案例分析题

Your manager has sent you a memorandum in relation to the Harrow Tan Ltd group. An extract from the memorandum and a schedule of group information prepared by Corella, the group finance director, are set out below.

Memorandum from your manager – dated 7 September 2017

Background

– We are advising Corella, the group finance director, on a number of matters. I’ve attached a schedule from Corella, which sets out much of the relevant information.

– Corella was only recently appointed the Harrow Tan Ltd group finance director. She has had very little experience of practical tax since qualifying as an accountant in 1994. I have carried out a brief review of Corella’s schedule and concluded that it is mathematically correct but that we cannot rely on its tax technical content.

– All five group companies are UK resident trading companies which prepare accounts to 31 December each year.

Sale of shares in Rocha Ltd

Harrow Tan Ltd acquired the whole of the ordinary share capital of Rocha Ltd (100,000 shares) on 1 December 2016 for £8,900,000.

On 1 January 2017, Seckel Ltd (owned 80% by Harrow Tan Ltd) sold a commercial building to Rocha Ltd for £800,000, its market value on that date. The group claimed exemption from stamp duty land tax in respect of this transaction. Seckel Ltd had purchased the building on 1 May 1998 at a cost of £330,000.

However, the results of Rocha Ltd for the year ending 31 December 2017 are now expected to be significantly worse than originally budgeted and an agreement was signed on 31 July 2017 for Harrow Tan Ltd to sell 60,000 Rocha Ltd ordinary shares for £10,300,000. It is planned that the sale of these shares will take place on 1 October 2017, although the sale could be delayed by up to three months if necessary。

Tosca Ltd – promotion of new product

Tosca Ltd manufactures high quality glass bowls. It accounts for value added tax (VAT) using the annual accounting scheme.

Tosca Ltd has developed a new product, which is expected to increase the company’s annual turnover from £1,200,000 to £2,000,000. The new product is to be marketed to the company’s customers, all of whom are UK based retailers, via promotional evenings in various parts of the UK.

At the promotional evenings the retailers will be provided with a meal. They will also be given a sample of the new product costing approximately £90, and a pen costing £40.

Please prepare notes for us to use in a meeting with Corella, which EXPLAIN the following matters:

(i) Sale of shares in Rocha Ltd

– The error(s) and omission(s) in part A of Corella’s schedule together with any tax saving opportunities or other matters, including stamp duty land tax, which are not addressed in part A of her schedule. Please include a corrected calculation of the taxable gain on the sale on the assumption that it occurs on 1 October 2017.

– Take some time to think about this. From my brief review I think there may be three or four issues which need to be brought to Corella’s attention.

(ii) Group relief – year ending 31 December 2017

– By reference to the information in part B of Corella’s schedule, the maximum amount of Seckel Ltd’s trading loss which can be surrendered to each of the other companies in the Harrow Tan Ltd group.

(iii) Rollover relief

– The rollover relief potentially available to the group and the accuracy of part C of Corella’s schedule.

Memorandum from your manager – dated 7 September 2017 (continued)

(iv) Tosca Ltd – promotion of new product

– The VAT implications of:

– the expected increase in the turnover of Tosca Ltd; and

– the entertainment and gifts at the promotional evenings.

Schedule of group information – from Corella, the group finance director

Notes:

1. Disposal of shares in Rocha Ltd.

2. Uta Far Ltd sold a building used in its business on 1 May 2017 for £1,800,000. This resulted in a chargeable gain of £85,000.

C: Harrow Tan Ltd – Acquisitions in the year ending 31 December 2017 qualifying for rollover relief

问答题
Sale of shares in Rocha Ltd.

Note: The following indexation factors should be used where applicable:

December 2016 to month of sale 0·015

May 1998 to January 2017 0·621

May 1998 to October 2017 0·650

【正确答案】
Harrow Tan Ltd
Meeting notes
Client Harrow Tan Ltd group
Subject Various group matters
Prepared by Tax senior
Date 7 September 2017
Sale of shares in Rocha Ltd
Substantial shareholding exemption
The gain on the sale of the shares in Rocha Ltd will not be subject to tax if the conditions of the substantial shareholding exemption (SSE) are satisfied.
The conditions are:
– Harrow Tan Ltd and Rocha Ltd must be trading companies
– this condition is satisfied. – At least 10% of the ordinary share capital must have been held for 12 months during the two years prior to the sale.
Accordingly, in order for the SSE to be available, the sale would need to be delayed until 1 December 2017. Taxable gain
If the sale takes place on 1 October 2017 the SSE will not be available, and the taxable gain will be calculated as follows:

This taxable gain would result in a substantial corporation tax liability. Accordingly, it is important that the SSE conditions are satisfied.
Notes
1. Degrouping charge
A degrouping charge will arise in respect of the building which was sold to Rocha Ltd by Seckel Ltd.
This is because:
– Rocha Ltd and Seckel Ltd are members of the Harrow Tan Ltd capital gains group (they are both 75% subsidiaries of Harrow Tan Ltd).
– The building would have been transferred automatically at no gain, no loss.
– Rocha Ltd will leave the Harrow Tan Ltd capital gains group when it ceases to be a 75% subsidiary on the sale of the shares. This will occur within six years of the acquisition of the building.
– Rocha Ltd will still own the building when it leaves the group.
The degrouping charge will be calculated as follows:

2. Rollover relief
– Company shares are not qualifying assets for the purposes of rollover relief.
– Accordingly, it will not be possible to roll over any of the gain on the sale of the shares.
Stamp duty land tax
Stamp duty land tax (SDLT) will not have been payable by Rocha Ltd in respect of the purchase of the building from Seckel Ltd because both companies were 75% subsidiaries of Harrow Tan Ltd at that time.
However, because Rocha Ltd will cease to be a 75% subsidiary of Harrow Tan Ltd within three years of purchasing the building, it will have to pay SDLT of £29,500.

【答案解析】

问答题
Group relief – year ending 31 December 2017.

【正确答案】
Group relief – year ending 31 December 2017
Harrow Tan Ltd
A company can claim available group losses up to a maximum of its taxable total profits (TTP).
For Harrow Tan Ltd, this will be £40,000 plus the chargeable gain on the sale of the shares in Rocha Ltd (if the SSE is not available).
Rocha Ltd
For the purposes of group relief, Rocha Ltd left the group on 31 July 2017, when the agreement was signed to sell 60,000 of the company’s shares.
The maximum surrender to Rocha Ltd will therefore be £35,000 (£60,000 x 7/12), as this is less than the loss available for this period.
Tosca Ltd
The maximum surrender to Tosca Ltd will be its TTP for the year of £70,000.
Uta Far Ltd
The effective interest of Harrow Tan Ltd in Uta Far Ltd is less than 75% (80% x 90% = 72%).
Accordingly, Uta Far Ltd is not in a group relief group with Seckel Ltd and cannot receive any losses.
However, it is possible to transfer some or all of Uta Far Ltd’s chargeable gain on the sale of the building to another group company, such that it could then be relieved by group relief from Seckel Ltd.

【答案解析】

问答题
Rollover relief.

【正确答案】
Rollover relief
Relief potentially available to the group
For the purposes of rollover relief, a capital gains group is treated as a single entity
The Harrow Tan Ltd capital gains group consists of:
– Harrow Tan Ltd
– its 75% subsidiaries
– and their 75% subsidiaries
– Harrow Tan Ltd must have an effective interest of more than 50% in any non-directly held companies.
Harrow Tan Ltd’s interest in Uta Far Ltd is 72% (80% x 90%), such that all five companies are in the Harrow Tan Ltd capital gains group.
The implications of this are:
1. Rollover relief is available in respect of the gain on the building sold by Uta Far Ltd on 1 May 2017.
The whole of the gain can be rolled over if there are qualifying additions in the qualifying period of at least £1,800,000. Any amount of the sales proceeds which has not been used to acquire qualifying business assets cannot be relieved and will be subject to corporation tax up to a maximum of the gain of £85,000.
2. There may be other qualifying additions.
– Qualifying business assets can be acquired by any company in the same capital gains group as the company which has sold a qualifying business asset.
– The qualifying period is the four-year period starting one year prior to the date on which the disposal of a qualifying business asset occurred.
Part C of Corella’s schedule
The land and building qualify for rollover relief.
Further information is needed in respect of the machinery; it must be fixed, rather than movable, if it is to qualify for rollover relief.
Patents and trademarks are intangible assets which are not qualifying additions for the purposes of chargeable gains rollover relief.

【答案解析】

问答题
Tosca Ltd – promotion of new product.

Professional marks will be awarded for the ability to follow instructions, the clarity of the explanations and calculations, the effectiveness with which the information is communicated, and the overall presentation.

【正确答案】
Tosca Ltd – promotion of new product
Increase in turnover
Tosca Ltd should notify HM Revenue and Customs that it expects its turnover to exceed the annual accounting turnover limit of £1,600,000. The company may then be required to leave the scheme. Once its turnover for an accounting year does exceed this limit, it will be required to leave the scheme.
Once the company is no longer in the annual accounting scheme, it will have to submit four VAT returns a year rather than one.
Its VAT payments will then fluctuate because they will be calculated by reference to its outputs and inputs in the quarter rather than being based on its VAT liability for the previous year.
Entertainment and gifts
Tosca Ltd will not be able to recover the input tax in respect of the cost of entertaining its customers.
It will not be necessary to account for output tax on the gifts of the pens, provided the total cost of any gifts made to the same person does not exceed £50 in a year. The related input tax will be recoverable in full.
It will also not be necessary to account for output tax on the gifts of the new product, even though its value exceeds £50, because it is a sample of the company’s own products. Again, the related input tax will be recoverable in full.

【答案解析】