The Chartered Tax Adviser Examination

Transcription

1 The Chartered Tax Adviser Examination May 202 Advanced Corporation Tax Advisory Paper Suggested Answers The suggested solutions set out below are intended as a guide to students as to what might be expected if each question were fully answered. Students are reminded that these are not necessarily definitive solutions and, particularly in written questions, alternative approaches may be equally valid. It is the Institute s policy to mark flexibly and credit is given for relevant points validly made in the context of the question requirement irrespective of whether such points appear in these solutions, subject to the overriding constraint of the maximum marks available for the question or part of the question concerned. It is recognised that on some aspects of a question a candidate will answer more comprehensively than is necessary to earn the marks. In such circumstances a candidate may earn additional marks. In a 5 mark question a maximum of 2 such marks are available and in a 20 mark question a maximum of 3; again subject to the to the total marks available for the question or part concerned.

2 Answer Mr Corpus Group Tax Manager Trent Corporation [Address] Dear Mr Corpus 2 Group Tax Manager Drewsted Group plc Thank you for your letter dated X. I set out below the corporation tax consequences of the issues you raised. [Address] The tax legislation that is most relevant is the loan relationships legislation at Part 5 of the Corporation Tax Act 2009 ( CTA 2009 ). A loan relationship is specifically defined under s.302. Generally speaking a company has a loan relationship whenever it is a debtor (it owes) or a creditor (it is owed) in respect of a money debt which arises from a transaction for the lending of money. The amounts brought into tax are based on the profits of the company s accounts on the assumption that those accounts are prepared in accordance with generally accepted accounting practice ( GAAP ). There are, however, some special tax rules that apply in certain circumstances, for example, for connected party transactions. The derivative contracts legislation at Part 7 CTA 2009 is similar to the loan relationships legislation in terms of its structure and its starting point is also with GAAP accounts. All references are to the CTA 2009 unless otherwise stated. Group continuity rules [Date] ) The 2 million loan is a loan relationship (s.302) and therefore falls within the loan relationships legislation at Part 5. From February 2009 to 3 July 2009, Drewsted Group plc accrues six months of interest of 50,000 so the company will bring in this amount as a non-trading loan relationship credit for the accounting period ended 3 December On 3 July 2009, when Drewsted Group plc sells the debt (the creditor loan relationship) its 0.2 million profit is ignored for tax purposes following the group continuity rules at Chapter 4 Part 5. The creditor loan relationship is transferred at a tax notional carrying value of 2 million, so on a no gain/ no loss basis. Drew Ltd brings in the interest as a non-trading loan relationship credit as it accrues from August So for the accounting period ended 3 December 2009, it will bring in a credit of 4,667, being five months of interest. For each of the accounting periods ended 3 December 200 and 20, Drew Ltd will bring in a credit of 00,000 being 2 months of interest. For the accounting period ended 3 December 202, Drew Ltd will bring in a credit of 8,333 being one month of interest. In that accounting period, Drew Ltd will also bring in a non-trading loan relationship debit of 0.5 million ( 2 million less.5 million repaid) since Drew Ltd is treated as acquiring the creditor loan relationship at 2 million. This makes an overall net non-trading loan relationship debit of 49,667 for the accounting period ended 3 December 202. Degrouping charge 2) Again the group continuity rule applies but this time under the derivative contracts legislation at Chapter 5 Part 7 because a forward contract to purchase coffee beans is a derivative contract under s.576. The transfer to Drew Ltd is treated as a no gain/ no loss transfer - Drew Ltd will be treated as acquiring the forward contract for the amount which would have been the carrying value in the accounts of Drewsted Group plc at the time of transfer. A degrouping charge, however, under s.630 applies where a company ceases to be a member of a group within a relevant six year period. Assuming that the legislation does not change, for tax purposes, Drew Ltd will be deemed to dispose of the forward contract at fair value, and immediately reacquire it for the same consideration, at the time at which it leaves the group (in 204). So the exit

3 Hedging charge fair value is computed at the date of the exit, not at the date of the asset transfer. This will only apply if the result of the deemed disposal at fair value is a credit. Section 630 cannot be used to crystallise a loss. 3) Since the group follows old UK GAAP accounting, the interest rate swap will be off balance sheet. For accounting purposes, therefore, Drennet Ltd will be treated as if it has a liability with a 4% fixed interest rate. This treatment is followed for tax purposes so in respect of this derivative contract, Drennet Ltd will bring in the 4% fixed interest rate as a non-trading debit under Part 5 (s.307). The swap is out-of-the money but the loss arising will only be recognised for tax purposes when it is recognised for accounting purposes (s.595(2)). Foreign exchange 4) In September 20, the sterling equivalent of the fine is 88,496 (00,000/.3). By the payment date, the sterling equivalent is 85,470 (00,000/.7). The company has made an exchange gain of 3,026 but this gain is not taxed because the fine itself would be disallowed for corporation tax purposes under s.54. Non-trading loan relationship deficits 5) Section 457() states, The basic rule is that the deficit must be carried forward and set off against non-trading profits of the company for accounting periods after the deficit period in accordance with subsection (3) and s.458. In this case, the deficit period for Dag Ltd was 200. But in the following year, Dag Ltd was dormant so it is arguable that Dag Ltd did not have an accounting period after the deficit period. On the other hand, it is arguable that 202 is the next accounting period after the deficit period. Overall it is my view that Dag Ltd should be able to use its brought forward non-trading loan relationship deficits against non-trading profits (but not trading profits) arising in 202. Debt-equity swaps 6) Drewsted Group plc will bring into account a non-trading loan relationship debit of 60,000 on the sale of the debt to Toasti Ltd. Under the normal loan relationships rules, where a debtor is released from a debt by an unconnected creditor, there is a tax charge on the debtor. But on the assumption that Toasti Ltd s acquisition of the shares and debt of Diamondo Ltd meet the conditions for the corporate rescue exception at s.36a, there will be no deemed release on Diamondo Ltd of 60,000. But if Toasti Ltd then releases the entire debt from Diamondo Ltd, there will be a release of relevant rights of 60,000 under s.358(4). Please contact me if you have further queries. Yours sincerely, A Group Tax Manager 3

4 General topic Marks Introduction to loan relationships legislation 2 ) Loan relationship group continuity - explanation of group continuity rules - interest accruals - adjusted repayment debit 2) Derivative contracts degrouping charge - derivative contract - degrouping charge 3) Hedging - old UK GAAP - tax treatment - year end loss 4) Forex - calculating forex gain - disallowance 5) Non-trading loan relationship deficits - basic rule for deficits - potential uncertainty 6) Debt/equity swap - Debit on sale - corporate rescue exemption - release of relevant rights Total

5 Answer 2 Notes for a meeting with Daison Ltd When the company, Edison Ltd, changed its name on April 20, it did not cease to exist; the company continued to trade albeit under a different name. The company therefore remains responsible for submitting a corporation tax return and settling its corporation tax liabilities for the accounting period from April 200 to 3 March 20. The company should have given notice of its chargeability to corporation tax to HM Revenue & Customs (HMRC) by 3 March 202. The company is now liable to a penalty under Schedule 4 FA The amount of the penalty depends on whether the failure is deliberate. For deliberate and concealed failure, the penalty is up to 00% of the potential lost revenue. For deliberate but not concealed failure, the penalty is up to 70% and for any other case, the penalty is up to 30%. The potential lost revenue is equal to the amount of tax payable for the accounting period that remains unpaid 2 months after the end of the period. No penalty is due to a failure that is not deliberate if there is a reasonable excuse for the failure. However, insufficiency of funds is not a reasonable excuse for this purpose. In this case, it does not appear that the failure was deliberate so it is likely that the company will face a maximum penalty of 30%. The penalty will be reduced if the company discloses the failure to notify. Where a disclosure is unprompted, a 30% penalty may be reduced to nil unless HMRC does not become aware of the failure until 2 months after the time tax first becomes unpaid by reason of the failure, in which case the penalty may not be reduced below 0%. Where a disclosure is prompted, a 30% penalty may not be reduced to a percentage below 0%, or 20% where HMRC does not become aware of the failure until 2 months after the time tax first becomes unpaid by reason of the failure. The company is considered to have made a disclosure if it tells HMRC about the failure, gives reasonable help in quantifying the tax unpaid and allows access to records. A disclosure is unprompted if made when the company has no reason to believe HMRC has discovered or is about to discover the failure. The penalty in respect of a failure is reduced by the amount of any other penalty which has been determined by reference to the same tax liability. Daison Ltd should be encouraged to make an unprompted disclosure of its failure to notify chargeability. Notes for a meeting with Georgette Ltd Regarding the three errors: ) HMRC does not have to accept a claim for over-payment relief where tax paid is excessive by reason of a mistake in allocating expenditure to a pool for the purposes of the Capital Allowances Act or a mistake consisting of making, or failure to make, such an allocation (Para 5A(2)(c) Sch 8 Finance Act 998). The remedy is to amend the return so where the year is still open, the company can amend the claim to capital allowances but where the return has become final, the claim may no longer be amended. In this case the company had until 3 March 202 to amend its return and is therefore now out of time. 2) A claim for relief for overpaid tax may be made in relation to an amendment to a self-assessment following an enquiry (Wall v CIR [2002] STC (SCD) 22). 3) The company should be able to overpayment relief in respect of the legal fees since it does not fall within any of the cases under Para 5A Sch 8 Finance Act 998. Overpayment relief replaced error or mistake relief from April 200. It applies to any claim made after 3 March 200, for all tax years. To obtain repayment, a claim must be made by notice in writing to the Board of HMRC (in practice, to the office that deals with the company s corporation tax return) not more than four years after the end of the accounting period to which the return relates (so 3 March 204 in this case). Interest on overpaid tax is paid from the date the tax was paid, or if later, the due date, to the day before the repayment. 5

6 General topic Failure to notify chargeability - should have given notice by 3 March penalty under FA2008 Sch 4 - reasonable excuse - prompted and unprompted disclosures Overpaid tax - capital allowance error - amendment to self-assessment following an enquiry - legal fees - how to make a claim - interest on overpaid tax Marks 2 Total 0 6

7 Answer 3 Overview of the worldwide debt cap rules Handout notes on the Worldwide Debt Cap Rules Possible restriction for Corporation Tax purposes for finance expenses of UK companies of large worldwide groups where certain conditions are met. Worldwide debt cap rules ( WWDC ) apply to accounting periods commencing on or after January 200. Broadly, WWDC rules apply where the gateway test applies see below. Defining the group WWDC applies to a group of entities that is large and contains one or more relevant group companies : Companies which move between being medium sized and large may move the whole group into and out of the scope of the rules from one accounting period to the next. Cannot apply to stand alone companies. Relevant group company is any UK tax resident company (or UK PE) that is not a securitisation company and is either a parent company of a group or a 75% subsidiary. Additional rules apply to ensure there can be only one ultimate parent for a group. Parent, subsidiary, and group all take their meaning from international accounting standards ( IAS ). A subsidiary is a controlled entity. Control is broadly ownership or power to influence more than half the voting power. The gateway test introduction Designed to filter out groups with relatively low levels of UK debt as compared to the group s external debt. Compares the UK net debt of the group ( UND ) to the worldwide gross debt of the group ( WGD ). UND > 75% of WGD means gateway test is failed so WWDC applies. UND < 75% of WGD means gateway test applies so ignore WWDC. Gateway test looks at financial liabilities and assets whereas the main rules, which provide for the disallowances and exemptions, look at financial expenses and income. The gateway test UK net debt of the group ( UND ) Aggregate of the net debt amounts ( NDAs ) of each relevant group company. NDA of a company is the average of its net debt for the period. Net debt = relevant liabilities relevant assets. No distinction is drawn between intra-group and external debt for UND purposes. NDA is deemed to be nil if the company is dormant throughout the relevant period of account or if the NDA of a company is less than 3m (including where the NDA is negative). The gateway test worldwide gross debt of the group ( WGD ) Average of the relevant liabilities of the group for the period beginning on the day before the first day and ending on the last day of the relevant period. Amounts in non-sterling must be converted into sterling at the spot rate at the balance sheet date. In contrast to UND, only external debt is considered for the purposes of WGD (because looking at the consolidated liabilities of the group rather than liabilities of any particular company within the group). 7

8 Calculating the disallowance introduction Where the gateway test is failed, there is a disallowance if the tested expense amount ( TEA ) exceeds the available amount ( AA ). The total disallowed amount is the amount by which the TEA exceeds the AA. If the AA exceeds or is equal to the TEA, no disallowance arises. Calculating the disallowance tested expense amount ( TEA ) TEA = total of each relevant group company s net financing deductions ( NFDs ). NFD of a relevant group = the total (intra group and external) financing expense amounts ( FEAs ) less its total financing income amounts ( FIAs ). If NFD is less than 500,000 it is treated as nil. If a company s total financial income amounts exceed its total financing expense amounts, its NFD is zero, not a minus figure. Calculating the disallowance financing expense amounts ( FEAs ) and financing income amounts ( FIAs ) FEAs are loan relationship debits (excluding impairment losses, exchange losses and related transaction losses), financial costs implicit in finance lease payments and financing costs payable on debt factoring. FIAs are loan relationship credits (excluding impairment loss reversals, exchange gains and related transaction profits), finance lease income, financing income receivable on debt factoring and guarantee fees. Calculating the disallowance available amount ( AA ) AA is the sum of certain interest expenses disclosed in the consolidated financial statements. These include interest payable on borrowing, amortisation of discounts/ premiums relating to borrowing and expenses ancillary to borrowing, financing expenses implicit in finance lease payments, financing expenses relating to debt factoring. Categories falling within the AA have been extended by regulations for periods of account beginning on or after January 20. Interaction with deduction of tax rules A disallowance under the WWDC does not change the nature of interest payable so the interest remains chargeable to corporation tax as non-trading profit under s.299 CTA 2009 or trading income under Part 3 CTA 2009 as appropriate. So where there is a statutory duty to deduct tax under s.874 ITA 2007 and account for the tax under the CT6Z procedure, that duty and procedure are not affected by the WWDC. Interaction with transfer pricing rules The transfer pricing rules at Chapter Part 4 TIOPA 200 apply before the WWDC. So the arm s length price for a provision should first be established and it is that arm s length amount (if it is a FEA or FIA) that is taken into account in performing the debt cap calculations. 8

9 General topic Marks Overview of world wide debt cap rules Defining the group 3 The gateway test 2 What is the UK net debt of the group? 2 What is the worldwide gross debt of the group? Calculating the disallowance Tested expense amount Financing expense amounts and financing income amounts Available amount Interaction with deduction of tax rules * Interaction with transfer pricing rules * Total 5 9

10 Answer 4 MEMORANDUM From: Darren Johnson, Tax Manager To: Gavin Porter, Group Finance Director Date: May 202 Re: Reorganisation of the Underground group in the year ended 3 December 20 Sale of District Ltd Ordinarily the sale of a company triggers a chargeable gain equal to the proceeds of the sale less the base cost of the shares. Where the Substantial Shareholding Exemption (SSE) is available however, any gain arising is exempt from Corporation Tax. The conditions for obtaining the SSE are as follows: Circle Ltd must have owned a substantial shareholding defined as at least 0% of the ordinary share capital of District Ltd for a continuous period of at least twelve months within the two years prior to the sale. This condition appears to be met. District Ltd must be a trading company both in the period for which the substantial shareholding requirement mentioned above was met and immediately after the disposal. The first part of the condition appears to be met. As for the second part we need to check the facts of the case to confirm that it was trading after the disposal. The third condition is that Circle Ltd is the holding company of a trading group. This condition appears to be met since all of the active subsidiary companies are trading. Assuming all conditions are met the disposal should qualify for SSE and be exempt from Corporation Tax. Transfer of freehold property to District Ltd When Jubilee Ltd transferred the freehold property to District Ltd the transaction would have been at nil gain/nil loss since both companies were members of a group for the purposes of chargeable gains. A degrouping charge is triggered because District Ltd is leaving the group and this is happening within six years of the transfer of the property. The degrouping charge is calculated on the difference between the market value of the asset at the time of transfer and its base cost. So the potential chargeable gain is 70,000 ( 50,000 minus 80,000). This degrouping charge is now subject to Corporation tax payable by the vendor of the Company, so Circle Ltd. However, since the disposal appears to benefit from the SSE, the degrouping charge should be likewise exempted. Transfer of trademark to District Ltd When the trademark was transferred to District Ltd the transaction would have been tax neutral since both companies were members of a group for the purposes of the intangible assets legislation and no Corporation Tax would have arisen. A degrouping charge arises now that District Ltd has left the group calculated as follows: ) The market value of the trademark at the time of transfer LESS 2) The tax written down value of the trademark based on the figure in the accounts LESS 3) Extra amortisation deduction to reflect a market value of 60,000 See Appendix for the calculation. The degrouping charge is 0,526. The degrouping charge remains a liability of District Ltd. However, it may be reallocated to another Underground group company by means of a joint election. In addition the company plans to purchase further trademarks and it may be possible to defer payment of the tax due by reinvesting the degrouping charge in these intangible assets. I would need details of the cost of these assets and when they were likely to be purchased to establish whether relief is available. 0

11 Pre entry losses The 00,000 capital loss in WCL Ltd is a restricted pre-entry loss since it was realised before WCL Ltd joined the Underground group. The loss may be offset against the gain made by Northern Ltd if all of the following conditions are met: ) The gain arises on the disposal of an asset which was acquired after WCL Ltd joined the Underground group. This condition appears to be met. 2) The asset was acquired either by WCL Ltd or a company in the same group as WCL Ltd at the time the asset was acquired. Northern Ltd was in the same group as WCL Ltd at the time Northern Ltd bought the building so this condition appears to be met. 3) The building was acquired from a person who is not in the same group as WCL Ltd. This condition appears to be met. 4) The building has not been used since its acquisition for any purpose other than the trade of WCL Ltd. The trade must have been carried on by WCL Ltd immediately before entering the group and carried on by WCL Ltd or another company in the group thereafter. This condition appears to be met. Accordingly the pre entry loss may be offset against the gain arising in Northern Ltd, to produce a chargeable gain of 60,000 (240,000 minus 80,000 minus 00,000). Transfer of trade to Central Ltd Ordinarily the sale of a trade which started before April 2002 to a connected company would trigger a chargeable gain based on the market value of the goodwill transferred less the base cost, if any. However, in this case Victoria Ltd and Central Ltd are wholly owned subsidiaries of Circle Ltd. Accordingly a group exists for Capital Gains purposes and the transfer will take place at no gain/no loss. Ordinarily the transfer of the trade would trigger the cessation of the trade in Victoria Ltd. Brought forward trading losses could not be carried forward and would be lost and a balancing allowance or charge may be triggered in relation to the capital allowance main pool. However, a different treatment applies when the following conditions are met: ) A company ceases to carry on a trade and another company begins to carry it on AND 2) On or within two years after the cessation the trade is at least 75% owned by the same persons as owned a similar interest within a year before the cessation AND 3) Throughout the periods referred to the trade is carried on by a company which is within the charge to Corporation Tax in respect of it. Victoria Ltd is ceasing its trade and Central Ltd then carries it on. Both companies are wholly owned by Circle Ltd before and both are within the charge to Corporation Tax. Accordingly all three conditions appear to be met. It follows that Central Ltd may succeed to the brought forward trading losses and the balance on the capital allowance main pool. The trading losses that may be succeeded to are, however, restricted to the extent that relevant liabilities exceed relevant assets. Relevant liabilities are broadly liabilities of Victoria Ltd excluding share capital which are not transferred to Central Ltd. Relevant assets are broadly assets which are not transferred to Central plus consideration paid. In this case the losses that may be transferred are 45,000. Please see Appendix 2 for workings. The capital allowances inherited by Central Ltd are not restricted by the non-transfer of assets/liabilities. The inherited trading losses may only be offset against trading profits of the same trade so in this case the one transferred from Victoria Ltd. Central Ltd must therefore identify each year the profits/losses that this trade has made and offset the brought forward trading losses against it.

12 Appendix Calculation of degrouping charge on intellectual property (trademark) Market value of the trademark at the time of transfer 60,000 Less tax written down value of trademark at the time of transfer (47,500) Less extra amortisation deduction To 3 October ,500-(2,500x60,000/47,500) 2,500-(2,500 x (658) To 3 October ,000/47,500) 2,500-(2,500 x (658) To 3 October 20 60,000/47,500) (658) Degrouping charge 0,526 Appendix 2 Calculation of transferable losses Relevant liabilities Trade creditors 5,000 Less: Creditors transferred (5,000) Bank overdraft 65,000 (75,000) Relevant assets Freehold property 70,000 Trade debtors 45,000 Consideration paid 30,000 45,000 (30,000) Trade losses at the date of transfer 75,000 Trade losses transferred to Central Ltd 45,000 2

13 Marks Disposal of District Ltd Explain availability of Substantial Shareholdings Exemption (SSE) on disposal and explain conditions for obtaining exemption and indicate that they will likely be met 2 Transfer of freehold property to District Ltd Explain that degrouping charge arises on the disposal of District Ltd, explain why and calculate the charge Explain that Circle is subject to Corporation Tax on the degrouping charge and that Circle Ltd is likely to be exempt from tax on the charge on the grounds that SSE will apply to the charge Transfer of trademark to District Ltd Explain that a degrouping charge arises on the disposal of District, explain why and explain how the charge is calculated Calculate the degrouping charge Explain who is liable to pay the charge; explain that the charge may be transferred by joint election to other group companies, that reinvestment relief may be available to defer the tax on the charge. Explain what further information is needed 2 Pre-entry losses Explain that the 00,000 capital loss in WCL Ltd is a pre entry loss and explain why Explain each condition that needs to be met for the pre entry loss to be offset against the chargeable gain in Northern Ltd 2 Calculate the chargeable gain arising in Northern Ltd Transfer of trade to Central Ltd Explain that transfer of trade does not trigger a capital gain and explain why and explain the ordinary treatment of a cessation of trade Explain conditions to be met for a succession to the trade to take place under s.940a et seq CTA 200 Explain that conditions are met and why Explain the beneficial tax consequences of a succession to trade under s.940a et seq CTA 200 Explain restriction of transfer of trading losses where relevant liabilities exceed relevant assets Calculate trading losses that may be transferred and explain that transfer of unused capital allowances is not restricted 2 Explain how trading losses transferred may be offset against future trading profits Total marks 20 3

14 Answer 5 Mr T Keating Mr J Smith Exoticpizzas Ltd A Tax LLP 3 Beak Street 2 Dove Street Bromley Bromley Kent BR 2XW Kent BR 7PJ Dear Mr Keating Exoticpizzas Ltd Claim for plant and machinery allowances It was good to meet you the other day. I can comment as follows on the matters you raised. Plant and machinery allowances take the form of an annual writing down allowance. There are two different rates which are relevant here: ) A 0% rate is applied to certain specified integral fixtures such as heating and hot water systems and electrical systems 2) A 20% rate is applied to other plant and machinery. To take advantage of the relief the company needs to have a qualifying activity and to incur qualifying expenditure on the provision of plant and machinery. The company has a trade of operating pizza restaurants and this would be regarded as a qualifying activity. Each item of expenditure needs to be considered to see whether it qualifies for plant and machinery allowances. Fixed wooden floor and walls It is provided at s.2 CAA 200 that expenditure on the provision of a building will not qualify for plant and machinery allowances. The word is defined to include walls, floors and ceilings. The construction of the floors and walls will not qualify for plant and machinery allowances. Toilets, urinals and basins It is stated at s.23 CAA200 that the provision of certain assets is not excluded from qualifying for plant and machinery allowances by virtue of being a building. The list of items includes sanitary ware such as toilets, urinals and basins. We must then consider whether what is being provided is plant and machinery. The key test is set out in the case of J Lyons and Co Ltd v Attorney General in which it is asked: are the goods which are purchased part of the setting in which the business is carried on or part of the apparatus used for carrying on the business?. The meaning of apparatus was later explained to mean a functional use. If an item has a functional use then capital allowances may be claimed. In this case it seems reasonable to argue that the sanitary ware is part of the apparatus of the trade and that plant and machinery allowances may be claimed. Note that these items do not appear on the list of integral features included in the capital allowances legislation and so form part of the general pool and qualify for plant and machinery allowances at 20%. Murals and paintings In the case of Hampton v Fortes Autogrill in which it was decided that decorative murals create an ambience within catering premises and that it was a function of the company s trade to provide this ambience. Accordingly plant and machinery allowances may be claimed. A restaurant likewise is a place in which it is a function of the trade to create an ambience and it may be appropriate to claim plant and machinery allowances on the murals and paintings. Electrical installation, Hot and cold water system, fixed lighting and built in air conditioning systems These items are treated as integral features of the building for the purposes of the capital allowances regime and qualify for writing down allowances at a rate of 0%. It may be possible to argue that the light fittings installed in the eating area are not an integral feature. Instead they are decorative assets and have as their purpose to create an atmosphere or ambience within the restaurant. As such they may qualify for plant and machinery allowances at 20%. This argument would 4

15 be unlikely to be effective for those light fittings which are located outside of the eating area, such as in the kitchen or washrooms. Moveable table lamps These are not integral features. Rather they are moveable, decorative items which create an ambience within the restaurant. As such writing down allowances at 20% should be available. Washroom and kitchen taps. Taps could be argued to be an integral feature and thus qualify for plant and machinery allowances at 0%. However, a reasonable argument could be made that they are a type of furniture similar to sinks and basins and thus qualify for the 20% rate of writing down allowances. Fixed seating, loose rugs, tables and chairs and kitchen equipment and fittings These items have a functional use in the trade and as such should qualify for writing down allowances at 20%. Annual Investment allowance (AIA) The AIA is a 00% plant and machinery allowance available on up to 00,000 of qualifying expenditure in the accounting period in which it is purchased. However, where companies are under common control a single allowance must be shared between them. Exoticpizzas Ltd and Fishscales Ltd must therefore decide between them whether Fishscales Ltd will claim the full 60,000 of allowance to which it is entitled or some lesser amount. Exoticpizzas Ltd may then claim the balance of the allowance itself. Professional fees These fees are capital in nature since they relate to the acquisition of an enduring benefit, namely the opportunity to sell alcoholic drink. As such they are not eligible for relief as a revenue expense. Plant and machinery allowances will likewise not be available since these costs do not relate specifically to the acquisition of plant and machinery. Please do not hesitate to contact me if you have any questions. Yours sincerely John Smith A Tax LLP 5

16 Marks Presentation Explain rates of p&m allowances available Requirement for a qualifying activity and for qualifying expenditure 2 Fixed wooden floors and walls do not qualify for p&m allowances. Explain why Toilet fittings do qualify. Explain why and explain the apparatus v setting test 2 Explain that toilet fittings do qualify for 20% writing down allowance and why Murals and paintings do qualify. Explain why Hot and cold water systems, electrical systems and air conditioning systems qualify for the 0% special rate of p&m allowances. Explain why Taps could qualify as an integral feature or as ordinary plant and machinery and qualify for 20% writing down allowances Light fittings in the eating area of the restaurant may qualify for 20% writing down allowances. Explain why Moveable table lamps qualify for 20% man rate. Explain why Seating, rugs, tables and chairs and kitchen equipment qualify for P&M allowances. Explain why Explain availability of Annual Investment Allowance and that ExoticPizzas Ltd and Fiscales Ltd must share the allowance Professional fees are capital in nature and do not qualify for capital allowances Maximum marks 5 6

17 Answer 6 Durnsford Ltd has Corporation Tax payable of 93,689. Please see attached working. Explanations are as follows: Note : The donation of freehold land is a gift and would ordinarily trigger a capital gain based on the difference between the market value of the land at the date of disposal and its cost plus indexation. However, donations to a UK charity are treated as nil gain nil loss for the purposes of Corporation Tax on chargeable gains. Note 2: Durnsford Ltd also qualifies for a deduction against total profits based on the market value of the land disposed of, so long as an appropriate certificate is received from the charity. Note 3: Forks for U Ltd is controlled by the wife of the owner of Durnsford Ltd. It operates from the same premises as Durnsford Ltd and its sole customer is Durnsford Ltd. Accordingly there would appear to be substantial commercial interdependence between the two companies and Durnsford Ltd would therefore have an associated company for the purposes of Corporation Tax. So the upper limit for the purposes of marginal relief is halved to 750,000.and the l lower limit is reduced o 50,000. Note 4: The legal costs of 45,000 relate to proposed capital expenditure, the extension of factory, and are disallowed. The fact that they are abortive is not significant. Note 5: The legal fees incurred in halting a compulsory possession order relate to the defence of an existing asset, land, which is used in the trade, so this expenditure should be allowable. Note 6: Following the case of Anglo-Persian Oil Company Ltd v Dale the compensation payment made to the export agent is likely to be treated as relating to the rationalisation of existing trading arrangements and not to an existing capital asset and so be allowable as a deduction. Note 7: Following Strong & Co of Romsey Ltd v Woodifield the damage to the factory triggered by the collapsing chimney is caused by Durnsford Ltd acting as property owner not trader and is unlikely to be deductible. Note 8: Following the case of Smith s Potato Estates Ltd v Bolland the legal fees concerning the tax appeal will not be deductible. Note 9: The metal presses have an expected useful economic life of longer than 20 years so are treated as a long life asset which means that they must be allocated to the special rate pool. Appendix Durnsford Ltd Corporation Tax computation Year ended 30 April 202 Trading profits 353,003 Property income 24,967 Note 0 Chargeable gain 6,400 Note Loan relationships 38,350 Deduction against total income (MV of gift of land) (40,000) Notes & 2 TTP 382,720 CT at 26% /2 9,25 CT at 24% /2 7,654 98,869 Less marginal relief = (750,000-TTP) 3/200 /2 (5050) Note 3 Less marginal relief = (750,000-TTP) /00 /2 (306) Corporation Tax payable 93,53 the 7

18 Trading profits working Profit before tax 265,98 Depreciation 0,396 Loss on disposal - plant 38,857 Loss on disposal - land 22,000 Abortive legal costs 45,000 Note 4 Compensation costs re chimney 00,000 Note 7 Legal fees re tax appeal 0,000 Note 8 326,253 Interest receivable 38,350 Rent receivable (see below) 4,67 Note 0 Capital allowances 96,74 Note 2 (239,23) Adjusted trading profits 353,003 Note 0 Grant of short lease Property income Rental element (40,000 (50-24)/50) 20,800 Annual rental (5,000 0/2) 4,67 Property income 24,967 Note Chargeable gain Taxable proportion of sale proceeds (40,000-20,800) 9,200 Allocated cost: (A/(A2+B) x cost of freehold (2,800) A = 9,200 - part of premium not taxed as property income A2 = 40,000 - full amount of premium B = 50,000 - reversionary interest + future rental rights Chargeable gain 6,400 Note 2 Capital allowance workings Main pool Special Allowances rate pool claimed TWDV bf at May ,000 78,000 Additions Metal presses 200,000 Note 9 Sundry equipment 3,023 New Lorry Disposal proceeds (See 3,000 below) (5,000) Note 3 359, ,000 AIA (93,750) 93,750 Note 4 359, ,250 BMW car 22,000 Honda car 8, , , %; 9.84% (72,829) (30,35) 02,964 Note 5 TWDV cf at 30 April , ,5 Total allowances claimed 96,74 8

19 Note 3 Disposal proceeds for plant Net book value of disposals 53,857 Loss on disposal (38,857) Sale proceeds of plant 5,000 Note 4 The Annual Investment Allowance (AIA) is calculated as follows: May 20 to 3 March 202 (00,000 /2) 9,667 April 202 to 30 April 202 (25,000 /2) 2,083 93,750 Note 5 The writing down allowances are calculated as follows Main rate Special rate May 20 to 3 March 202 (20%/0% /2) 8.33% 9.7% April 202 to 30 April 202 (8%/8% /2).5% 0.67% 9.83% 9.84% Marks Add back depreciation and add back loss on disposal Calculate property income element of grant of short lease Calculate rent receivable and chargeable gain on grant of short lease 2 Allocated metal presses to special rate pool and explain why Allocate motor cars to correct pools Compute Annual lnvestment Allowance and allocate to special rate pool, compute writing down allowance and capital allowance claim 3 Explain relief available on donation of land to charity Explain number of associated companies for Durnsford Ltd 2 Explain deductibility of legal fees re compulsory purchase and accident re chimneys 2 Explain deductibility of legal fees re tax appeal Explain deductibility of compensation payments and make appropriate add backs 2 Calculate trading profits correctly and loan relationship credit Calculate Taxable Total Profit and tax payable before marginal relief Calculate marginal relief Total 20 9

20 20