Thoughts on Tax

[Michael Jones@2]

Hi, I have a tax query that is beyond the reach of my existing accountant and I need further advice / help. I know I should have looked into this before it started happening, but it actually seemed really straightforward.


OK -


I own a financial advice firm - Lets call it LTD - I am the sole director. It is under the shelter of a compliance network . In the eyes of the FCA, the clients are the networks. All business is written through them, they sign it off and they are paid, then they pay my LTD.

To remove clients from LTD to another firm, I would have to novate them. The network, would have to agree to this and so would the clients, in writing. The network would only allow clients who signed - to novate. The rest would become the networks clients or no ones..


In June 2020, I personally joined another firm, similar to a network as a sole trader. They issue put and call options and a loan agreement.


The plan was to direct offer clients, with no advice the new proposition. Those who move and join me in my sole trader firm, become my clients in the new sole trader firm. There is no need to have clients novated, because they are simply exercising their rights to choose any adviser.


At some point in the near future, the new network will buy my clients from my new self employed firm.


It is clear from The FCA's point of view that client has the right to enjoy freedom of movement and choice of adviser.

My accountant argues otherwise and feels the monies should be paid to my LTD firm as they started off as the LTD firms clients.

My view is that there was no goodwill from the clients to my LTD as they chose (not advised) to move with me to the new firm. If there was goodwill, it was with me personally, not my LTD.


I would prefer to pay 20% CGT tax on the sale of my new sole trader firm than the money having to be be paid into LTD and 19% CT, then additional tax on extraction.

I have talked to a tax advisor who agrees with my way of thinking, which is the same as the new network, who incidentally only buy clients in this way.

My old network has no issues with this as it was a direct marketing offer.

I am waiting for calls with some tax lawyers but I thought I would put this out there to see what others views are.

Would you consider this to be self assessment and CGT on the sale of my client bank from the self employed firm?

Or

Should it go to my ltd firm? If so why?

Thank you for taking the time to get to this point and I look forward to your opinions.

 

[Newchodge]

but it actually seemed really straightforward.

?????????????? (That is a non-accountant's opinion)

 

[Financial-Modeller]

Will the new network let you choose whether it is buying a group of clients from you personally or your LtdCo?

Much more likely that it will buy from the organisation that has the clients signed at the date of transfer, which will remove the choice from you.

Also, you need to explain the significance of the sentence:

...In June 2020, I personally joined another firm, similar to a network as a sole trader. They issue put and call options and a loan agreement...

If you have personally received a premium last year, giving them the option to buy your client book, the capital gain from the profit on the option (100% probably) will be accounted for personally, although the consideration they pay for the clients in your LtdCo would be paid to the LtdCo.

Can you clarify?

PS another non-accountant's opinion.

 

[Michael Jones@2]

Thanks for the responses. So the new network has a process to ease clients into their proposition. This is by having people like me, join them under a new company set up, which could be as a sole trader or new ltd firm. A new entity at least. They want nothing to do with my old LTD firm.

So in this respect, the clients that they purchase will be mine under my new self employed structure, not my old LTD firm.

Then once I am set up with them, trading as the new firm, I invite my old clients to join me in my new firm. Approx 50% decided to join me. The other 50% will be purchased by 2 members of staff for their new company.

I have received monies from the new network under a loan agreement. When I strike the option, calcs are made and I will either get a little more, or have to repay some. At that point, the monies are actually cemented as being paid to me and to my new self employed structure.

Hope that makes sense?

 

[Newchodge]

Does your old limited company still exist?

 

[Michael Jones@2]

Hi, over the next month, the other 50% of clients will move to the new firm my employees have created. I will then change the name of my LTD firm and the type of activities.

 

[Newchodge]

Hi, over the next month, the other 50% of clients will move to the new firm my employees have created. I will then change the name of my LTD firm and the type of activities.

So does your limited company still exist. Has it been dissolved or struck off? I ask becase HMRC generally frowns on sole-owners and directors of limited companies carrying out the same work as a sole trader, rather than putting it through the limited company. I think they tend to see that as an attempt at tax evasion?

 

[Energise Accounting]

So does your limited company still exist. Has it been dissolved or struck off? I ask becase HMRC generally frowns on sole-owners and directors of limited companies carrying out the same work as a sole trader, rather than putting it through the limited company. I think they tend to see that as an attempt at tax evasion?

Sounds what he is trying to do. It sounds like he is a Mortgage advisor however, he is not regulated by the FCA so has to join a network in order to get the compliance work done.

 

[Frank the Insurance guy]

Hi @Michael Jones@2 ,

Perhaps you need to take a step back and consider your position as a director of the Ltd co. As a Director you have a legal duty to act in the interest of the company - to not do so could leave you personally liable for any wrongdoing.

If the Ltd company has a legal claim to the clients or goodwill, you will need to come to an arrangement to pay the company for them.

 

[Michael Jones@2]

Thanks for your posts. The thing is and maybe I didn't make this clear. The firm who is buying my client bank, have structured their purchase in the way they want it. I did not choose to do it this way. So I couldn't be trying to evade tax or hurting my Ltd firm.

For this new company to buy my clients, I had to join under their umbrella either as a new self employed agent, or as a new Ltd company. They would NOT buy my clients from my existing Ltd company. I suppose because they would have to get embroiled in novating clients from my existing firm to their firm.

They invite agents to join them as a newly formed entity. Then direct mail clients to see who wants to join me under the new umbrella. After 12 months, they then purchase the newly formed client bank and data from the newly formed entity. In my case, ME soletrader.

They have obviously paid lawyers and accountants a lot of money to produces all contracts etc and I am sure that they wouldn't do anything underhanded as they would not wish to get struck off. In fact, since being within their fold, I have seen first hand how slick and responsible a firm they are.

 

[Frank the Insurance guy]

So I couldn't be trying to evade tax or hurting my Ltd firm.

How did the new firm get the client data to contact? If you, as a director of the ltd company were involved in this, you could be in breach of your duties as a director (Nothing to do with tax though!)

They invite agents to join them as a newly formed entity. Then direct mail clients

Assuming all direct mail is from the new firm direct to clients - ie. lead generation. Then I would consider these all as new client's of yours personally. However I am not a lawyer or work for the FCA who may see things differently (Again, this is unlikely to involve tax)

After 12 months, they then purchase

This would be a purchase from you directly. As you have said earlier, they would not buy client's from your Ltd company, so clearly the purchase is from you personally - this will no doubt be confirmed once payment is being done. Who will the new firm pay?

If you are wondering why they structure the contract this way - my thoughts are all to do with Liability and in particular the state of the Professional Indemnity Insurance for FCA authorised firms! Your new firm does not want to take responsibility for any past issues or liabilities for advice/services provided by your Ltd company - this would cause big issues and costs with their insurance!. Therefore, they will not buy from your Ltd co or novate them. By setting you up as an individual, they can treat you as a "third party" and are free then to direct mail client's with little issue. After a year, when you have got all the client's you can, they will then "buy" them and bring them in house. From an Insurance perspective, this creates a "clean break" where they are only liable for services or advice since appointed you personally.