The Chartered Tax Adviser Examination

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1 The Chartered Tax Adviser Examination November 2017 Taxation of Major Corporates An Advisory paper developed as part of the Joint Programme with the ICAEW leading to the ACA and CTA TIME ALLOWED 3 ¼ HOURS plus 15 minutes reading time You should answer all SIX questions. Start each answer in a new answer booklet. At the end of the examination put all answer booklets used in the envelope provided. Ensure your candidate number appears on all answer booklets used and on the front of the envelope. 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 booklet. Unless otherwise indicated by the provision of additional table information, you may assume that 2016/17 rates and allowances continue to apply for 2017/18 and future years. Candidates referring to actual or pending rates and allowances for 2017/18 and future years will not be penalised.

2 1. You are a tax manager at a firm of Chartered Accountants. Your client, Low Grey plc, is the parent company of a listed group that manufactures equipment used in the telecommunications industry. The main trading company in the group, Low Grey Telecom Ltd, mainly manufactures in the UK but also has two overseas branches, located in Ruritania and Buranda. Your firm has been engaged to prepare the Corporation Tax computation for Low Grey Telecom Ltd. Tom Cole, the financial controller, has provided you with the following information for the 12-month accounting period to 30 September Notes Profit before tax per the accounts 530,257,000 Profit before tax includes the following items: Profit of Buranda branch 1 475,000 Profit on sale of fixed assets 2 11,000 Depreciation (15,650,450) Accrual for directors bonus scheme 3 (2,575,000) Contribution to company pension scheme 4 (1,100,000) Loss of Ruritania branch 1 (365,200) Notes 1) The profits/losses for the two branches are calculated using UK Corporation Tax rules. No election under s.18a Corporation Tax Act 2009 has been made. 2) The opening capital allowances position is: Main Pool Special rate pool Tax Written down value 2,350,350 1,657,200 The following assets have been purchased in the year: Integral electrical system 105,000 Energy saving boiler 8,500 Suspended ceiling in accounts office 13,750 Machinery 1,024,360 Thermal insulation for the factory 1,365,000 Equipment used in research & development activities 76,700 The following disposals have been made in the year: Proceeds Low emission car 1,750 Plant and machinery 33,150 3) The directors bonus scheme is linked to sales growth over the current and next three years. The target for 2017 was met and so a bonus of 500,000 was paid on the first pay date after the year-end. The rest of the bonus will be paid after the end of years two, three and four. 4) The company has a defined benefit pension scheme for the benefit of certain key members of staff. The scheme has a deficit and therefore the scheme s advisers have requested that the company makes contributions totalling 1,100,000 this year. You have been informed that this payment was made on 30 September. In previous years, the contributions were 200,000 per annum, and it is expected that the contributions will return to that level in Continued Page 2 of 10

3 1. Continuation 5) The company is a large company for R&D tax relief purposes. The company has started developing a new material to be used in manufacturing and in the year to 30 September 2017, has incurred the following revenue expenditure in the development project: Personnel costs employees 280,510 Personnel costs external staff 35,600 Consumables 32,070 Allocation of management costs 40,700 6) To date, Corporation Tax totalling 79,300,500 has been paid in instalments. 1) Draft the Corporation Tax computation for Low Grey Telecom Ltd for the year ended 30 September 2017 stating the Corporation Tax payable and include a note explaining when instalment payments were/are due and the effect of over/under payments of Corporation Tax. (12) 2) Explain how income from an overseas Permanent Establishment may be exempted from UK Corporation Tax. (3) Total (15) Page 3 of 10

4 2. You are a tax manager in a firm of accountants that advises ABC plc, the UK incorporated and tax resident parent company of a pharmaceutical group listed on the FTSE 250 index with operations in the UK, the US, Germany and the Netherlands. You are currently assisting ABC plc in undertaking due diligence on a prospective acquisition of the CDE group, a Private Equity backed group that develops and markets cancer drugs. It is proposed that ABC plc will acquire CDE Ltd, the parent company of the CDE group, on 31 December The CDE group structure is set out below with the jurisdiction of incorporation and tax residency of each subsidiary company stated. All the subsidiaries are wholly owned. All companies in the ABC group and CDE group prepare accounts to 31 December annually. CDE Ltd FGH AG (Switzerland) IJK Ltd (UK) LMN GmbH (Germany) OPQ Ltd (UK) You have been provided with the following information about the CDE group: 1) CDE Ltd is the holding company of the group and does not carry on a trade nor has any other source of income. Until 1 January 2015, all Board meetings took place in the Isle of Man. Since then there have been six Board meetings, all of which took place in London. From 1 January 2015 to 31 December 2016, CDE Ltd incurred interest expense of US $65 million (50 million) per annum on a loan from the Private Equity investor that was repaid on 31 December CDE Ltd has the US Dollar as its functional currency. 2) On 1 November 2017, CDE Ltd disposed of a 5% shareholding in Drug Smart Inc, a US incorporated and tax resident drug manufacturing company. The sale proceeds were US $97.5m (75 million) and CDE Ltd acquired the shares for US $58.5m (45 million) on 30 June This shareholding was CDE Ltd s sole investment in Drug Smart Inc. 3) FGH AG owns all the group s intellectual property (consisting of drug patents). A large proportion of the group s management and employees are employed by the company and work at its office in Geneva. FGH AG pays corporate tax in Switzerland at a rate of 8%. It had taxable profits of 20 million for the year ended 31 December 2015 and 50 million for the year ended 31 December ) IJK Ltd and LMN GmbH conduct all sales activity in the UK and Germany, respectively, on behalf of FGH AG. Each company has a service agreement with FGH AG that guarantees each will make an annual profit equal to 5% of costs incurred. Any profit exceeding 5% of costs is paid as a quarterly management fee to FGH AG. Conversely, where an insufficient profit or a loss arises for quarter, FGH AG will make a payment to compensate the companies for not achieving the agreed level of profits (and hence ensuring that they do). 5) OPQ Ltd manufactures cancer drugs. This has been funded by various share issues to CDE Ltd. OPQ Ltd pays royalties to FGH AG for the use of patents. IJK Ltd and LMN GmbH acquire the drugs from OPQ Ltd at cost plus a markup of 2%. Continued Page 4 of 10

5 2. Continuation 6) IJK Ltd and OPQ Ltd have filed Company Tax returns for all years up to and including the year ended 31 December 2016 and paid all taxes on time. Both companies have made quarterly instalment payments relating to the year ending 31 December 2017 on the due dates and plan to make further payments on 14 January 2018 and 14 April Draft the UK section of the due diligence report for ABC plc explaining the Corporation Tax risks associated with the acquisition of CDE Ltd. You should assume that a company is tax resident in the Isle of Man if incorporated there and the UK/Isle of Man Double Taxation Agreement has no tie breaker clause for residency. (20) 3. You are a tax manager at PRJS Chartered Accountants. The firm has a longstanding client, Petersfield Enterprises plc, of which Jane Jenkins is the Finance Director. You are aware that Petersfield Enterprises plc is considering the acquisition of a privately owned, UK based trading group with some overseas subsidiaries, the Hammersmith group of companies. You received a phone call from Jane yesterday, in which she informed you that overall the Hammersmith group has a low effective tax rate. She is concerned that this low rate may be due to the Hammersmith group entering into various transactions, both within the UK and cross-border with its overseas subsidiaries, that have led to a mismatch in tax treatment, with tax deductions in one group company not being matched by taxable receivables in another group company. She is aware that there is a General Anti-Abuse Rule to counteract a tax advantage in certain circumstances and she would like to understand the scope and purpose of the rule and how they could potentially apply to the Hammersmith group. Prepare a briefing note for Jane Jenkins describing the scope and application of the General Anti-Abuse Rule to the acquisition of the Hammersmith group, including how any exposure may be addressed. (15) Page 5 of 10

6 4. You are the in-house Tax Manager employed by Ramcourt plc, a listed company with subsidiary trading companies located in the UK and overseas, all of which have a 31 December year-end. The structure of the group in the UK is set out below. Ramcourt plc 100% 100% 75% Courtfoods Ltd 75% Courtpackaging Ltd Court Manufacturing Ltd RM Machines Ltd The group manufactures machinery used in the food production industry. It is currently undertaking a programme of reorganisation and has recently acquired companies trading in the same industry and will sell surplus assets as manufacturing activity is transferred around group companies. Michael Robins, the Group Finance Director, has informed you that as part of this programme of reorganisation, a building is to be sold. The building is currently owned by and used in the trade of Courtfoods Ltd. The building has potential for redevelopment as a leisure centre but planning permission must first be obtained. A developer, which is planning to sell a leisure centre to a national chain of gym operators, has made the following offer for the building: 1) Upfront cash consideration of 4 million payable on completion, which is expected to be 31 December ) Additional consideration of 500,000 when the developer applies for planning permission, which is expected to be no later than 31 December ) Additional consideration of 1.5 million if planning permission is granted. 4) If the purchaser develops the site into a leisure centre and sells it to a national chain of gym operators at a price exceeding 12 million, a contingent consideration is payable to Courtfoods Ltd, equal to 10% of the proceeds received above 12 million, capped at a maximum payment of 150,000. This right to receive the contingent consideration is currently valued at 70,000. Michael believes this to be a good offer for the property and that it is highly likely that the developer s plans will be realised. Continued Page 6 of 10

7 4. Continuation You have ascertained that the building was purchased on 1 January 1999 and that the following expenses were incurred: Cost of building 1,750,000 Incidental costs of purchase: Professional fees Stamp duty 7,500 52,500 Planning consultant fees (paid 30 June 2017) 12,000 You have also ascertained that: 1) On 30 June 2017, Courtfoods Ltd sold plant and machinery for 75,000. The plant and machinery had cost 900,000 on 1 January 1999 and capital allowances totalling 800,000 had been claimed up to 31 December ) On 30 September 2017, Courtpackaging Ltd purchased fixed plant and machinery costing 500,000. 3) In 2019, Court Manufacturing Ltd is planning to purchase a warehouse for 1.5 million. 4) There are unused carried forward capital losses in the group as follows: (a) (b) (c) 1,475,000 in Court Manufacturing Ltd. 2,500,637 in Courtpackaging Ltd. These losses were in existence at the time the company was acquired in 2007 by Ramcourt plc. 690,000 in RC Machines Ltd, a 75% subsidiary of Courtfoods Ltd. Draft a memo to Michael Robins explaining the Corporation Tax consequences of the above information, including calculations and suggestions on how any chargeable gain arising might be mitigated. (20) Page 7 of 10

8 5. You are a senior manager at Complex Tax Solutions LLP and recently met with Paul Smith, the Group Tax Director of the Jupiter group, to discuss a transaction due to take place shortly. The Jupiter group specialises in the production of chemicals and natural resources. The group structure is set out below, with the jurisdiction of incorporation and tax residence of each company stated. All subsidiaries, except for Saturn Ltd, are wholly owned. Jupiter plc (UK) Pluto GmbH (Germany) 50% Saturn Ltd (Jersey) Venus LLC (US) Earth XL Ltd (UK) Mercury BV (Netherlands) Neptune Ltda (Brazil) All companies in the group have a 31 December year-end and Paul has provided you with the following background information: 1) Jupiter plc and Mercury BV are both holding companies and do not carry on a trade or hold any investments other than in subsidiary companies. 2) Pluto GmbH is a holding company that does not carry on a trade but has a portfolio of investment properties. 3) Saturn Ltd manufactures and sells chemicals in Jersey and is owned jointly with an unrelated third party investor. 4) Venus LLC produces natural gas in US and is currently valued at 60 million. The company was incorporated and commenced trading on 1 November ) Earth XL Ltd and Neptune Ltda are both trading companies with the former producing shale gas in the UK and the latter undertaking oil and gas exploration in Brazil. Proposed transaction On 31 December 2017, Jupiter plc will transfer its entire shareholding in Venus LLC to Mercury BV in exchange for the issue of 1,000 ordinary shares by Mercury BV. This transaction is to be undertaken urgently to facilitate the issuance of a convertible loan note by Mercury BV in January Following discussion with potential investors, it is a condition of issuing the convertible loan note that Mercury BV will hold all of the group s oil and gas assets at the time of issue. Continued Page 8 of 10

9 5. Continuation Paul is aware that the UK tax status of Venus LLC is unclear but has not had time to discuss this with his Customer Relationship Manager at HM Revenue & Customs, but believes there are three alternatives to consider: 1) Venus LLC may be regarded as a body corporate with issued share capital. 2) Venus LLC may be regarded as a body corporate without issued share capital. 3) Venus LLC may be regarded as a branch of Jupiter plc. Draft a letter to Paul Smith explaining the UK Corporation Tax implications of the proposed transaction and how any potential tax charge may be mitigated assuming each alternative may represent the UK tax status of Venus LLC. (20) Page 9 of 10

10 6. You are a senior tax adviser at Whitecross Accountants LLP and recently met with Chris Wallace, the Group Tax Manager of Omnicorp plc. Omnicorp plc is the UK incorporated and tax resident parent company of a group specialising in online sales and online fraud protection. Omnicorp plc has two wholly owned subsidiary companies: 1) OS Sarl, a Luxembourg tax resident and incorporated company that set up and ran an online sales business. 2) OmFraud Ltd, a UK incorporated and tax resident company, carrying on an online fraud protection business. OmFraud Ltd wholly owns TeleIndex Ltd and TeleSales Ltd; both UK incorporated and tax resident trading companies. All companies in the Omnicorp group make up accounts to 30 September annually. The UK group companies showed the following taxable results for the year ended 30 September 2017: Taxable Profit / (Loss) Expenses of management Non-trade loan relationship credits million million million Omnicorp plc OmFraud Ltd TeleIndex Ltd (50) - - TeleSales Ltd 20 Omnicorp plc had excess management expenses of 50 million and non-trade loan relationship debits of 40 million brought forward at 1 October Chris advised you of the following events that occurred during the year: 1) On 31 December 2016, the Board of OS Sarl decided that the online sales business previously carried on by the company was unsuccessful and that operations should be terminated with immediate effect. The company has a Sterling functional currency and had incurred tax losses for the year ended 30 September 2017 of 30 million. 2) TeleIndex Ltd ceased to trade on 30 June The company had a taxable profit of 35 million for the year ended 30 September 2016, and nil in the previous accounting period as a result of 15 million of group relief claimed from Omnicorp plc. 3) On 1 October 2016, TeleSales Ltd transferred valuable know-how to Omnicorp plc in order that this could be licensed back to Telesales Ltd for an annual royalty of 25 million. Draft an to Chris Wallace explaining how the above events will impact on the utilisation of tax losses by UK group companies for the year ended 30 September (10) Page 10 of 10