Further to our recent meeting I set out below the consequences of the proposed disposals.

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1 TOMC NOVEMBER 205 MODEL ANSWERS ANSWER TO QUESTION Memorandum Date: X November 205 To: Finance Director From: Tax Manager Subject: Potential disposals of Scottish Operations Further to our recent meeting I set out below the consequences of the proposed disposals. Corporation Tax Paper (Aberdeen) Ltd At the date of the disposal of trade and assets, Paper (Aberdeen) Ltd will cease to trade, triggering the end of an accounting period for Corporation Tax. The profit/loss in relation to trading stock (based on the sale proceeds less accounting book value) will be a trading receipt included in the profit/loss for the final accounting period. A chargeable gain of 5 million ( 5 million less 0 million) will arise on the disposal of Aberdeen House. Rollover relief may be claimed if, as planned, the group spends at least 5 million on freehold premises, within year before and 3 years after the disposal. The goodwill was acquired before April 2002 and is therefore an old intangible. The disposal is outside the current intangible fixed asset regime and will give rise to a chargeable gain of 5 million ( million less 6 million). However, rollover relief is only available if expenditure is incurred on new intangible assets. The previous amortisation of goodwill will not have been tax deductible and its accounting book value is irrelevant at disposal. Paper (Edinburgh) Ltd The sale of shares in Paper (Edinburgh) Ltd should be covered by the substantial shareholding exemption ( SSE ). There are a number of conditions attached to this exemption but as Paper (Edinburgh) Ltd is a trading company, owned for more than 2 months and the group is a trading group with no non-trading assets, the exemption should be available. A degrouping charge will arise on the property, Edinburgh House, since Paper (Edinburgh) Ltd will cease to be a member of the Paper group and the property was previously transferred intra group in the last 6 years. The original transfer (between Paper plc and Paper (Edinburgh) Ltd) will have been at no gain/loss. The degrouping charge is calculated as a deemed disposal by Paper (Edinburgh) Ltd at market value at the date of the original transfer to Paper (Edinburgh) Ltd on January 202, i.e. 3.5 million ( 2 million less 8.5 million).

2 However the gain arising can be added to the sales proceeds on the disposal of the shares in Paper (Edinburgh) Ltd and therefore exempt under the SSE. A further degrouping charge will arise on the goodwill. Since this goodwill was acquired after April 2002 it is new goodwill and within the intangible fixed assets regime. Under the intangible fixed asset regime, amortisation is a deductible debit. The debit would have been based on 0 million amortised over 20 years in line with the accounting treatment, i.e. 500,000 per annum. The degrouping charge is based on a deemed sale and reacquisition of the goodwill on January 202. This gives rise to a profit and to adjustments to the annual amortisation. The calculation is as follows: Deemed sale proceeds 3,000,000 Less cost 0,000,000 3,000, amortisation ( 3m/20 years) 650,000 Already claimed (500,000) (50,000) 203 (50,000) 204 (50,000) 205 Net credit 2,550,000 There is no amortisation charged to the profit and loss account in 205 following the introduction of IAS, thus no adjustment arises. Unlike the exit charge on Edinburgh House the degrouping charge is not exempt under the SSE. VAT If the following circumstances apply, the disposal by Paper (Aberdeen) Ltd should be a transfer of going concern (TOGC):. The business must be capable of separate operation as a going concern, 2. The assets must be used by the transferee in the same kind of business as that of Paper (Aberdeen) Ltd, 3. The transferee must be VAT registered (or become VAT registered immediately after the transfer), and 4. There can be no significant break in the trade. If TOGC applies, there is no taxable supply of goods so no output tax is chargeable on the assets transferred. Otherwise output tax will need to be charged by Paper (Aberdeen) Ltd on standard-rated assets transferred. If the purchaser is making wholly taxable supplies, the VAT paid can be recovered as input tax, and so tax neutral. 2

3 The TOGC will not cover Aberdeen House as an option to tax has been exercised unless the transferee also opts to tax the property. The sale of shares in Paper (Edinburgh) Ltd will be outside the scope of VAT. Thus any input tax on directly attributable costs will not be recoverable. The company will need to be removed from the group registration and the purchaser will need to VAT register. 3

4 CIOT MARKING GUIDE FOR QUESTION TOPIC MARKS Format Paper (Aberdeen) Ltd Stock, trading receipt End of accounting period Property gain and rollover IP gain and rollover Paper (Edinburgh) Ltd SSE Property exit and covered by SSE Calculation of gain on property degrouping IP exit IP calc Not covered by SSE VAT TOCG Conditions Consequences Building chargeable Purchaser needs to opt Sale of shares TOTAL 5 4

5 ANSWER TO QUESTION 2 Tax Adviser [Address] Kevin Clift Tax Manager [Address] X November 205 Dear Kevin PROPOSED GROUP REORGANISATION As requested I am writing to set out the tax analysis of the proposed reorganisation following the acquisition of Wharf Ltd.. Transfer of subsidiaries from Wharf Ltd to Aire plc For Corporation Tax purposes, once Aire plc has acquired Wharf Ltd, the transfer of subsidiaries from Wharf Ltd to Aire plc will take place at a value which gives neither a chargeable gain nor a loss. Aire plc will therefore inherit the original base cost (plus indexation) of those subsidiaries. 2. Formation of Europe Boats BV and transfer of Seine SA and Amstel BV On first principles, the transfer to Europe Boats BV of Seine SA and Amstel BV by Aire plc is a disposal for Corporation Tax purposes, since it is a transfer by a UK company to an overseas resident company. However, to the extent the share-for-share provisions apply, Aire plc is not deemed to have made a disposal. Instead, the shares issued by Europe Boats BV to Aire plc are treated as the same asset as the shares previously held in Seine SA and Amstel BV. Thus the new Europe Boats BV shares will have the same base cost as those in Seine SA and Amstel BV. However, the substantial shareholding exemption ( SSE ) rules also need to be considered. The transfer is of shares in a trading company by a member of a trading group. Whilst Aire plc will not have held the shares in Seine SA or Amstel BV for the 2-month period normally required to qualify for the SSE, the ownership period is extended to include that of Wharf Ltd because of the no gain/no loss transfer (at above). Therefore the SSE should be available. This takes priority over the share-for-share exchange and an exempt gain accrues. 3. Set up of Boats UK Ltd The transfer of all the UK subsidiary companies to Boats UK Ltd should fall within the sharefor-share exchange rules. These take priority over the intra group transfer rules (see above) which are specifically dis-applied, and over the SSE rules, since this is wholly within a UK capital gains group. Therefore there will be no taxable disposal and the shares issued by Boats UK Ltd will be treated as acquired by Aire plc at the same time and at the same cost as the subsidiary shares transferred. 5

6 For the share-for-share provisions to apply the exchange must take place for bona fide commercial reasons and not have as its main purpose (or one of its main purposes) the avoidance of Corporation Tax. A clearance service is available and I would recommend that an application is made for this as well as a further clearance that specific anti-avoidance legislation targeting transactions in securities would not apply. 4. Hive Down of trade to Thames Fish Ltd The hive down of the fish farm trade will be tax neutral. Capital allowance pools will transfer at their written down value and any losses will be transferred with the trade. Any chargeable assets will transfer at that value which gives neither a gain nor a loss (as per above). The share disposal of Thames Fish Ltd should qualify for the SSE. Thames Fish Ltd will acquire the trade from Thames Ltd, which used the assets for 2 months before the transfer. There is a look through provision here despite the fact that Thames Fish Ltd will not itself have been trading for 2 months previously. 5. Liquidation of Wharf Ltd The distribution-in-specie is a capital disposal in respect of the shares and gives rise to a capital gain or loss. It is not covered by the intra group transfer provision nor will the SSE apply. In this case a loss is likely to arise based on the acquisition price. However this is likely to be restricted by the value shifting or depreciatory transaction legislation since pre acquisition reserves have been distributed and assets (subsidiaries) sold intra group at below market value. 6. Stamp Duty Share transfers give rise to Stamp Duty at %. However, here the acquisitions are within a group (75%) and thus group relief will be available. A claim for this relief must be submitted with the stock transfer form to the Stamp Office within 30 days of each transfer. I will be happy to discuss any aspects of the above further. Yours sincerely Tax Adviser 6

7 CIOT MARKING GUIDE FOR QUESTION 2 TOPIC MARKS Letter Tfr of shares to Aire plc Formation of Europe Boats BV and transfer of subs Disposal outside UK Share for share SSE and override 2 month condition Boats UK set up S7 disapplied by s35 Clearance Transaction in securities Hive Down Treatment of hivedown SSE Degrouping Bonus mark given Liquidation Disposal Depreciatory transaction Stamp duty Group relief each for any other points including 30 days and % - they were the main 2. TOTAL 5 7

8 ANSWER TO QUESTION 3 Memorandum To: Finance Director, Garment plc From: Tax Manager, Garment plc Date: X November 205 Subject: Transfer pricing Further to our recent meeting I can advise as follows. Overview The transfer pricing provisions will apply to all transactions between associated companies of Garment plc since the company is large. This will include all transactions between Garment plc and its subsidiaries Makeit Pvt and Distribution Australia Pty. Transactions here include not only the sale of goods but all services and arrangements between the entities, including the provision of finance and central management charges. The basic requirement is that the price charged for transactions between connected parties should be the same as would apply between independent third parties acting on an arm s length basis. Where a UK company has benefited (in terms of tax payable) from prices that are not at arm s length then HMRC may make an adjustment to either increase taxable profits or reduce available losses. Any adjustment is purely for tax purposes and does not impact the company s statutory accounts or the actual price payable. Where the other party is in a jurisdiction with which the UK has a double tax treaty it may be possible to negotiate a compensating adjustment. Under Corporation Tax self-assessment, Garment plc is required to self-assess its tax liability and may be penalised if it fails to do this properly. It is therefore important that robust documentation is prepared and retained to demonstrate that arm s length pricing has been adopted by Garment plc. Choice of Pricing Method The OECD Transfer Pricing Guidelines set out a number of ways in which to determine an arm s length price. The guidelines stress that the most appropriate way will depend on the circumstances of each case. Typically, a functional analysis is appropriate, which analyses the functions undertaken, assets employed and risks adopted by each party to a transaction. Manufacture and Distribution of Clothing Regarding the manufacture and sale of clothing, the high value functions (control, design, ownership and application of brand name) are undertaken by Garment plc with less complex functions, contract manufacturing and distribution, being undertaken by subsidiary companies. Thus one would expect that the majority of the overall profit would be earned by Garment plc, with a more basic return in the subsidiary companies. 8

9 For both the manufacturing and distribution subsidiaries it is advisable to try to establish a comparable uncontrolled price (CUP). This requires the identification of a transaction with a third party which is equivalent in all major aspects to the intra-group transaction. If this can be established then the price of the third party transaction can be used to benchmark the intragroup price and demonstrate that it is arm s length. The difficulty is in finding a comparable third party transaction. No third parties are used for manufacturing in India and thus no CUP is immediately available. The price charged before Makeit Pty was acquired may not be useful if there have been significant market changes since acquisition. Distribution Australia Pty periodically purchases goods from a third party so the terms of these transactions should be examined to determine whether an appropriate CUP can be identified. A usual pricing method for a contract manufacturer such as Makeit Pty is cost plus. This means that Makeit Pty would be remunerated based on its costs plus an appropriate margin. Determination of the margin would need to be based on an analysis as to what would constitute arm s length. Resale price minus is the most commonly applied method for distribution companies in the absence of a CUP. The third party price for the clothes is ascertained and a margin deducted to establish the profit earned by Distribution Australia Pty and thus the price it pays to Garment plc. Head office recharges A charge should be made by Garment plc to its subsidiaries for its head office functions. The OECD guidelines raise two questions. Firstly, has a service been rendered and secondly, what is the arm s length price for such a service. A distinction is made between a direct charge, which can be made where similar charges are made to third parties (and therefore a CUP is available) and an indirect charge. It may be appropriate to look for a CUP for example based on consultancy services for a direct change. A charge for low value administrative services under the indirect charge would normally be based on a cost plus basis. If higher value services are provided then it follows that a higher margin should be earned by Garment plc. Stewardship costs must specifically be excluded from any charge. This will include costs directly attributable to Garment plc as a parent company, so costs of directors meetings, consolidation, etc. Loans Intra-group interest should be charged at an arm s length price. This will depend on all the terms of the loan (quantum, ability to borrow, credit rating, etc). It may be based on the rate of any external borrowing that is comparable. However they will normally expect Garment plc to charge a margin to take account of the likely lower credit rating and borrowing ability of the subsidiary companies. 9

10 Advance Pricing Agreement In order to remove the uncertainty over potential transfer pricing adjustments, Garment plc can apply to enter into an advance pricing agreement (APA) with HMRC. However, an APA is usually only granted where the issues involved are complex or where there is a risk of double taxation. There is a set procedure to follow and involves and initial informal approach to HMRC as an expression of interest. This enables HMRC to consider whether the transactions Garment plc is undertaking are suitable to enter into an APA. If deemed suitable, a formal application in writing must then be made. This can be unilateral, i.e. binding on the UK and Garment plc only or bilateral i.e. binding on the other jurisdiction as well. An APA typically covers 3 to 5 years and be conditional on certain covenants or conditions being applied. Should Garment plc fail to comply with the terms of any APA then HMRC can revoke the agreement. A penalty of up to 0,000 can be applied if false or misleading information is provided either negligently or fraudulently in connection with an APA application. 0

11 CIOT MARKING GUIDE FOR QUESTION 3 TOPIC MARKS Format Basics - Associated/control - Arms length - Explain - OECD - Adjustment - MAP/Compensating adj - Tax only - Documentation Methods - Most appropriate method - Based on functions/assets/risks CUP and explanation Cost plus and explanation Resale minus and explanation Mention of any other method Application Plc main profit maker so others are tested parties Contract manufacturing cost plus Distribution resale minus Head office cost plus Loans ATCA BEPS bonus mark bonus mark

12 APA Gives certainty Written application Process Period covered Revoke etc TOTAL 20 In addition, bonus given for unilateral/bilateral and for penalties. 2

13 ANSWER TO QUESTION 4 Briefing notes for presentation to CIOT branch meeting. The General Anti-Abuse Rule ( GAAR ) was introduced in FA 203 to target abusive tax avoidance schemes. Its purpose is to counteract tax advantages arising from tax arrangements that are abusive and thereby deter taxpayers from entering into, and promoters promoting, such arrangements. If the GAAR applies, it results in adjustments being made. The taxes targeted are: Income Tax, Corporation Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax and National Insurance Contributions (and Petroleum Revenue Tax and Annual Tax on Enveloped Dwellings). Looking at the different components of the GAAR in turn: The concept of a tax advantage follows the definition in other areas of the legislation and includes: a relief or increased relief from tax, a repayment or increased repayment of tax, avoidance or reduction of a charge to tax or an assessment to tax, avoidance of a possible assessment to tax, deferral of a payment of tax or advancement of a repayment of tax, and avoidance of an obligation to deduct or account for tax. There will be tax arrangements if having regard to all the circumstances it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose or one of the main purposes of the arrangements. Key points to note are:. Concept of reasonableness is included: it is an objective test; 2. Purpose requirement is that found in other anti-avoidance rules question is whether a transaction has been reshaped or entered into under different terms and conditions to change the tax result; and 3. HMRC consider that the test is widely drawn. In considering whether the tax arrangements are abusive, there is a double reasonableness test: arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions. Circumstances that might be considered include whether the:. Substantive results of the arrangements are consistent with any principles on which those provisions are based and the policy objectives of those provisions; 2. Means of achieving those results involves one or more contrived or abnormal steps; and 3. Arrangements are intended to exploit any shortcomings in those provisions. The legislation gives examples of indicators of what is abusive arrangements where:. Income, profits or gains are less for tax purposes than for economic purposes; 2. Deductions or losses are greater for tax purposes than for economic purposes; and 3. There are repayments or credits of tax that have not been paid. On the other hand, if tax arrangements accord with a practice that HMRC has indicated is acceptable that could indicate they are not abusive. 3

14 If the GAAR applies:. Notice to be given by designated HMRC officer to taxpayer who can make representations; 2. Reference to GAAR advisory panel which is independent from HMRC; 3. Sub-panel of three will produce an opinion on specific issue: whether entering into arrangements was a reasonable course of action, or will state that can t give opinion; 4. Designated HMRC officer makes final decision and notifies taxpayer together with (just and reasonable) adjustments required (if applicable); 5. Taxpayer may apply for consequential adjustments to ensure no double taxation. Note that the GAAR takes priority over other anti-avoidance rules but HMRC can opt to invoke other anti-avoidance provisions. No clearance procedure for the GAAR. The GAAR needs to be considered as part of a company s Corporation Tax self-assessment. There are no specific penalties arising from the GAAR, but the normal penalty system applies. If a court or tribunal were to consider the application of the GAAR, it would be for HMRC to demonstrate that the arrangements were abusive as opposed to for the taxpayer to prove that they are not. Despite the published guidance, there is still uncertainty surrounding its application and how it will affect tax structuring in practice, although it seems fairly clear that it should not be possible inadvertently to fall foul of the GAAR. Tax advisers eagerly await a case to be heard in order to better understand how far HMRC might take its application. This could however take a number of years. In addition, despite the presence of the GAAR, new TAARs continue to be introduced, which is perhaps somewhat surprising, but is further evidence the Government is leaving no stone unturned in their battle against tax avoidance. Disclaimer: The above information is a summary only of the key terms of the GAAR. It is not a substitute for specific professional advice. 4

15 CIOT MARKING GUIDE FOR QUESTION 4 TOPIC Purpose of GAAR Applicable taxes (s.206 FA 203) Effect: adjustments Explain individual components:. Tax advantage (s.208 FA 203) 2. Tax arrangements (s.207() FA 203) including highlighting reasonable standard and purpose requirement (para C3 HMRC GAAR guidance) 3. Abusive (s.207 FA 203) o Double reasonableness test (para C5.0 HMRC GAAR guidance); o Circumstances considered; o Examples of what could be abusive (but not exhaustive); and o Noting what might not be abusive Explain what happens if GAAR applies (s.209(6) FA 203):. Notice by designated HMRC officer to taxpayer (paras 2 and 3 Schedule 43 FA 2003) 2. Reference to independent GAAR Advisory Panel (paras 5 and 6 Schedule 43 FA 2003) 3. Sub-panel of three members to produce opinion on whether entering into the arrangements is a reasonable course of action, or whether not possible to give opinion (para Schedule 43 FA 203 and para C6.5.7 of HMRC GAAR Guidance) 4. Obligation of designated HMRC officer (para 2 Schedule 43 FA 203, section 209 FA 203 and para C6.5. of HMRC GAAR Guidance) 5. Taxpayer may apply for consequential adjustments (s.20 FA 203) Interaction between GAAR and other rules:. Other anti-avoidance provisions can be invoked but GAAR takes priority 2. No clearance procedure 3. Consider in self-assessment 4. No specific penalties 5. Onus on HMRC to demonstrate abusive MARKS Conclusion TOTAL 5 Note bonus marks of where accelerated payments or additional procedural detail given. 5

16 ANSWER TO QUESTION 5 Finance Director H-to-O plc [Address] [Accountants] [Address] Date: [ ] November 205 Dear [name of Finance Director] H-to-O plc Withholding Tax issues Thank you for your recent instruction. A company has a duty to deduct an amount representing income tax at 20% ( WHT ) on payments of yearly interest arising in the UK. Broadly, interest will be yearly where the loan to which it relates exceeds a year. The loans from the National English Lending Bank plc, Sac d Argent S.A. and Money Bags Ltd all have a term in excess of a year and so the interest would be yearly interest. All interest payments described below are likely to have arisen in the UK. Water Ltd An exemption from WHT exists where interest is paid on an advance made by a bank within the charge to Corporation Tax. National English Lending Bank plc is a bank (an entity authorised under FSMA 2000), and within the charge to Corporation Tax. No WHT will therefore be imposed on interest payments under that loan. Sac d Argent S.A. is not a bank and the above exemption will not apply. If Sac d Argent S.A. lends from Luxembourg, the payment of interest may be exempt from WHT under the terms of the UK/Luxembourg Double Tax Treaty if such Treaty gives the recipient country taxation rights in respect of the interest. Water Ltd would however have a duty to withhold until it has received clearance from HMRC to pay gross. If Sac d Argent S.A. has applied for a passport under the Double Taxation Treaty Passport Scheme, it will be entitled to be paid gross. Water Ltd must notify HMRC that it intends to take advantage of the scheme before any interest is paid. If Sac d Argent S.A. lends from London and Water Ltd is satisfied that there is a proper trade being carried on in the UK through that branch and the interest received will be taxed in the UK, the interest payments would also be exempt from WHT. Aqua Ltd The WHT obligation arises when interest is paid, not when it is due. If Aqua Ltd rolls up its interest, no WHT will arise on each actual interest payment date. The shares issued by Aqua Ltd in satisfaction of the payment of the interest will constitute funding bonds and deemed to be an actual payment of interest. No specific exemption applies to the WHT on payments of interest to Money Bags Ltd (there is unlikely to be a Double Tax Treaty exempting the interest in this case). Aqua Ltd must therefore retain an amount of shares equal to the interest that would otherwise have been withheld. It may remit these to HMRC in lieu of payment. If (exceptionally) it were impracticable to retain the shares and Aqua Ltd notified HMRC of the identity of Money Bags Ltd, then the duty to retain the shares and to make any payment to HMRC in respect of the WHT would not apply. If shares were issued, no WHT obligation in respect of dividends paid. 6

17 The loans from Michael and Frank have a term of nine months. The interest will not be yearly interest. There will be no WHT due from Engine Ltd in respect of such payments, and therefore, no grossing-up required. Filing obligations Where an obligation to deduct exists, the relevant company must file a return to HMRC accompanied by payment of the WHT within 4 days of the end of the relevant return period (return periods are usually three months long, ending on the last day of March, June, September or December, although can be shorter depending on when the last day falls within the accounting periods of the relevant companies). Protections in the SPA The agreement for the acquisition of the shares in Engine Ltd could contain warranties and indemnities from Michael and Frank. Warranties are representations of fact about the status of the company. If they are incorrect, Aqua Ltd may rescind the contract or sue for damages. Indemnities are a promise to pay the company or the purchaser if certain events arise causing a liability. Unlike with damages, there is no need to prove loss, just that the events giving rise to the liability have arisen. Please do not hesitate to contact me if you have any questions. Yours sincerely [Partner] 7

18 CIOT MARKING GUIDE FOR QUESTION 5 TOPIC MARKS Presentation General Identifying the general duty to deduct income tax at 20% on payments of yearly UK source interest made by a company (s.874() and (2) ITA 2007). Explanation of yearly interest. National English Lending Bank plc Referring to exemption from duty to deduct in respect of interest paid to banks with charge to Corporation Tax (s 879 ITA 2007). Reference to National English Lending Bank plc being a bank as defined (s.99 ITA 2007). Sac d Argent S.A. Noting treaty relief may be available in respect of UK income tax (s.6 TIOPA 200) for Sac d Argent S.A. However duty to withhold exists until direction has been issued to payer by HMRC (s. 849 ITA 2007 and reg. 2 Double Taxation Relief (Taxes on Income) (General) Regulations 970). Note DTT passport scheme could have been applied for by Sac d Argent S.A. If lending through London branch, exemption applies (s.934 ITA 2007), and reasonable belief exists that it is an excepted payment (s.930 ITA 2007). Money Bags Ltd When interest is capitalised, no payment and so no duty to withhold on date interest is due (SAIM 900). Issue of shares in satisfaction of interest is an issue of funding bonds (s.43 CTA 2009). Where duty to withhold under s.874 ITA 2007, apply s.939 ITA 2007, and retain shares equal to tax otherwise withheld. Shares may be tendered to HMRC. Exception from duty to deduct if impracticable to do so and information provided to HMRC (s.940 ITA 2007). No WHT on dividends Fire Engine Ltd This is not yearly interest and so no withholding and no gross-up 8

19 required (s.874 ITA 2007). Filing obligations: If duty to withhold does exist, Water Ltd must make a return and pay the income tax to HMRC (ss.949 and 95 ITA 2007). Protections in SPA: Warranty protection: representations in relation to the company. Can rescind or sue for damages. Indemnities: promise to pay the company or purchaser if a liability arises. No need to show loss as for damages, just circumstances of claim. TOTAL 5 9

20 ANSWER TO QUESTION 6 To: [Partner] From: [Tax Manager] Date: X November 205 Re: Potion plc group group relief. Executive Summary The key issue is whether group relief can be surrendered by the loss-making companies held by Potion plc to those that are profit-making. Cauldron Ltd is the only profit-making company in the group, with taxable profits of 5 million and 3.5 million for the years ended 3 December 203 and 3 December 204 respectively. For the year ended 3 December 203, losses of,666,667 should be available for surrender to Cauldron Ltd from Black Cat Ltd, leaving it with taxable profits of 3,333,333 and a tax liability of 775,000. For the year ended 3 December 204, losses of,830,000 should be available for surrender to Cauldron Ltd from Broomstick Ltd, leaving it with taxable profits of,670,000, and a tax liability of 2,509,050. Further losses could be surrendered from Wizard Ltd if Wizard Ltd falls within the group for group relief purposes. 2. General Losses arising in one company (the surrendering company) may be surrendered to another company (the claimant) if certain conditions are satisfied. For UK tax resident companies (such as those in the Potion plc group), a surrender of losses may be made if the companies concerned meet the group condition or a consortium condition. In general, the group condition will be met if the companies are members of the same group, i.e. one is a 75% subsidiary of another, or both are 75% subsidiaries of a third company. A 75% subsidiary is one in which at least 75% of the ordinary share capital is held directly or indirectly by another company other than as trading stock. The following companies should, in principle, be in a group:. Potion plc; 2. Black Cat Ltd; 3. Cauldron Ltd; 4. Simmer Ltd (as Potion plc owns 85%); and 5. Wizard Ltd (as Potion plc owns 76.5% indirectly 85% x 90%). 3. Black Cat Ltd Losses can only be surrendered to the extent accounting periods of the claimant and the surrendering company overlap, during a time at which the group condition is met. The only overlap period for Black Cat Ltd with another group member is from March 203 to 30 June 203, four months. 20

21 The maximum losses available for surrender from Black Cat Ltd are therefore 4/2 x 8 million = 2,666, Cauldron Ltd We need to establish the available profits of Cauldron Ltd against which losses can be surrendered. For the year ended 3 December 203 they are 5 million. Deduct b/f trading losses; 2. Can t deduct b/f NTLRD (there are only trading profits); and 3. Deduct qualifying charitable donation. For the year ended 3 December 204 they are 3.5 million. Don t deduct NTLRD (no claim has been made); 2. Can t deduct b/f NTLRD (there are only trading profits); and 3. Add chargeable gains. 5. Wizard Ltd Wizard Ltd appears to be a 75% subsidiary of Potion plc. However, it will not be treated as a member of the group between August and December 204 as there are arrangements in place for Wizard Ltd to cease to be a member of the group at some time during or after the 204 accounting period. Acceptance of an offer subject to contract is sufficient to constitute arrangements. It is immaterial that the sale finally aborted. On a time apportioned basis, the losses available for surrender for the year ended 3 December 204 are those deemed to arise from January 204 to 3 July 204, seven months: 7/2 x 3 million =.75 million. It is possible that none of the losses are capable of surrender: a company will only be a 75% subsidiary of another for group relief purposes where that other company is beneficially entitled to at least 75% of the profits and the assets on a winding up of the subsidiary, in each case available for distribution to equity holders. Equity holders include loan creditors of the company in relation to a loan other than a normal commercial loan. The concern with the unusually high interest rate in Wizard Ltd s debt facility may indicate that the interest payable exceeds a reasonable commercial return. In that case, the loan would not be a normal commercial loan and the loan creditor could be an equity holder. If such equity holder were entitled to more than 25% of profits or assets as described above, Wizard Ltd would not be in a group relief group. 6. Broomstick Ltd Broomstick Ltd is not a group company. It is however a company owned by a consortium as at least 75% of its ordinary share capital is owned by other companies, each of which beneficially owns at least 5% of that capital. Potion plc is a consortium member. As a consortium company, Broomstick Ltd should be able to surrender its losses to a member of the Potion plc group, as:. It is a trading company; 2. Potion plc is a link company (it is a member of the consortium and a member of a group); and 3. It is not held by Potion plc as trading stock. 2

22 The maximum surrenderable amount will be.83 million, which is 30% of 6. million (the property losses can only be used to the extent they exceed the CFC apportioned profits and chargeable gains so 800,000 less 200,000 less 500,000). 7. Possible surrenders and tax calculation: Year ended 3 December 203: Black Cat Ltd can surrender up to 2,666,667. However, the available profits of Cauldron Ltd attributable to the overlap period ( March 203 to 30 June 203) are 4/2 x 5 million =,666,667. Only,666,667 can therefore be surrendered. Cauldron Ltd s taxable profits are 5 million -,666,667 = 3,333,333. Tax payable is therefore 3,333,333 x 23.25% = 775,000. Year ended 3 December 204: Cauldron Ltd can claim surrenders from:. Broomstick Ltd of,830,000; and 2. Wizard Ltd (possibly) of,750,000. Cauldron Ltd s taxable profits are,670,000 or 9,920,000 (deducting from taxable profits of 3.5 million) with consequent tax (at 2.5%) of 2,509,050 and 2,32,800 respectively. 22

23 CIOT MARKING GUIDE FOR QUESTION 6 TOPIC MARKS Presentation General Note that losses can be surrendered between various companies if certain conditions are met (s.97 CTA 200). Note group condition or consortium condition needs to be met for claim (s.30(2) CTA 200). Set out group condition (ss.3, 52, 5, 54(3), 55 CTA 200) and note which companies are in group..5 Black Cat Ltd Noting the requirement for there to be an overlapping period (s.30 CTA 200) during which group condition has to be met. Overlapping period: March 203 to 30 June months apportioned on time basis so 4/2 of 8 million is 2.666,667 loss available can all be surrendered as A/S = (s.39 CTA 200). Cauldron Ltd Establish available profits 203 results - 5 million. Deduct b/f losses (s.37(4) CTA 200); 2. Can t deduct b/f NTLRD (s.458 CTA 2009); and 3. Deduct qualifying charitable donation. 204 results million. No claim for NTLRD so don t deduct (s.459 CTA 2009 and s.37(4)(b) CTA 200); and 2. Add chargeable gains. (note no points awarded for b/f NTLRD as same answer as for 203) Wizard Ltd Note arrangements in place (s.54 CTA 200). Arrangements widely defined (s.56 CTA 200 and SP3/93). No need for sale to complete. Apportion on time basis (Shepherd v. Land Law plc (990 STC 795)) possible surrender of.75 million. Reference to loan: Additional 75% requirement (s.5(4) CTA 200) could loan holder be equity holder? (s.58 CTA 200). Non-commercial loan where excessive return (s.62(4) CTA 200). 23

24 Broomstick Ltd Explain consortium company (s.53 CTA 200). Explain that can surrender to group as there is a link company (ss.30 and 33() CTA 200). Establish qualifying losses: Can use trading losses (s.99 CTA 200). Property loss can only be surrendered to the extent it exceeds CFC apportionment and chargeable gains (s.05 CTA 200). Calculate how much 30% of 6. million is.83 million..5 Calculation Work out profits for overlapping period - 4/2 of 5 million. Black Cat Ltd Can only surrender up to amount of profit (s.38 CTA 200). Calculate tax for Cauldron for 23.25%. Calculate profits and tax for Cauldron for 2.5%. 2 TOTAL 20 24

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