CIOT Examination: Advisory Advanced Corporation Tax

Transcription

1 CIOT Examination: Advisory Advanced Corporation Tax QUESTION 1: Note Prepared by: Tax Manager Subject: Group Relief This file note sets out the position on the availability of group relief from the Albinoni Ltd group before and after acquisition by Holdings plc. Group Structure The first consideration over group relief availability is which companies will be in a group. Assuming Holdings plc acquires the entire share capital of A Ltd, A will join the Holdings plc group. With the other companies, further consideration is required. Two companies are in a group if one is a 75% subsidiary of the other company or both are 75% subsidiaries of another company (S152 CTA 2010). A company is a 75% subsidiary if at least 75% of its share capital is owned directly or indirectly by the parent company (S1154 CTA 2010). However, ownership is defined as beneficial ownership. Therefore, if for example share options exist over a company's shares, although these have not been exercised, ownership is still held through them. However, there is an exclusion to this if one of the following two cases holds: the parent is not beneficially entitled to at least 75% of the profits available for distribution, or the parent is not beneficially entitled to at least 75% of the assets available for distribution to equity holders on a winding up These conditions prevent situations where the rights of different shares are altered to give 75% share capital to one company but rights of say 30% to another company (S157(4)CTA 2010). Therefore, there is a risk Bach Ltd would not be in a group with Albinoni Ltd. This would be the case if a further 10,000 shares were under option. This would mean only 75000/ = 68% of the ordinary share capital would be beneficially owned by Albinoni Ltd. Therefore, these options should not be implemented. Instead, it should be considered if different remuneration strategies are available. Alternatively, if the management team will be bought out on the acquisition, the option could be granted after this date. Assuming the options are not implemented, Bach Ltd is likely to be in a group with Albinoni Ltd. With regards to Chopin Ltd, the issue is the convertible bank loan. If the bank can convert the loan into more than 25% of the share capital of Chopin Ltd, this will cause Chopin to leave the group. Furthermore, as Bach Ltd is a 75% subsidiary itself, Chopin Ltd would need to be 100% owned by Bach Ltd in order to join the Albinoni Ltd group. Otherwise it will just be in a group with Bach Ltd and potentially Dvorak Ltd, as discussed below. Given the existence of the convertible loan, it is considered that Bach Ltd does not beneficially own 100% of Chopin Ltd so that Albinoni's direct ownership is less than 75%. This means Chopin is not in Albinoni's group and would not be in the Holdings plc group on acquisition. Dvorak is owned 100% by ordinary share capital by Bach Ltd. However, as discussed above, since there are equity holders entitled to a share of profits, this is not the ownership to be used.

2 Instead, Bach Ltd will be considered to own 90% due to the 10% profits due to the preference share holders. This means Dvorak is in a group with Bach Ltd and Chopin Ltd but not with Albinoni Ltd. It would therefore not join the Holdings plc group. Date group relief available Group relief will be available throughout the year for companies in the Albinoni Group. This will enable losses to be surrendered from Albinoni Ltd to Back Ltd and between Bach Ltd, Chopin Ltd and Dvorak Ltd. Albinoni Ltd and Bach Ltd will join the Holdings plc group on the date the contracts are exchanged. The only losses available to the Holdings Group will be those generated after this date and these will be apportioned on a pro-rata basis unless this gives an unjust or unreasonable basis. An example of such a situation would be a large capital gain either before or after the acquisition. The group can elect to use a different basis in these situations as HMRC may require it. Further Information Further consideration needs to be given to the beneficial ownership of these companies to check which companies form groups together. Of particular importance is the 75% ownership of Bach Ltd. If a greater ownership was owned, it may bring Chopin and Dvorak into the Albinoni group. Therefore, details are required over whether the management teams ownership will be retained after the acquisition. Also, it may not be possible to cancel the implementation of the share option plan, If so, Bach Ltd will not be in a group with Albinoni. Further information is required. The loan in Bach Ltd is noted. It does not appear this gives any beneficial ownership to the bank. Furthermore, as no equity is held by the bank, it does not fall into S157 (4a) CTA 2010 as discussed above. However the terms of the loan must be reviewed in detail to ensure this is the case. A review of the current balance sheet position of Chopin and the loan agreement is required to check the beneficial ownership. The full rights of the preference shares on a winding up of Dvorak Ltd need to be checked to ensure they are not entitled to more than 25% of the assets. QUESTION 2: File Note Prepared by: Tax Manager Subject: The Green Group This note sets out the corporation tax position of various events and transactions in the Green Group. Entering Administration & Liquidation Firstly, on entering administration on 31 March 2011, an accounting period ends. As the company continues to trade, there is no further impact of this. (S10(1i) CTA 2009). On entering liquidation, a further accounting period ends. The cessation of trade on 30 September 2011 does not cause a new accounting period to end as the company is in liquidation (S12 CTA 2009). Losses of the period to 30 September therefore need to be apportioned as follows: To 31 March 2011: 1.8m x 3/9 = 600,000 To 31 August 2011: 1.8m x 5/9 = 1,000,000 2

3 To 30 September 2011: 1.8m x 1/9 = 200,000 Transfer to Yellow Ltd from Brown Ltd The transfer of the trade and assets to Yellow Ltd will fall within S938 CTA As the trade was owned beneficially by the Green group at some point two years before the transfer and 1 year after the transfer, the ownership condition of S941 CTA 2010 is met. Also, as all the companies are UK resident, the tax condition of S943 CTA 2010 is met. The impact of this is that the trade losses in Brown Ltd will transfer to Yellow Ltd for use against future profits from the trade. Also, all plant and machinery will transfer at tax written down value. Because the transfer falls within these provisions, no terminal loss relief is available under S44(2) CTA Also, as Brown Ltd is retaining liabilities, the losses will be restricted to remain in Brown Ltd to the extent that there are no assets left to offset the liabilities. Transfer of Property The transfer of the property by Red Ltd will take place at no gain no loss under S171 TCGA Therefore, the proceeds will be deemed to be cost plus indexation. As Yellow Ltd then leaves the group within 6 years, a de-grouping charge arises on 31 October This falls in Yellow Ltd based on a market value disposal by Yellow on 30 September 2011 with base cost as transferred from Red Ltd. The charge can be reallocated to the Green group by election. However, the trade losses in Brown will not be available as they fall before 30 September This is despite the fact Brown remains in a capital gains group with Green after entering liquidation. Compensation The compensation is a post-cessation receipt. It will be taxable as miscellaneous income to the extent it was not accrued for by 30 September Only expenses and losses which would have been available for offset if the receipt was received before the cessation are available for offset. However, as no accounting period end on cessation of trade, the loss which is not transferred to Yellow Ltd, due to the liabilities in Brown, can be used against this income. Distribution Since Brown is in liquidation, this will be a capital distribution. The secondary substantial shareholding exemption will not be available to the Green Group as it will not be trading following the sale of Yellow Ltd. Therefore, any gain will be taxed in full and any loss will be allowable. The base cost will be provided on the first distribution. Use of Brown Losses As mentioned above, no terminal loss relief is available. However, group relief is available until appointment of the liquidator. There are only 2 associated companies until Yellow Ltd begins to trade on 30 September This is a Green distributes all dividends and has no expenditure or other activity. Therefore, the preference is to use Brown's losses by carry back as Red Ltd is a small rate tax payer. Carrying the loss in the year ended 31 December 2010 back to 31 December

4 saves the most tax. The loss in the period to 31 March can then be group relieved. However it is restricted to: 3/12 x 60,000 = 15,000 Also, the loss to 31 August 2011 can be group relieved up to: 5/12 x 60,000 = 25,000. Any remaining losses must be carried forward for transfer to Yellow Ltd. QUESTION 3: Report Prepared By: Tax Director Subject: Various Tax Issues The report sets out the findings of a review of the tax history of Consolidated Pharmaceuticals plc. Drug Deliveries (UK) Ltd Generally, an amendment can be made to a tax return up to 1 year after the filing date. So for the year ended 31 March 2008 this is 31 March Therefore, the company is out of time to amend the two tax returns. As the enquiry is into a different issue for 31 March 2008, no amendment can be made in respect of it. However, overpayment relief may be available. This is available if an error is made in a tax return. It is available for 6 years and a claim must be made in writing. The claim must set out why the relief is being claimed, confirm that no relief has previously been obtained in respect of the error, and qualifying the amount of relief. Drug Manufacturing Ltd The time limit for making a claim for Research and Development is 1 year after the filing date, so 31 March 2012 for the year ended 31 March 2010 and 31 March 2011 for the year ended 31 March Therefore, a claim should be made for the year ended 31 March 2010 in order to obtain relief. HMRC have advised they will accept a late claim for research and development tax relief. The claim must be made in writing setting out why a claim was not made. It will not be sufficient for the reason to be negligence on behalf of the company or its advisors. The success of the claim will also depend on the extent the claim is late. It should therefore be made as soon as possible. Asian Pharma (Hong Kong Ltd) As the company is centrally managed and controlled in the UK, it is resident in the UK for tax purposes. Therefore tax returns should be prepared and submitted. Notice should have been provided to HMRC within 3 months of trading, so by 1 July Penalties may be due for late notification. Interest will also be due on any late payments of tax as well as potential penalties. Disclosure should be made to HMRC as soon as possible as penalties will be reduced for disclosure. Double tax relief will be available for the Hong Kong tax suffered. Before disclosure is made however, the UK-Hong Kong tax treaty should be checked, if one is in place. This may give a tie-break clause for companies considered to be resident in both territories. Drug Retailing (UK) Ltd a) Year ended 31 March

5 The company is out of time to make an amendment to the return. Also, HMRC is out of time to enquire into the return. Therefore, as HMRC was in possession of all the facts, it cannot adjust the error. No action needs to be taken. b) Year ended 31 March 2008 The payment of tax on this amount should be made as soon as possible to minimise interest accruing. This coincides with the periods in Dry Deliveries where overpayment relief may be available. A claim can be made to surrender the repayments to Drug Retailing (UK) Ltd if the claim is successful. This will reduce any interest. c) Year ended 31 March 2009 It appears that this was deliberately hidden by the company. Although the enquiry window has passed, HMRC may raise may raise a discovery assessment in respect of it. Since the error is deliberate & concealed, maximum penalties may arise on the additional tax of 5600, assuming full rate. Therefore, disclosure should be made to HMRC to bring this to light and reduce any penalties which may be charged. Consolidated Pharma (Head Office Services) Ltd As the company has not entered the reference name on the return, penalties will be due. This will be up to 5000 and up to 600 for each day without notification. Again, disclosure should be made to minimise any penalties. QUESTION 4: Report Prepared by: Tax Manager Subject: Transfer Pricing This report sets out the UK transfer pricing rules and their application to EuroAmerican Holdings Ltd. Transfer Pricing Rules The transfer pricing rules require UK companies to calculate taxable profits and losses on the basis arms-length terms are used for all transactions with connected parties. There is an exemption to this if the group is not large which means: Employees are less than 250 and either: turnover is less than 50m, or balance sheet total is less than 43m (S166 TIOPA 2010). This exemption does not apply to medium groups where the other party is resident in a tax haven (S167 TIOPA 2010). HMRC may also required a medium enterprise to use transfer pricing (S168 TIOPA 2010). Assuming a company is not part of a small or medium group, it must self-assess any transfer pricing adjustments required. Many transactions will fall within this on top of inter company sales. For example, interest payments and use of intercompany services must be charged on arms length terms. The transfer pricing adjustments will also only be required where there is a UK tax advantage. This could be by reducing taxable profits or alternatively enabling brought forward losses to be utilised (S147 (4b) TIOPA 2010). 5

6 The provisions also do not apply to dormant companies. Therefore a company with an intercompany balance which is dormant does not need to adjust for deemed arms-length interest (S165 TIOPA 2010). The legislation definition of an arm's length transaction is merely what two independent parties would charge (S147 (d) TIOPA 2010). Therefore, the UK basis of calculating an arm's length provision rests on the OECD transfer pricing guidelines. This gives a number of transfer pricing methods such as benchmarking on the costs for the goods or services in an open market or using a cost plus method. These are known as traditional methods and are preferred by the guidelines and HMRC than Transactional methods. Application to EuroAmerican i. $100m loans There are a number of issues with these loans. Firstly they may cause the EuroAmerican Holdings Ltd company to be capitalised. This occurs where a company is funded by loans in excess of what a third party would give. Calculations must be made of which interest a third party would charge and how much debt would be provided. It does not matter that the company is profit making. This is as HMRC would argue it should make higher profits if funded by equity. ii. Swiss bank loan Again, EuroAmerican Inc is causing large debt to be available through its guarantee. It needs to be investigated how much debt would be provided and on what terms in the absence of the guarantee. A disallowance would be required of any excess over this. iii. Eurocash Ltd As mentioned previously, dormant companies are excluded from the provisions so no adjustment will be required. iv. Poland A detailed review of Polish transfer pricing rules are required to consider this structure. However, again arms length terms need to be made on transactions. However, when there is no UK tax advantage an adjustment is not required. Funding by debt will not give an advantage as interest income is taxed whilst dividends from controlled subsidiaries are not. Therefore debt or equity funding can be decided upon based on the companies' preferences. QUESTION 5: 1. Research and Development Relief Qualifying Costs The staff costs of 150,000 qualify in full. Cambridge University is a qualifying body so again relief is available for the full expenditure. The costs of the complete staff are eligible but they are agency staff. Therefore only 65% of their costs qualify. The payments to the self-employed professor are qualifying payments to a subcontractor as they are to an individual (S1078 (2b) CTA 2009). So for Project A, total qualifying expenditure is : 150,000 75,000 65,000 50,000 6

7 340,000 For project B, the staffing costs again qualify in full. The software qualifies in full, under S1125 CTA The payments to the SME will not qualify. This is as the claim will be under the large companies scheme, see below. The payments to a partnership are not qualifying. This is as the partnership is connected with Research Ltd under S 1079 (6) CTA2010. Therefore the total qualifying costs are 225,000. Scheme Applying As the company will be taken over by a large company, the first years grace on becoming large does not apply. Therefore the large companies scheme applies. Amount of Relief Relief is therefore at 30% and is: 30% x (225, ,000) = 169, Conditions for Research and Development The solicitors should ensure the expenditure will continue to qualify for relief. HMRC has already confirmed the projects qualify, this will be that they seek an advance in science or technology through overcoming uncertainty. However, the guidelines state that research and development ceasing to be qualifying once the uncertainty is overcome. Therefore, it needs to be checked that the uncertainties have not yet been overcome of either project. If they have, the expenditure incurred before this will qualify. Also, only staffing costs incurred on salaries, pension contributions and secondary class 1 national insurance qualifies. Therefore, it should be checked no expenditure relating to, for example, benefits are included in the staff costs. It should be checked the agency providing the computer staff is not connected to the company. If it is, the amount of expenditure available for relief will be limited to the expenditure actually incurred by the agency. Changes to Projects Relief is limited on a number of the types of expenditure in Project B. Firstly, the subcontractor claims relief instead of Research Ltd. It should be considered if there are expertise in the large health group which can carry out this work. After the takeover, the payments to the partnership will qualify. Therefore no adjustment needs to be made for this. The payments to the agency compute contractors only qualify to 35%. Again, it should be considered if expertise are available in the group or if it is more beneficial to bring the staff in house. This may lower actual costs or provide a greater deduction. QUESTION 6: File Note Prepared By: Tax Manager Subject: Metropole Ltd The file note sets out the issues around the loan relationship plans in Metropole Ltd. Star Ltd 7

8 The loan in Star Ltd is currently with a third party. Any write offs of the debt would therefore be a taxable credit. On sale of the debt to Metropole, there will be tax implications to the bank as it will make a loss. Also, the debt will become a connected party debt. The debt must therefore be accounted for under the amortised cost basis under S349 CTA This falls within S361 CTA 2009 as the loan is acquired at an undervalue however. Therefore, Metropole is treated as releasing its rights to 9m of debt. Metropole will then be taxed on this credit under S358 (2a) CTA 2009 as it is a deemed release. There are three exceptions to this but the transaction does not fall within them. An alternative would be to bring the transaction into the debt for equity exception of S361C CTA The bank would need to receive ordinary shares in Metropole or a group associated with Metropole. This needs to be considered in detail however in terms of the groups desire to lose some control. Acquisition of Epsilon's Bank Loan This aquisition is also brought within the deemed release as above. However, there is a change of ownership within 60 days of the acquisition of the loan so S361A CTA 2009 may give an exception to the deemed release. This exception will apply where the insolvency conditions are likely to be met in the year after the change in ownership and also that the loan acquisition would not have occurred without the change in ownership. Epsilon would meet the insolvency conditions broadly if a liquidator or administrator would have been appointed in the year following the change of ownership but for the change. The plans of the bank and current owners need to be considered to check if they are thinking of placing the company into liquidation or administration. If not, a gain of 14m may be charged in Metropole Ltd. Waiving of loan in Epsilon The companies will become connected on the reacquisition of Epsilon. Therefore, S350 CTA 2010 comes into place. The loan impairment recognised before the connection will be brought back into account. This will bring a credit into account in Metropole. The subsequent write off will not lead to a taxable credit or allowable deduction in either company. It may be best to not impair the loan in Metropole before acquisition of Epsilon as this will prevent the abnormal results of a debit in the year ended 30 June 2011 and a credit in the year ended 30 June