The Chartered Tax Adviser Examination

Transcription

1 The Chartered Tax Adviser Examination November 2009 Advanced Corporation Tax Advisory Paper TIME ALLOWED 3 HOURS You should answer all SIX questions. Start each answer on a new sheet of paper and write on one side only. Do not write in the left-hand margin. All workings should be shown and made to the nearest month and pound unless the question specifies otherwise. Marks are specifically allocated for presentation. Candidates who answer the law elements in this paper in accordance with Scots law or Northern Ireland law should tick the appropriate box on the front of each answer folder.

2 1. You are a tax manager in a firm of Chartered Tax Advisers which acts for Acorn plc, a UK incorporated and resident company, in connection with a transaction involving the securitisation of Croatian residential mortgage loans. These loans were originally made by Crotio Banka, a Croatian bank. The original borrowers under these loans are all individuals and the property secured by the mortgages is all located in Croatia. Acorn plc acquired the loans from Crotio Banka on 10 December 2008 for an arm s length price. In addition to the cash consideration payable by Acorn plc to Crotio Banka for the purchase of the loans, Acorn plc granted Crotio Banka the right to receive deferred consideration for a period of five years. The deferred consideration is the income received by Acorn plc in respect of the loans less expenses and a commercial profit made by Acorn plc. Since the deferred consideration is to be paid annually, the tax director of Acorn plc is concerned that tax should be deducted on the basis that these are annual payments. Acorn plc made the following payments during its 12 month accounting period ended 31 July 2009: Date paid Description Gross amount 30 November 2008 Debenture 10,000 Mr A Recipient (UK resident except where stated) interest 1 January 2009 Patent royalty 1,000 Mrs B 28 February 2009 Patent royalty 30,000 Cashew GmbH (an associated company resident in Germany) 31 May 2009 Debenture interest 30 June 2009 Deferred consideration 10,000 Mr A 80,000 Crotio Banka (Croatia) Acorn plc received the following sums during the same period: Date received Description Gross amount Payer (all UK resident) 15 August 2008 Patent royalty 2,000 Mr C 15 November 2008 Patent royalty 2,000 Mr C 31 December 2008 Annual payment 40,000 Nutree Ltd (unrelated company) 15 February 2009 Patent royalty 2,000 Mr C 15 May 2009 Patent royalty 2,000 Mr C 31 July 2009 Patent royalty 15,000 Mr D You are required to write a memo to your tax partner: 1) Explaining whether Acorn plc should be deducting Income Tax from the payments of deferred consideration to Crotio Banka. (8) 2) Setting out the payments or repayments of Income Tax that should arise to Acorn plc for each CT61 return period for the 12 month accounting period ended 31 July (7) Total (15) Page 2 of 7

3 2. You are the tax manager of Westmere plc, a UK headquartered group incorporated in 1998 which manufactures and sells sports equipment. The Group has recently completed the acquisition of the Enclave Group, incorporated and managed in Singapore where the corporate tax rate is 18%. Prior to the acquisition, the Enclave Group was wholly owned by shareholders resident in Singapore. The Enclave Group consists of the parent company, Enclave Pte Ltd and two 100% subsidiary companies, Enclave Sports Goods Pte Ltd (incorporated and managed in Singapore) and Enclave Distributors Sdn Bhd which respectively manufacture and sell products. Enclave Distributors Sdn Bhd buys all of the products manufactured by Enclave Sports Goods Pte Ltd and sells these at a profit to third parties internationally. Enclave Distributors Sdn Bhd is incorporated and managed in Labuan, a tax free zone within Malaysia and is not liable to Malaysian tax on its profits. The finance director of Westmere plc has suggested that the activities of Enclave Distributors Sdn Bhd be expanded considerably by also buying products manufactured in the UK by companies in the Westmere Group and selling these to current and new customers. Alternatively, Enclave Distributors Sdn Bhd could perform a sales service and receive a commission with the sales continuing to be made by the UK companies. He would also like to take advantage of the lower tax opportunities offered by both Singapore and Labuan and has asked if it would be possible to move the various design rights and patents currently held by Westmere plc to a new company in one of these jurisdictions. Furthermore, the finance director has explained that the non-executive chairman of Westmere plc has been reading about companies moving the residence of the parent company from the UK so as to save tax. The chairman has asked whether the existence of operations in Singapore and Labuan offers the opportunity to move the parent company incorporation to one of these jurisdictions which could then charge large management and service fees to the UK companies. He understands from what he has read in the press that there is no need for the directors or senior management actually themselves to move to the chosen jurisdiction. You are required to prepare a memorandum to the finance director explaining the UK tax issues relating to these proposals. (15) Page 3 of 7

4 3. You have just joined the tax department of P Ltd, a UK incorporated and tax resident trading company the share capital of which is owned by UK resident and domiciled individuals. P Ltd has been connected to other companies for a number of years as shown in the diagram below. P Ltd Individuals Individuals 85% 15% 100% Q Ltd R Ltd 40% 60% Individuals S Ltd 10% 90% 100% U Ltd T Ltd On 17 May 2008, P Ltd sold goods to a third party customer in Singapore for S$75,000. The customer paid P Ltd S$20,000 on 1 July 2008 but the balance remained outstanding at the year end. The exchange rates on the relevant dates were: 17 May = S$2 1 July = S$ December = S$1.7 The profit for the year ended 31 December 2008 for P Ltd excluding the above exchange gain or loss was 104,621. Since P Ltd trades extensively with overseas parties, it is thinking of presenting its financial statements in a foreign currency in future, even though its functional currency would continue to be sterling. For the year ended 31 December 2008, the other companies had the following profits/(losses) for corporation tax purposes: Q Ltd ( 40,000) R Ltd nil S Ltd ( 30,000) T Ltd 20,000 U Ltd ( 13,000) Continued Page 4 of 7

5 3. Continuation None of the companies had any losses brought forward and none of the companies made or will make loss carry back claims. On 1 October 2008, P Ltd and Q Ltd made payments in respect of their Corporation Tax liabilities for the year ended 31 December 2007 of 130,000 and 115,000, respectively. Following a recent HM Revenue & Customs enquiry, their liabilities have just been agreed as 110,000 and 132,000, respectively. The rate of interest charged by HM Revenue & Customs on overdue tax was 2.5% and the rate of interest given on overpaid tax was 0.5%, throughout. You are required to: 1) Calculate, with explanations, the losses that may be claimed by P Ltd and T Ltd for the year ended 31 December (8) 2) Calculate, with explanations, the interest consequences if P Ltd surrenders to Q Ltd its overpaid tax in respect of the year ended 31 December You may assume that if no surrender is made, all outstanding tax payments and repayments will be made on 1 December (4) 3) Explain how P Ltd should present its future CTSA returns if it prepares accounts in a currency other than sterling. (3) Total (15) 4. You are a manager in a firm of Chartered Tax Advisers and have been advised that a meeting has been arranged with the chief executive of Vanderwick Holdings Ltd, a UK incorporated holding company owned by members of the Vanderwick family. It has two UK trading subsidiaries, Vanderwick Mining Tools Ltd, which manufactures tools for use by mining companies, and Vanderwick Motors Ltd, which owns several car dealerships. Vanderwick Motors Ltd has generated considerable cash reserves over the years but the family considers that it is Vanderwick Mining Tools Ltd, which has been growing significantly, which has the most potential for the future including a possible stock market flotation within the next five years. The family accordingly wish to separate the ownership of the two companies and it has been suggested that this be achieved by way of a demerger. It is intended that all current family shareholders will hold proportional shareholdings in both businesses but it is possible that certain family members may not wish to have a long-term interest in the car dealership business and it has been suggested that, shortly after the demerger, the cash reserves in that company could be used to buy back the shares of these family members in that business. You are required to prepare briefing notes for the meeting. (20) Page 5 of 7

6 5. You are the UK tax adviser to Ironworks Ltd, a company tax resident in Ruritania. It sells bulk orders of door handles exclusively to large contractors in the building trade in South America, has an annual turnover of about 90 million and over 300 employees. It makes up its accounts to 31 December and has no associated companies. The company now wishes to sell door handles in bulk to large building contractors in the UK market. At a recent meeting in October 2009, the chief financial officer, Jeff Jackson, outlined the following options to you: 1) The company could export its door handles to the UK. In this case the door handles would be sold to a local wholesaler who would then sell them to customers. 2) It could hire a local sales agent in the UK to make contact with potential customers, and set up meetings. Salesmen from Ironworks Ltd would then fly to the UK, meet the customer and agree a contract for the sale of goods. Alternatively the agent may be given power to contract with customers on Ironworks behalf. 3) The company could set up a showroom for its stock in the UK. Sample door handles would be on display. Contracts for sale would be agreed by staff based in Ruritania. Goods would then be exported to the UK and stored at the showroom, pending delivery. 4) The company could set up a sales office in the UK. A suitable site has already been found and a 10 year lease has been offered by the landlord. Goods would be imported for sale from Ironworks Ltd, stored in warehouses near the office and staff based at the office would agree sales with customers. This is thought to be the most likely option. Whichever option is chosen operations in the UK will not commence until January If option 4) is pursued, the projected income and expenditure of the UK sales office for the year to 31 December 2010 is as follows: Sales: 800,000 Cost of sales (350,000) Legal fees re acquisition of lease on office (2,000) Interest payable on loan finance from UK bank (see Note (30,000) 1) Recharge of royalties (see Note 2) (2,000) Wages (90,000) Utilities (2,500) Rent and business rates (30,000) Computer and furniture purchases (120,000) (626,500) 173,500 Note 1: The loan finance is being used purely to fund Ironworks UK operations. Note 2: This a recharge made by Ironworks Ltd of certain patent royalty fees which it has incurred. The computer and furniture will be purchased in January Ironworks Ltd will additionally incur IT support costs in relation to the UK office of 15,000. There is no Double Taxation Treaty between the United Kingdom and Ruritania. Page 6 of 7 Continued

7 5. Continuation You are required to: 1) Write a file note in preparation for a telephone conversation with Jeff Jackson commenting on the UK Corporation Tax implications of the above proposals. (11) 2) Compute the Corporation Tax due if option 4) is chosen, including notes.(4) Total (15) 6. You are a tax manager at a firm of Chartered Tax Advisers. You have recently met with Tony Bridges, finance director of a new client, Brewmaster UK Ltd. The company owns a small chain of pubs in Hertfordshire. It has no associated companies. It employs 150 staff and has a turnover of about 20 million per annum. The company has just purchased a freehold building which was formerly a large grocery shop. The shop closed six months ago and has been vacant since then. The company plans to turn the shop into a pub. Both food and drink will be served. The building is in a very run down condition and was acquired at a bargain price. Nothing was paid for the existing fittings in the shop which will all need to be scrapped. Refurbishments are needed and the company s quantity surveyor has prepared a schedule of works as follows: Works Cost New brick wall to separate off kitchen 2,500 Replacement of damaged walls and structural underpinning 40,000 New toilet stalls and wash basins 15,000 False ceiling for kitchen 1,500 Paintings for pub lounge 3,000 Mains electrical renewal 30,000 New pub lighting 15,000 Plumbing improvements to cold water systems 25,000 Pub furniture, kitchen fridges and cookers 20,000 Alteration of wall to accommodate fixed seating (see Note 1) 1,500 Sundry preliminary works ( Preliminaries ) 2,000 Professional fees to obtain liquor licence and legal advice re change of use for planning permission 4,000 Note 1: This alteration involves attaching brackets to the wall to support the new seating. The company s year end is 28 February All of the above works will be completed, invoiced and paid by that date and the company will make no other capital expenditure during the year or any fixed asset disposals. It had a tax written down value brought forward at 1 March 2009 of 400,000 on its general pool and 55,000 on its special rate pool. You are required to write a letter to the finance director explaining the tax relief available on the above expenditure. (20) Page 7 of 7