3K maximum per year.

Can you see the method?  It's still a bit foggy for me, but I'll get there.

[Sir Squeaky]

Sorry, Ronnie, Squeaky has stopped biting at my derogatory posts about him; so I've chosen you to fill his boots.  It means I like you really!  Honest!

So you've just inadvertantly said you like me Tosh.

Ah, so sweet!

[Tosh]

Squeaks, you're alright for a ginger balding bloke!

[AuRavelling79]

No - cuz that book talks about capital gains tax, not income tax ....

Anyway Squeaky hasn't got any work worth a £100, so it's academic.

I suppose you've got a better round than me then Malc? :
You know that for a fact do you?

No Rog - Your round is way better than mine! My post was meant to be a little light humour - sorry if I caused offense. 

[Tosh]

but last year was the first full year where ALL they had to do was fill in my return online, I sort all my stuff out neatly & present them with it. i.e. I didn't use them for advise or any other matters relating to tax. My bill was nearly 400 quid, personaly I think this is steep
Tony

Tony,

Your accountant company earned £400 for less than - at most - half-an-hours work!

That's not a bad business to be in, is it?

[Tosh]

Oh, and having a Chartered Accountant is no guarantee that you'll avoid a tax investigation.

My Bible (tax book) explains fully how and why some businesses get tax investigated; how it all works; etc.

[AuRavelling79]

Oh, and having a Chartered Accountant is no guarantee that you'll avoid a tax investigation.

My Bible (tax book) explains fully how and why some businesses get tax investigated; how it all works; etc.

Why do some get investigated Tosh?

[Tosh]

Oh, and having a Chartered Accountant is no guarantee that you'll avoid a tax investigation.

My Bible (tax book) explains fully how and why some businesses get tax investigated; how it all works; etc.

Why do some get investigated Tosh?

ISBN 978-0340-92741-0, Understanding Tax for Small Businesses, page 38 explains it all in depth.

It says HMRC will never tell you that they are satisfied with our tax return and because it is up to you to self-assess your tax they have a right to check the form in detail.  This process is called an enquirey, investigation or audit.  

It then goes on to list all the occassions when they will investigate you, and one of the scary things is that they have upto the end of October each year, even though you may have submitted your return in April/May time; and you have had your bill.  

If you're like Squeaky, you could submit your return electronically on the 31st January; and then the Tax Nazis still have till the next October to investigate; even if you've had your statement.

Scary isn't it!

[dai]

I read recently that apart from receiving information that there is some fiddling going on, the investigations are chosen at random by computer.

[Tosh]

I read recently that apart from receiving information that there is some fiddling going on, the investigations are chosen at random by computer.

Ah Dai, I was trying to be 'coy' and you gave the game away; you're pretty much right.

Wait a sec, I'm off for a smoke, and  when I return I'll type out all the reasons my book gives for a tax investigation; and add some anecdotal information too.

Give me a sec!

[macmac]

but last year was the first full year where ALL they had to do was fill in my return online, I sort all my stuff out neatly & present them with it. i.e. I didn't use them for advise or any other matters relating to tax. My bill was nearly 400 quid, personaly I think this is steep
Tony

Tony,

Your accountant company earned £400 for less than - at most - half-an-hours work!

That's not a bad business to be in, is it?

Yeah, I'm starting to realize that now! What about this-

TOSH & MACMAC- "let us cook your books"

We could be partners

[Tosh]

what about Mac an Tosh you could do it on rainy days 

Hey, I used to have an 'oppo' called Mac (a good friend) and that's what they called us, Mackintosh!

[macmac]

MacinTosh- "when there's rain there's a claim, give us your good will"

[AuRavelling79]

Tax men (or their computers) flag up significant changes in income/expenditure.

If they come round your gaff and your saying you earned £15K and there's an Aston on the drive and your mrs has spent more on implants than Michael Jackson then you've got biiigg probs!

[Tosh]

Tax men (or their computers) flag up significant changes in income/expenditure.

If they come round your gaff and your saying you earned £15K and there's an Aston on the drive and your mrs has spent more on implants than Michael Jackson then you've got biiigg probs!

Malc, that was one of the things I was going to point out.  But apparantly, so I've been told, in the 'olden days' when tax returns were checked by local inspectors they could tell if a return was overly fraudulent, because the inspectors had local knowledge.

So if someone was claiming just to turnover a pittance, yet lived in a big posh house; they knew something could be dodgy. 

But since it's all 'centralised'; now they don't!

But here's what my book says (when I get round to scanning it):

[Tosh]

Tax investigation reasons!

[mikethechamois]

those whose acountants told them not to try and claim for goodwill were right

goodwill is intangible...................how do you put a monetery figure on it

if a round has been worked well for years its worth more as your more likely to keep the goodwill of the customers

if its a recent round and most of the customers dont even know who their wc is

you will have to work hard to build customer loyalty

you will pay market value for the round , the more desirable, the more interest, the more you will have to pay

be very wary of capital expense

if its capital losses .................vehicle, tools, equipment etc

not a problem as its all going your way

if its something that could appreciate in value it could work against you

so you buy a round for 3k  and claim an annual right down against depreciation

5 yrs later sell for 6k...................the taxman will claim back all the writedown as its not depreciating its appreciating and then claim 40%  of the profit as unearned income

so the accountants are right...............its not worth it

if your a sole trader turning over under 45k then you only need to make a statement to the taxman.......................income less allowances

you can put the 3k through as a business expense the same as stationary, marketing etc, you wont get 3k off your tax  liability but you will get a lump of it back and they will tax you on  the profits made from this purchase

when you come to sell they will consider you have prepaid the tax on the 3k and leave it alone

[Moderator David@stives]

Tosh

Can you scan the next page as well

[macmac]

Mike

That just about sums up what the accountant explained to me & they also produce a statement on my behalf.

So, can we take from this that if you are subject to a full investigation ( 6 years worth of books) anyone claiming a purchased round as tax deductable @ 100% in that given year may be subject to fines, interest etc?

Tony

[mikethechamois]

no your fine with that as its a legitimate business expense, you cant use it for your own personal use and wouldnt have bought it otherwise

its business develpment the same as marketing

they will tax you on the profits from that purchase

[macmac]

no your fine with that as its a legitimate business expense, you cant use it for your own personal use and wouldnt have bought it otherwise

its business develpment the same as marketing

they will tax you on the profits from that purchase

those whose acountants told them not to try and claim for goodwill were right

That confuses me even more I thought you were saying the opposite in your previous post?

So, if i buy a round (goodwill) for 3k, is that then 3k I can take off my year end turnover? i.e. I won't pay tax on that 3k?

A domestic round with no contracts is goodwill isn't it? I bought 3k worth of goodwill?

Tony

[mikethechamois]

thats right it comes off of your taxable profit

[macmac]

thats right it comes off of your taxable profit

How can it if it's goodwill? you just said accountants were right not to claim goodwill against tax?

p.s. I just re-edited my post before you posted, above

Tony

[macmac]

Bump

Any advance anyone?

Tony

[Tosh]

Personally, after what I've been reading, I reckon goodwill in our circumstances is not something you can claim on when you sell your business from a Capital Gains point of view.  I see no logic in that.

Nor is it an Expense, the tax man wants you to pay tax, so if you spend £3K on a round; I doubt he'd like you to add that against your other expenses and end up paying no tax at in that year.

So I reckon it's a Capital Expense, where you deduct an amount of it from your profit (reducing your tax liabilty) each year.

If I were in this position, that's how I'd treat it, and if I were investigated and it was picked up, I'd argue the case.

Much of the nitty gritty when it comes to tax can't be legislated for, there's just too many small transactions; you'd have tax books the size of libraries; so the tax man is pragmatic when it comes to stuff like this.