CTA Examination- Application and Interaction- Case Study 3

Transcription

1 CTA Examination- Application and Interaction- Case Study 3 To: ddodd@doddcooper.co.uk From: taxadvisor@taxfirm.co.uk Subject: Mr Wise & GM Sunshine (Tooling) Ltd (GMST) Dear Mr Dodd I enclose the planning report together with attached appendices. I have prepared the reports as having come from your firm rather than mine on the assumption that our engagements is with you and not direct with Mr Wise or the company. Should you have any queries, please contact me. Yours sincerely Tax Adviser To: Mr Wise of GM Sunshine (Tooling) Ltd (GMST) From: Dodd + Cooper LLP RE: Taxation Issues of various transactions Date: November 2012 Report Introduction Both yourself and GMST (the company) have entered into, and are planning on entering into, various transactions. The purpose of this report is to advise you of the various tax implications of these transactions. The report will cover the following: 1) Tax implications of the recent sale of trade and assets by the company, loss relief claims and closure of the company. 2) Sale of the furnished holiday let (FHL) by the company to Mr Wise. 3) Potential investment into Sybil s Care Homes (SCH) and a discussion of the capital allowances available in respect of investment into the home at Bournemouth. 1) Loss relief & closure issue for the company 1.1 Corporation tax computation y/e I have prepared a computation for the year which takes into account the following transactions: sale of trade & assets sale of FHL to Mr Wise surrender of lease Sale of trade & assets

2 The goodwill is a chargeable asset for capital gains tax purposes. The goodwill has no cost attached to it. However, as the sale proceeds were only 1 a gain of just 1 arises. This is shown on working 2compliationof appendix 1. The stock is treated as having been sold at an amount equal to the amount realised on sale- i.e. 100,000. This is because the stock has been sold to an unconnected person. The legislation allows the price paid to be substituted for market value in such cases. A further trade loss of 110,000 therefore arises (being the balance sheet value of 210,000 less the 100,000 you received.) The plant and machinery is deemed to be transferred for the price paid. Balancing adjustments are required on the capital allowances computation. Please see working 1 of appendix 1. Please note that in the final year of trade there are no Annual Investment Allowances (AIA s), first year allowances )FYA s) or writing down allowances (WDA s). A balancing allowance has arisen though of 128,050 which increases the company s loss in the year Sale of FHL to Mr Wise Please see the notes in section 2 for more information regarding this. There is no capital gain for the company. Appendix 2 shows the computation Surrender of lease This is a capital item therefore the 50,000 compensation payment you made does not qualify for a deduction against trade profits. Instead, a capital loss arises. This has been offset against the goodwill of 1. The balance of 49,999 will be lost as the company has no other chargeable gains. (working 2 appendix 1 shows the computation). 1.2 Loss Relief The company has made losses in 2 years as follows: y/e ,200 y/e ,250 The loss arising in y/e can be relieved as follows: Firstly, it is offset against other income for the same accounting period (i.e. rental income). Secondly, it can be carried back to the previous accounting period and offset against total income.

3 If there are still losses remaining then they are carried forward and offset against future trade profits. Appendix 3 shows a summary of how this loss can be relieved. Unfortunately, 180,450 of the loss will be unrelieved as there is insufficient income in the current and previous year to utilise it fully. The balance would normally be carried forward and offset against future trade profits but as the company is closing this will not be the case. A different treatment is applied to the loss in As this is the final year of trading the loss is a terminal loss. The effect of this is that the loss can be carried back to the previous 3 years- i.e. to Appendix 3 shows how this loss has been relieved. As a result of the loss claims I estimate that a tax refund of 36,925 will be due to the company. 1.3 Extraction of funds- dividend You mention that you have yet to take any funds from the company & you wish to take a dividend. As the company is about to be wound up I would recommend against taking a large dividend as there is a more tax efficient method. I will explain this in more detail at section. I notice however that your director s loan account is overdrawn (see my comments at section 2) and as such I would recommend that this is repaid immediately. The amount overdrawn is 30,000. There are special rules which apply to loan relationships for close companies (controlled by less than 5 shareholders.) The 30,000 is treated as a loan to you and the tax implications are as follows:- The company is subject to a corporation tax charge of 25% of the loan. You are treated as having a benefit in kind. I would recommend that a net dividend of 30,000 is paid immediately to clear this overdrawn loan account. Provided the loan is repaid by the 1 January 2012 the corporation tax charge will not apply. 1.4 Extraction of funds- capital distribution A concession is available where shareholders wish to extract funds from their company when it is wound up. The concession allows a distribution to be treated as capital rather than income. Most capital distributions will qualify for entrepreneurs relief (ER) which taxes the capital gain at just 10%. This is compared with 32.5%/ 42.5% if it were taken as dividend.

4 ER is available if:- You own more than 5% of the shares in the company You work for the company The company is a trading company And these conditions have been met for the previous 12 months. Clearly the first 2 conditions are met. The company was a trading company up until 31 March Since then it has simply held investments, however, as the company is in the process of being closed HMRC allow a company time to do this The capital distribution will therefore qualify for ER and be taxed at 10%. Please note however, that if normal striking off is undertaken the concession only allows you to distribute up to 25,000 as capital. The rest would be a dividend. To get all the funds as capital you must undertake a member s voluntary liquidation (MVL). I note that this will be more costly however the tax saving will justify the expense of the MVL. I have estimated the funds which will be available in your company as 165,925. Please see appendix 4. This assumes you collect liabilities owing to you and pay the ones you owe. 1.5 Tax efficient extraction- overall tax liabilities to you Assuming you have no other income in 2011/12 I recommend: - Gross dividend of 42,475 (i.e. net 38,327) - Balance taken by way of capital distribution via MVL. See appendix 5. The total charge to withdraw 165,925 will be just 5, Other issues No VAT on transfer of trade and assets as transfer of going concern. 2) Sale of FHL to Mr Wise 2.1 CGT/overdrawn loan account You and your company are connected persons for CGT purposes. As such market value must be used when computing a gain on the sale or transfer of an asset. The sale proceeds you paid did actually equal the market value therefore no adjustment is necessary. See appendix 2 for a computation of the company s gain.

5 Companies are entitled to indexation allowance but this cannot create a loss. The disposal therefore results in a nil gain/ nil loss for the company. The base cost to you is 280,000. The proceeds were paid via your director s loan account (DLA). As this only had a credit of 250,000 a deficit of 30,000 arose. I discussed the implication of this in section VAT As there has been no option to tax on this building there is no VAT to be charged on the sale. 2.3 Stamp duty land tax (SDLT) SDLT is due on the sale at a rate of 3%. The SDLT charge is therefore 7,500. You must pay this, not the company. The SDLT charge was due 30 days following the sale i.e. 30 April The payment and land form is therefore late. I recommend that this is dealt with immediately. 3) Potential Investment in SCH/capital allowances 3.1 Investment One of the most tax efficient ways to invest in business ventures is via the Enterprise Investment Scheme (EIS). I have reviewed the legislation surrounding EIS and unfortunately, nursing and care homes are specifically excluded activities. As such the investment will not qualify for EIS. 3.2 Capital allowances etc. Firstly it is necessary to consider if expenditure is revenue or capital. Capital means there is an enduring benefit (i.e. expected to last more than 2 years). Once we have determined if an item is Capital we then need to decide if capital allowances (CA s) are available. To do this we need to consider statute, case law, and whether the item has a function or not. As part of the functionality test it is necessary to consider if the expenditure is part of the setting with which trade is undertaken or the setting in which the trade is undertaken. Certain expenditure is specifically excluded by the legislation- this is mainly expenditure on a building such as roof, ceilings, walls, sewerage systems etc. See appendix 6. Building work won t get CA s except:

6 Suspended ceiling 20% CA Tiling no CA Decoration etc.- revenue exp. Summary Close company via MVL Maximise basic rate band with dividend Take rest as capital Pay off overdrawn DA SDLT Appendix 1: Corporation tax computation y/e 31 March 2012 Trade profit/ (loss) per accounts (99,500)* Add: disallowable expenditure Entertaining 2,000 Depreciation 50,000 52,000 (47,500) Less: capital allowances (w1) (128,050) Trade loss (175,550) Other income: Chargeable gains (w2) - Rental income re FHL 15,300 Total taxable profits/ (loss) (160,250) *a further 110,000 in respect of loss on sale of stock should be included here. This will impact on availability of company s loss relief later. Capital allowances y/e 31 March 2012 General Pool Bas b/f ,6000 Additions: ,450 Disposals: (200,000) CA s Claim

7 Balancing allowance 128, ,050 Note: No AIA, FYA or WDA available in the final year of trade. Capital gains y/e 31 March 2012 i) Gain re. sale FHL (appendix 2) NIC ii) Goodwill- sale proceeds cost iii) Compensation paid re. lease (50,000) Capital loss (49,000) Appendix 2: Capital gain re sale of FHL to Mr Wise Sale proceeds (market value) 280,000 Less: cost (Dec 2004) (228,400) Less: indexation (Dec march 2012) (57,328) = x 228, Capital loss ( 5,728) Indexation cannot create a loss therefore the loss is reduced to NIL. Base cost to Mr Wise Market value at transfer = 280,000 Appendix 3: y/e y/e y/e y/e Trade profit 170,880 17, Other income 23,500 13,400 11,780 15,300 Total income 194,380 30,880 11,780 15,300

8 S37(3) (a) c/y (11,780) S37(3) (b) p/y (30,880) S89 (144,950) (15,300) TTP 49, Tax repayment (30,440) (144,950 x 21%) (6,485) (per Mr Dodd) Loss memorandum: y/e = (223,200) s37 (3) (a) c/y = (11,780) s37 (3) (b) p/y = (30,880) bas c/f = (180,540) - wasted as no relief can be claimed y/e = (160,250) s39-c/y = (15,300) = (144,950) ---- Appendix 4: Balance sheet at 31 March 2012 Fixed assets - Plant & machinery - Current assets: Stock - Debtors 130,160 Cash (300, ,450 (overdraft)) 169, ,000 Liabilities (171,000) Net assets 129,000 *Does not include a potential repayment of corporation tax by HMRC. Net assets 129,000 Tax refund 36,925 Potential funds in co y 165,925

9 Appendix 5: Tax computation for Mr Wise y/e 5 April 2012 Dividend 42,475 Less: PA (7,475) 35, ,500 Less tax credit (3,500) Income tax - Capital gains tax: Sale proceeds 165,925-38, ,700 Cost (67,000) 60,700 AE (10,600) 50,100 10% 5,010 Appendix 6: Capital allowances Electrical works Emergency lighting Integral Mains distribution Integral } 10% General power Integral Heating & ventilation Integral Fire alarms/ sprinklers etc. 20% General lighting Integral 10% Plumbing Boiler etc. Soil & waste Sanitary Baths sinks Showers No CA No CA Revenue exp. Revenue exp. } building

10 Building See notes in section of report. Plan: Report to Mr Dodd to give to Mr Wise & covering Report 1) Loss reliefs & other tax closure issues. (55) Requires advice on: i) Corp tax comp ii) Loss relief iii) Extraction of funds (possibly via final divi) consider loan penalty / cap dist iv) Best way to wind p/ dissolve GMST v) Estimate post tax funds he can expect on closure. vi) FHL needs to be taken into a/c re (v) vii) Income/ CGT comp on closure 2) Sale FHL to Mr Wise (16) (:. Brief (ish)) SP were 280k = MV so connected pty ok. i) CGT in company on sale/ Mr W base cost nil gain ii) Old loan acc- implications iii) Impact on ER (poss separate part) iv) VAT /SDLT. No OTT: no VAT SDLT will be due by company. 3) Investment into sisters care home (29) - EIS qual, connected pty, max inv, excl trade etc. - CAA s int features Cost: 67k Dec 86. 1,000 1 crd. Mr Wise GMST 100% Loan made to co.

11 (supply tools) Jan k (still 0/ per b/s) y/e trade loss 223,200. Rental Inc 11,780 = TTp 211,420 *Then needs to close company 1 March 2012 Sale of trade & assets (exl debtors & liabilities)* - Cap dist Esc C16 MVL? - 4-5k quick liquidator (cap costs?) - Easier way? (but note cap dist) - 4k other profit costs (cap cost?) - loan- old > sale of FHL - FHL sale - Post closure funds + tax comp Unconnected party Discounted SP 300k G/W 1 P+M 200,000 (WDV 325,600) BA Stock/ WIP 100k (BIS k - Use of losses? Various options (xfe occurred + losses have remained in GMSt :. MCINORT may not apply) - Formal liquidation/ struck off? - VAT TOGC - SDLT n/a no l+b transferred - Sale of FHL ( ) - Tax Imp - Funds available- company closed - DR loan a/c 280k - Cr 250k - Dr 280k - O/d 30k :. Need dividend Loss reliefs & other tax closure issues - Loss y/e ,200

12 Nb- other income - Loss II m/e ,500 pre adj Sale re FHL (nil gain/loss) Sale re trade/ assets Stock - Validation rules S162 CTA 2009 *if company permanently ceases to trade:- - trading stock being made at that time must be valued - and- valued in accordance with S164-S167 Sale bases- unconnected pty S165 applies -value - value = am + realised on sale P+M - arm s length :. JP :. CA s to calculate Lease - capital loss