The Chartered Tax Adviser Examination July 2015 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 folder. Unless otherwise indicated by the provision of additional table information, you may assume that 2014/15 rates and allowances continue to apply for 2015/16 and future years. Candidates referring to actual or pending rates and allowances for 2015/16 and future years will not be penalised.
1. The Government has taken steps in recent years to make the UK tax system much more competitive with the aim of making it the location of choice for multinationals setting up a holding company. Explain why the UK Corporation Tax system might be attractive to a multinational group setting up a holding company in the UK. (15) 2. You are a Tax Manager in a firm of Chartered Accountants. One of your clients is Beachside Ltd, a UK company within a large multinational group. The company manufactures and sells industrial capacitors. Beachside Ltd has decided to rent new premises from an unconnected party, which has given consent for Beachside Ltd to make alterations. The ground floor will have a customer demonstration area and the first floor will be used as offices. The Finance Director of Beachside Ltd has drawn up a breakdown of the capital expenditure on the alterations but he is unsure how the costs will be treated for tax purposes. None of the expenditure is repairs or replacement of existing items. Description of spend Date work completed/asset purchased Air conditioning units 15,000 October 2014 Cold water plumbing 20,000 October 2014 Demonstration units 20,000 November 2014 Electrical systems 40,000 November 2014 Demonstration equipment 592,000 December 2014 Partitioning (fixed) 42,000 December 2014 Warehouse shelving and racking 37,000 December 2014 Computer equipment 276,000 January 2015 Fork lift trucks 88,000 January 2015 Office furniture 245,000 January 2015 1,375,000 None of the equipment above is listed on the Energy Technology Product List. Beachside Ltd s year end was 31 December 2014, but it has extended its accounting period to cover the 15 months to 31 March 2015 so as to align its year end with the rest of the group. At 1 January 2014, the brought forward tax written down value on the general pool was 1,458,972 and the brought forward tax written down value on the special rate pool was 458,320. The only capital expenditure by Beachside Ltd during the 15 months to 31 March 2015 was on the premises as set out above. The only other UK resident company within the group has already incurred 210,000 of capital expenditure at the start of the year ended 31 March 2015, which will utilise some of the Annual Investment Allowance. None of the Annual Investment Allowance was utilised by other UK group companies in the year ended 31 March 2014. Draft a letter to the Finance Director setting out the Corporation Tax consequences of the proposed capital expenditure, including capital allowance calculations. You are NOT required to consider filing obligations. (15) 2 of 6
3. You are the Tax Manager at Lentil plc, a fast growing manufacturer of speciality bakery products, which is also rapidly expanding overseas. The company has decided to start a new operation in Thousisland, to commence in late 2015. The Finance Director, Ms Verde, has advised you that there will be significant start-up costs in Thousisland, including advertising and marketing costs, and therefore expects to make losses in the first two years. However, the forecasts show a break-even position for year three and then profits for year four and onwards. It is likely that Lentil plc will continue manufacturing the products in the UK in the first two to three years before setting up a new manufacturing plant in Thousisland, to be owned by the Thousisland entity. The manufacturing plant in Thousisland would only supply the Thousisland market. In addition, Lentil plc will provide head office services to the Thousisland entity on an on-going basis. In the context of the above, Ms Verde would like to understand the advantages and disadvantages of setting up the new operation as a permanent establishment versus a subsidiary and has asked for your recommendation on the preferred structure from a UK tax perspective. At this stage, Ms Verde is not concerned with the tax implications of financing the overseas operations. You are aware that the corporate tax rate in Thousisland is marginally lower than in the UK and that it is not regarded as a tax haven. Lentil plc is a large company for UK Corporation Tax purposes. Write an internal memo for the Finance Director providing her with the requested advice. (20) 4. Fruit plc is the parent company of a multinational group. Fruit plc s own UK operations include a general insurance business and the provision of management services to wholly owned UK resident subsidiary companies. Fruit plc and these subsidiaries are all currently separately registered for VAT. Fruit plc outsources certain management functions to BelgManCo NV, a wholly owned subsidiary company that is tax resident in Belgium. It has recently been charged a management fee by this subsidiary. Fruit plc has recently acquired a computer costing 10 million, which it will use for all of its UK operations. Explain the UK VAT issues surrounding the above intra-group transactions and the purchase of the computer. A discussion of the benefits of a VAT group is NOT required. (10) 3 of 6
5. Bella Ltd is a UK trading company and part of a UK group with 1,000 employees. Bella Ltd had the following results for the year ended 31 March 2015: Note Turnover 1) 30,000,000 Cost of sales 2) (15,000,000) Administration expenses 3) (7,000,000) Interest payable 4) (1,000,000) Dividends receivable 5) 2,000,000 Profit on sale of fixed assets 6) 4,000,000 Exchange gain 9) 300,000 Profit before tax 13,300,000 Notes 1) Turnover includes 4,000 of rent from temporarily letting surplus office space, which was back in use for the trade by March 2015. 2) Cost of sales includes: Depreciation of plant and machinery 1,000,000 Employer pension contributions for existing employees (the 3,000,000 3,000,000 was paid in March 2015; the March 2014 contribution was 1,000,000) Leased cars (15,000 for cars with emissions of 130g/km and 20,000 5,000 for motorcycles also with emissions of 130g/km) Provision in respect of remaining rental obligations under a lease 100,000 taken out by the company 3) The administration expenses were incurred in respect of trading activities and include the following amounts: Staff entertaining 20,000 Client entertaining 10,000 Professional fees incurred in abortive acquisition of a company 30,000 Fees in respect of defending ownership of fixed assets 50,000 Costs of setting up approved company share ownership plan 100,000 Costs of setting up Employee Benefit Trust for directors 30,000 Outplacement counselling for former employees 20,000 4) 500,000 of the interest payable relates to a loan from a bank taken out for trading purposes. The remaining 500,000 is interest payable on a loan from another UK group company, Connor Ltd. Connor Ltd has not brought this interest income into account for UK tax purposes. 5) 1,000,000 of the dividends were received from a 100% UK subsidiary. The other 1,000,000 is the gross amount of a dividend received from a Utopian company. Withholding tax of 100,000, in line with the Double Tax Treaty between the UK and Utopia, was deducted from the dividend. The dividend was deductible in calculating the taxable profits of the Utopian company. Continued 4 of 6
5. Continuation 6) The following disposals took place: 15% interest in Ruritanian trading joint venture (Kadie Ltd) Accounting profit realised 1,000,000 Sales proceeds 2,000,000 Date of disposal 1 June 2014 First acquisition 1 June 2008 100 shares at 500 per share Sale of shares in UK investment company (Gerard Ltd) Accounting profit realised 3,000,000 Sales proceeds 6,000,000 Date of disposal 1 July 2014 First acquisition 1 July 2009: 50 ordinary shares at 10,000 per share Shares of same class 1 July 2011: 1 for 10 issue at 15,000 per share bought under rights issue Bella Ltd s group (including Bella Ltd itself) and Kadie Ltd are trading entities. 400,000 of Ruritanian tax has been withheld at source from the sales proceeds. No foreign exchange gain or loss arose in respect of this transaction. 7) Capital allowances balances brought forward as at 1 April 2014: General pool 12,000,000 Special rate pool 6,000,000 8) In 2012 the company purchased the trade and assets of a former competitor, which it has used in its trade since that time. Amongst the assets purchased was 1,000,000 of goodwill. It made an election under s.730 CTA 2009 in respect of this expenditure. 9) Bella Ltd took out a 10 million loan to hedge its investment in an Irish subsidiary. The loan was taken out in 2013 and the 300,000 exchange gain relates to this hedge. Bella Ltd has not opted out of the disregard provisions. 10) No group or consortium relief is available from elsewhere in the group. Bella Ltd has 1,000,000 brought forward management expenses and 750,000 of brought forward trading losses. 11) Bella Ltd s financial statements are prepared in accordance with International Accounting Standards. Calculate the Corporation Tax payable and state the due dates and amounts of payments for Bella Ltd for the year ended 31 March 2015. Where relevant, include brief explanations of your treatment of items of income or expenditure. (20) 5 of 6
6. You are the Tax Manager of Propco Ltd, a UK resident 100% subsidiary of Petrochem plc, an international petrochemical group. For the past 10 years, Propco Ltd s only activity has been to rent UK investment property to UK resident group trading companies. Your Finance Director has advised you that Propco Ltd is now considering the following property management strategy for the year ended 31 December 2015: 1) Selling the freehold of its existing buildings to a third party who will lease the properties back to Propco Ltd for a period of 40 years, following the payment of a premium by Propco Ltd. The sale will allow Propco Ltd to realise the inherent capital growth in these assets. The construction of these properties was funded by a loan from a Luxembourg bank on which accrued interest and capital are outstanding. The loan will be repaid in full from the proceeds of sale. 2) Starting a new business to build freehold properties on several surplus land plots. Upon completion, the properties will be sold. This will either be carried out: a) Within Propco Ltd; or b) In Zooco Ltd, a newly formed 100% subsidiary of Propco Ltd, resident in Zooropa. The land would be transferred from Propco Ltd to Zooco Ltd before this activity commences. The tax rate in Zooropa is 15% and Zooropa is not a tax haven. The Double Tax Treaty between the UK and Zooropa follows the OECD model. Propco Ltd has substantial brought forward non-trade loan relationship debits, property business losses and capital losses. There have been no changes of ownership of Propco Ltd since these losses arose. Other UK subsidiaries within the same Petrochem plc group also have brought forward capital losses. Write a memo to the Finance Director: 1) Explaining the UK Corporation Tax implications of the new property management strategy. (17) 2) Summarising the key stages in the legal process of buying land and buildings. (3) Total (20) 6 of 6