Sole trader to limited company - an essential guide
Incorporation involves the disposal of an existing self-employed or partnership business to a new entity ('person') in exchange for shares in the company.
Any assets of the business (eg the business's premises) are transferred to the company which then carries on the business as successor to the former self-employed owners. The transfer of assets will automatically trigger a CGT charge at market value because the purchaser and disposer are connected persons.
However, there are reliefs which, if possible to claim, can reduce or at least defer the CGT chargeable.
Incorporation relief
A claim to incorporation relief (IR) will defer ('roll over') any CGT charge however the conditions are very specific, namely that:
- the business transferred must be as a 'going concern'
- all of the assets of the business (with the possible exception of cash) must be transferred
- the consideration for the transfer of the business assets must be satisfied wholly or partly by the issue of shares to the sole trader/partnership
Where the consideration is fully satisfied by the issue of shares, the CGT charge is deferred until the shares are eventually sold. If the consideration is only partly satisfied (the balance possibly being in cash or as amounts left outstanding on the directors' loan account), then the gains 'rolled-over' are restricted to the value relevant to the shares with the balance becoming immediately chargeable to CGT. Chargeable gains are calculated and treated as reducing the base cost of the shares; the lower the base cost the higher the potential CGT liability on the eventual disposal of the shares.
All of the assets of the business must be transferred for the claim to succeed. This means that if there is a business property then the owner must transfer the property into the company, which may not be what is wanted or be possible. In addition, should property be transferred then Stamp Duty Land Tax may be payable calculated by reference to the market value of the property on the value of transfer.
Entrepreneurs’ relief
As the sole trader or partnership business will have ceased trading on incorporation, a claim to entrepreneurs’ relief (ER) may be possible should assets be transferred. Under an ER claim the CGT charge is reduced to 10% provided that the gain together with any previous gains that benefited from ER does not exceed the lifetime limit of £10 million.
With this relief not all of the business or all of the assets need to be transferred. However, the individual must have owned the business for at least a year (two years as from 1 April 2019) and the assets used in the business itself.
ER cannot be claimed on a gain arising on the transfer of goodwill to a close company where that company is a 'related party' to the seller (i.e. an individual who controls or has a major interest or is a participator or associate of a participator). It is only ER on goodwill that is affected by the 'related party' restriction.
'Hold-over' relief
If IR cannot be claimed, it may be possible to claim 'holdover relief'/'(gift relief') on the gains that arise on transfer on an asset by asset basis.
This relief applies to disposals of chargeable assets used in a trade where the disposal is not an 'arm’s length' transaction. As such, the relief is commonly used in the transfer of a business to a company because it allows the debtors and creditors to be retained by the sole trader outside of the company thus allowing the company to commence with no left-over debtors or creditors.
The condition for the relief is that the asset must have been used in the trade throughout its period of ownership by the trader transferor. The CGT charge is deferred until the asset is sold.
Compliance is dead, AI is replacing jobs, accountancy is on the way out?
The news that Capitalise had raised £3.5m in Series A investment got plenty of traction in the financial media last week. This follows iwoca raising £150m and Go Cardless $75m for its US venture.
Last year Receipt Bank raised £50m, and recently announced that Adrian Blair would be appointed CEO. Mr Blair has a record of growing firms' digital businesses into global businesses - look at Spotify and Just Eat.
Last year we saw Futrli raise £4m with the hottest VC team in town, Notion.
We know that Xero has a fund of $300m to spend on the best apps within its ecosystem and beyond ... and that means that Intuit will not be far behind.
Oh, and I almost forgot that IRIS completed a deal with Hg Capital that was worth about £1.2bn. Sincere congratulations to you all.
So why, when we see the stories of doom about the future of accountancy, are all these investment funds ploughing money into the sector?
Because it’s booming and it’s here to stay!!
The above list is just a small part of the tale. Apologies to those firms that have been missed off the list, I’m sure there are many more and I’m sure of some additional funding to come in the short term, for those that are listed above and those not.
Yes, it’s a sector that is ripe for disruption and is being disrupted... but that’s great news. Technology is an enabler in this process, but what the above stories show is that accountancy and accountants are going to be around for a long time.
It’s great news and a great time to be an accountant.
Yes, you have to learn new tools and approaches, but funders employ the sharpest brains and these folks are showing massive faith in the sector.
Yes, there will be change - in some areas significant change - but that is happening in all areas of life. I’ve used the example of parking to illustrate change before. In my time we’ve gone from men, with a Woodbine hanging out of their mouths, sitting in a tiny office taking cash for the car-park to automatic barriers, to self-service machines, self service machines that give change, to phoning automated numbers, to texting, to apps, to automated number plate recognition.
In fact, park at Stanmore tube station today you have most of the above. But the man in an office, has been replaced by local residents encouraging you to park on their drives, if you haven’t pre-booked another service online.
If you need a hand to understand the modern world and the choices in it, then there is plenty of help. Accountex brings the whole industry under one roof for two days in early May, where you can meet friends old and new. And bring to life those that you only know through LinkedIn.
You’ll even get the chance to hear me speak about the Smart Digital Practice.
It’s a wonderful time to be an accountant, go make hay!
Feeling overwhelmed? Cloud, Apps, advisory, MTD and GDPR causing you headaches? Looking for a cure to the above issues and then grow your firm, whilst spinning all these plates.
I can be contacted via LinkedIn, @LangdonHamblin or [email protected]
FRC to be replaced by new accounting watchdog
Business secretary Greg Clark has confirmed that the UK's accounting watchdog is to be scrapped after a highly critical report.
The Financial Reporting Council is to be replaced by a stronger and more coherent body that will, it is hoped, bring the Big Four auditing groups to heel and prevent further scandals like Carillion.
Clark said on Monday that he would follow the recommendations made by former L&G chief and top civil servant John Kingman in a report published at the end of last year.
Sanctions
Kingman was drafted in amid a growing feeling that the FRC was a spent force that was too slow to look at misconduct and whose eventual sanctions were too soft.
Win Bischoff, FRC chairman, said: “In line with the consultation document, we believe the speedy implementation of the recommendations can help increase public confidence in audit in the UK. We will move forward to implement the agreed proposals as soon as possible.”
Audit controversies at big companies including Carillion, BHS and Patisserie Valerie have raised worries about the FRC.
New audit regulator
Kingman added: "As I set out in my review, we need a new audit regulator with a clear and precise sense of purpose and I am pleased that the government shares that vision.
"I look forward to continuing to work closely with the Secretary of State as the Audit, Reporting and Governance Authority is established.
Direct changes
According to officials, the new regulator will for the first time:
- Be a statutory body with powers such as those to make direct changes to accounts rather than apply to court to do so, and more comprehensive, visible reviews for greater transparency.
- Have strategic direction and duties to protect the interests of customers and the public by setting high standards of statutory audit, corporate reporting and corporate governance, and by holding companies and professional advisers to account.
- Regulate the biggest audit firms directly (rather than those being delegated)
- Have a new, diverse board and strong leadership to change the culture and rebuild respect of those it regulates
Clark added: “This new body will build on our status as a great place to do business and will form an important part of strengthened public trust in businesses and the regulations that govern them.”
Interesting to see how this one works out...
Let's have a chat at Accountex!
Engaging, joining, participating – that’s three elements that if carried out successfully, would constitute a pretty successful Accountex 2019 conference, right?
Hi, we’re Melu, which handily, is Javanese for “engage, join, participate” (our chat widget code uses JavaScript, just to keep the symbolism flowing). Our business is built on the premise that engaging, joining & participating are key to the success of an organisation, just as they are to the success of an exhibition. The most effective (and evidence-based) strategy we’ve seen to increase all three, is through managed Live Chat, which is why we set up the service following our long history of web design businesses in Oxford.
We’d like to highlight the word “managed” and explain why this differs from industry standard Live Chat. In short, we provide fully trained, Live Chat operators to engage with your customers so that you don’t need to lift a finger. Our operators will be trained in your company ethos and your frequently asked questions, putting them in the most effective position to generate more leads for you.
Our objective is simple, we want to see our clients achieve dramatic increases in business successes resulting from people visiting their website.
In order to do this, we’ve strived to deliver the most efficient, resourceful and cost effective managed Live Chat product available today.
We see Live Chat as not just a way to engage with visitors to generate leads, but to also compliment the client and their business in providing an instant and easy way to communicate - in turn providing an exceptional level of customer service, far in advance of 90% of other firms (who, according to statistics, aren’t yet using Live Chat, to their detriment).
It’s precisely this vision that led to Lawrence King, a partner at accountancy firm, Critchleys in Oxfordshire to say "We've received more leads via Melu managed Live Chat in two months than we have via the website over the last five years!"
We’re very proud of this kind of feedback and we’re seeing it with increasing regularity, hence our desire to attend Accountex and spread the success stories of managed Live Chat.
Please do come along and discuss your business needs with us at Stand 1146. We’d be delighted to share more stories like Lawrence’s, just as we’d be equally delighted if you’d engage with us, participate with us and ultimately, join with us.
How to improve your practice’s workflow – one process at a time
What is workflow? Well, it’s the way work gets done in an office. These workflows are orchestrated and repeatable business activities.
Your practice’s interactions and activities...
For accounting practices, workflows represent all the activities that take place in each practice area, as well as the interactions that the firm has with its clients. Understanding all these activities and recording them helps a firm analyse processes and ensure it’s running smoothly.
But to stay competitive, firms need to ensure high productivity and be able to rationalise resources needed for a process. Workflow automation technology can help achieve efficient and compliant productivity.
We know work never stops, so to ensure maximum focus on each practice area while reviewing processes, the best approach is to review and improve one process at a time.
How to improve a process...
- Start with low hanging fruit – areas that appear to be most in need of help because of broken processes, high operating costs, low client satisfaction or paper-intensive operations.
- Appoint an in-house champion to coordinate the effort and work with the practice heads to understand the workflows and look for ways processes can be optimised.
- Use the opportunity to introduce digital automation technology that will help you move to a paperless environment, enhancing client satisfaction and employee experience.
- Choose a workflow automation platform that will accommodate your custom workflows, be easy to implement for each process and can integrate well with your existing systems.
- Choose a technology partner that can work with you to review, map and then move you to the digital environment. This can save costs on additional IT consultants.
- Last but not least, choose an automation platform that charges by process and not by number of users. This will reduce costs and allow you to deploy the workflow automation technology across internal as well as external users.
One Paper Lane is helping accounting firms of all sizes digitise workflow and automate their practice areas and client management work – one process at a time. You get more than cutting edge technology with One Paper Lane, with our willingness to work alongside firms, help them review and map processes and bring in custom solutions as needed.
Who we are and what we do...
We are One Paper Lane, the digital process automation and collaboration platform of the future. We are launching in the UK at Accountex on stand 490.
Our technology will enable you to streamline, automate and improve your processes. It can work together with your existing software, apps and tech tools. Our specialists also help you implement these improvements.
We have already helped accountancy and other professional services firms increase productivity and improve both the client and team member experiences.
Visit us and our UK partner, practice advisers Foulger Underwood, at Accountex. Alternatively, for more details, contact Julia Whistler at [email protected]
Gifts with reservation of benefit - an essential guide
The ideal in inheritance tax (IHT) lifetime planning would be for the owner of a main residence to gift the property to another such that the property does not form part of the donor’s estate but at the same time allowing the donor to remain living in that property.
Unfortunately, the ‘Gifts with Reservation of Benefit’ (GWRB) rules come into play in such an instance. These provisions are designed to catch individuals who aim to reduce their exposure to IHT by making lifetime gifts, surviving seven years, yet continue to have the use or enjoyment of the gifted asset. As such, the transfer of a whole or even part of a property to another whilst the donor remains in residence (i.e. ‘reserves a benefit’) will be caught. If such a transaction takes place the property is treated as remaining within the donor’s estate on death. Exemptions are available but they are necessarily restrictive.
One’s possible exemption is where the gift is made and both the donor and donee occupy the property. The restriction is that the donor must not receive any benefit from occupation other than a negligible one, which in itself must be paid for by the donor. The consideration for this benefit must be in the form of market rent paid in full throughout the period of occupation. The rent paid would need to be reviewed regularly with clauses to this effect being included in the agreement. In addition, the expenses of occupation must be shared. It is not necessary for the expenses to be proportionate, but the donor must at least bear the full share of the expenses attributable to him or her. It should be noted that the rent will normally constitute taxable income in the hands of the recipient.
Other exemptions include the situation where a freehold is gifted and the donor either takes out a lease on the property at full rent or a lease at full rent had been carved out before making the gift.
There is no requirement for the donor to be completely excluded from visiting the property but the restriction is to one month if the donee is also present or two weeks if not. Should what is termed in the rules as 'unforeseen change in circumstances' arise then the GWROB rules will be disregarded but only in the situation where the donor has become unable to maintain himself, the occupation represents reasonable provision by the donee for the donor’s care and maintenance, and the donee is a relative of the donor (or his spouse or civil partner).
Check out Tax Insider HERE
The secrets of SEO for accountants
Every time a prospective client searches for accountancy practices near them, they see the following types of results:
- Advertisements: These are placed by businesses using Google Ads. This is known as SEM (search engine marketing) and it is an easy way to promote your website so that it appears whenever someone searches for specific keywords.
- Map of the area: If Google knows where you’re searching from, a map will pinpoint some local accountancy businesses. Try a Google search for “accountant near me” and you’ll see an example.
- Organic results: These are the websites that Google considers to be more relevant. You’ll want your business to show up at the top of this list. Some of the first results might be directories of accountancy practices so it’s important that your practice is also listed in those sites.
In order to appear at the top of the list of organic search results, your SEO needs to be up to scratch. It enhances your probabilities of being among the first organic results and, although it takes time, it is highly effective when done right. Below is a summary of four steps to follow to start optimising your website:
1. Set up a high-quality Google My Business profile
If you haven’t already set up a ‘Google My Business’ profile, do it now. Every small business should have one these days.
2. Fill your website with highly relevant content
One of the most effective ways of optimising your page for search is to look at the keywords people are using in your area and including them in your website. If you start a Google Ads campaign you will gain access to their Keyword Planner. Find more tips on relevant content in my blog.
3. Ensure consistency across directories and social media
Search engines also refer to directory websites such as Yelp and Yellow Pages to confirm details about your business. Be sure to have the exact same business name, address, and phone number in listings on all the important sites of this type.
Finally, look up your business on ‘Moz’ and check that your listings are verified, identify any duplicates you might find and get recommendations.
4. Seek great links, ratings and reviews
Never underestimate the power of great reviews - Google loves reviews because searchers love reviews. Politely ask your clients to share their opinion about your accountancy practice on these pages, and even send them direct links to the review pages to make it even easier for them to leave their feedback. See my blog for ideas on how to encourage clients to give positive web reviews which will boost SEO.
Why smart staffing is central to your accounting firm's future
Practices are finding it increasingly challenging to recruit, manage, develop and retain their employees - and also to provide a good working environment with a positive and clear culture.
Smaller practices may struggle to manage the day-to-day ‘HR’ issues alongside the challenges of delivering value to their client base. Larger practices can forget to manage and invest in their talent, resulting in it walking out the door to a more appreciative competitor.
Frequently, the resulting recruitment activity is ‘cavalier’. With the war for talent so strong, the recruitment process is often informal, poorly planned and executed.
In many cases, no detailed role profile is evident, no resource partner carefully chosen (or fees negotiated upon), no inclusive recruitment process agreed, and in a few cases, individual references are not are not taken at all.
Why are practices happy to pay extortionate recruitment fees to replace employees, but not to invest that same money into the development and nurturing of those same employees – making it a much harder decision for them to leave? Nurture = loyalty.
The MTD effect on roles
Making Tax Digital (MTD) is bringing us increasingly to the assessment of individuals. We see MTD as a catalyst for reassessing individuals’ roles and indeed dictating future employment profiles for new employees.
Processes and staffing will have to be reviewed/redeployed and, in our view, this is not a situation that is going to sit naturally and easily with most practices.
Speak to us
HR is one of only a few key pillars which fundamentally support a progressive and growing practice. As is highlighted by the paragraphs above, being able to successfully manage talent, innovation, collaboration and engagement across your practice, is quite often directly linked to the leadership given by a small handful of people within the practice.
We focus much energy and resource on leadership, helping our clients to develop their leadership capacity and leadership capital, helping people define themselves as leaders and supplying some practical skills knowledge that will support them in their journey as a leader. Our offering includes:
- Bespoke senior management and partner development
- Ensuring aspiring partners and junior partners understand their role and responsibilities
- 360-degree appraisal and benchmarking
- Arranging feedback from your employees and teams, without this you aren't best equipped to devise strategy
- Coaching and mentoring
- Managing, introducing and implementing team appraisal systems
- Staff and practice skill-set analysis to prepare for MTD and an increasingly digital age
If talent management and leadership are issues for you and your practice, please do come and meet the Foulger Underwood team on stand 490 at Accountex, on 1-2 May. If you’d like to speak beforehand, please email Julia Whistler at [email protected].
Foulger Underwood are a team of M&A and strategy consultants focused on the accounting, legal, trust and corporate service and wealth management sectors.
Evolve into the digital practice event
Nomisma accounting software group is hosting a seminar event entitled Evolve into a Digital Practice.
A spokesman for the company says: "We will be looking to guide through the sense of overwhelm that you may be feeling, when it comes to developing a digital strategy.
"There is so much talk in the accountancy media, about what you should be doing to embrace the cloud, so this morning session, will enable you to see the haze and start understanding how you develop your business."
Speakers at the event on Thursday 21 March at the Jumeriah Hotel, Kensington, London: Sign up HERE
Sumit Agarwal: Founder and chairman of the DNS group .
Dermot Hamblin: 20 years' experience of the UK accountancy scene. From the introduction of software into the sector through the numerous changes since.
The morning event is for accountants in practice, firms of up to 20 employees, who are looking to grow.
Up for discussion:
- The digital world we live and work in.
- What does a modern accountancy practice look like.
- Using Nomisma in your growth plans.
- How to evolve into a smart digital practice.
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Opportunity knocks but most accountants aren’t at home….
As fees for compliance work become more commoditised and clients get fussier about what exactly you are doing to “earn” your fee because their best friend is paying half as much as they are for “the same” work, you can feel somewhat deflated and begin to wonder if there is a future for you in accountancy.
Opportunity abounds out there for those accountants willing to move out of their comfort zone and consider upskilling whereby they can earn higher fees with less client badgering over those size of those fees.
One area that has tremendous potential is advisory work, but what kind of advice should you consider to move into dispensing?
Merger & acquisition (M&A) is a field that most accountants only find out about because one of their biggest fees and largest clients is leaving them due to be being acquired. Unfortunately the accountant has been largely cut out of the process from an earnings standpoint because the client simply didn’t think that the accountant “cut the mustard” beyond compliance.
M & A is often related closely to “corporate finance” and is a busy and crowded field but a lucrative one for accountants who put in the time and energy to focus and grow their expertise locally, regionally or beyond.
It takes on many formats, from grooming firms for sale to acting for buyers, either performing due diligence, searching for acquisitions or assisting with raising finance for deals.
A skilled negotiator can make a name for themselves, especially if they build up expertise in a particular sector where it can be easier for one’s name to spread.
It’s not easy money and it can take time to get your feet under the table but it does generate large fees that clients don’t’ quibble over, because they have a feeling of gratitude to you for assisting them in their achievement as opposed to simply knocking out statutory accounts that adds little value to their lives.
A good starting point is online networking on a platform such as LinkedIn or approaching brokers and agents who may be looking work hand In hand with a firm of accountants to boost their offerings, whether it is number crunching or driving business their way.
Some accountants join a business-builder-cum mentoring type of network or franchise that will give them training as well as exposure to firms that are growing and/or seeking an exit route.
A word of caution. Income can be uncertain and lumpy especially in the early years so don’t give up your day job yet, but build it up as an adjunct to your current practice. Do it right and perhaps you’ll end up selling your own practice to concentrate on the lucrative advisory business you have built up.