TOMC Nov 2017 Answers

Answer 1

a) Corporation Tax computation for year ending 30 September 2017

£ £
Profit per accounts 530,257,000

Adjustments
Add Depreciation 15,650,450
Pension contributions (W1) 440,000
Directors bonus (W2) 2,075,000
Research and Development –
Taxable RDEC (W3) 38,300

18,203,750

Deduct Profit on sale of fixed assets (11,000)

Capital Allowances (W4) (1,120,542)

(1,131,542)

Total Taxable Profits 547,329,208

Corporation Tax
liability
FY 2016 (182/365) 54,582,968
@20%
FY 2017 (183/365) 54,882,874
@20%
109,465,842
Less RDEC (W3) (38,300)

Corporation Tax 109,427,542

payable

Due dates for Corporation Tax payments

Corporation Tax is due in four equal instalments on 14 April 2017; 14 July 2017; 14 October
2017 and 14 January 2018. The first three payments have already been made, totalling
£79,300,500. The final payment based on the final computations will be £27,356,886.
However, the company has underpaid tax in the first three instalments, of £2,770,156. This
amount needs to be paid as a “top-up”, and interest will be charged on this underpayment.

Workings

W1 - Spreading of pension contributions

Step 1 – Does contribution exceed 210% of last year’s contributions?

Last year’s contribution - £200,000

210% x last year’s contribution= £420,000
This year’s contribution - £1,100,000
As this year’s exceeds £420,000 Step 1 is met

Step 2 – What is excess, and does it exceed £500,000?

 This year’s contribution less (last year’s x110%)
£1,100,000 – (200,000 x 110%) = £880,000
As this exceeds £500,000, spreading must be considered.

Step 3
As the excess is less than £1m, spread over this year and next year,
Excess is £880,000, so divide by 2, therefore £440,000 is allowed in year to 30.9.2017.

W2 - Directors bonus
The amount not paid within 9 months of year-end and therefore disallowed is £2,075,000.

W3 - Research and Development Expenditure credit

Company is a “large” company.

Costs £
Personnel 280,510
Consumables 32,070
External staff 35,600
Qualifying 348,180

RDEC (11%) 38,300

W4 - Capital Allowances

Main pool Special Enhanced R&D Allowances

rate pool
£ £ £ £ £
TWDV b/f 2,350,350 1,657,200
Additions
Integral electrical 105,000
system
Boiler 8,500
Machinery 1,024,360
Thermal
insulation 1,365,000
R&D equipment
76,700

Annual
Investment
allowance (200,000) (200,000)
FYA 100% (8,500) (76,700) (85,200)

Disposals P&M (33,150)

Car (1,750)

2,927,200
3,339,810

WDA 18% (601,166) (601,166)

8% (234,176) (234,176)

Total
allowances (1,120,542)

TWDV c/f 2,738,644 2,693,024

Notes:
• Suspended ceiling not eligible for allowances unless related to specific items of plant and
machinery.

• AIA allocated to special rate pool to maximise acceleration of allowances.

(b) Election to exempt overseas branches from UK Corporation Tax

At present, profits from the two branches are taxed or losses relieved in the UK, so the year
ended 30 September 2017, Corporation Tax payable tax on a net profit of £109,800.

It is possible to elect for the branches to be exempt from UK Corporation Tax; however this
election must apply to all branches of a company and is irrevocable. Therefore, any future
loss arising would not be offset against UK profits; equally no profits would be taxable in the
UK, and so the branches would only be taxed in the overseas jurisdictions i.e. Ruritania and
Buranda.

The election should be beneficial if the branch is profitable and subject to a rate of tax lower
than the UK Corporation Tax rate. Where the profitable branch foreign tax rate is higher than
the UK rate there would be no tax saving.

The election would not be advantageous (from a UK perspective) if it resulted in branch

losses not be UK tax deductible

Any election is effective for the accounting period after the one in which the election is made,
therefore it is now too late to make an election for the years ended 30 September 2017 and
30 September 2018; however an election made now (in the year to 30 September 2018)
would be effective for the year to 30 September 2019, onwards.

There are transitional rules for loss making branches, whose future profits cannot be treated
as exempt until the losses in the previous six years have been matched with profits arising in
subsequent periods. It is possible to apply this rule separately to a particular territory so that
they do not delay the exemption of other territories, which do not have losses.
MARKING GUIDE

TOPIC MARKS
Adjustment to profit
Add back depreciation 0.5
Deduct profit on fixed asset disposal 0.5
Pension scheme –calculation of excess 0.5
Pension scheme – spreading and current year deduction 1.0
Disallow accrued bonus 0.5
Treatment of Branch profits/losses forming part of taxable profits 0.5
Capital allowances
Suspended ceiling not eligible 0.5
Inclusion of integral electrical system in special rate pool 0.5
Energy saving boiler – 100% FYA 0.5
Inclusion of machinery in main pool 0.5
Inclusion of thermal insulation in special rate pool 0.5
Inclusion of proceeds of sale of car in main pool 0.5
Inclusion of proceeds of sale of P&M in main pool 0.5
R&D equipment capital allowances - FYA 0.5
Calculation of writing down allowance in general pool 0.5
Calculation of writing down allowance in special rate pool 0.5
AIA maximisation – include in special pool 0.5

R&D
Calculating allowable amount ; disallow non-direct costs 1.0
Allowing Expenditure credit 1.0
Calculation of liability using correct Corporation tax rates 0.5
Payment dates and amounts; amendments to Payments on account; 0.5
interest
Note re overseas profits
Election needed 0.5
Applies to all branches 0.5
Effective date – from following accounting period 1.0
Irrevocable; effect on tax payable UK and overseas 1.0
TOTAL 15
Answer 2

Proposed acquisition of CDE Ltd – UK Tax Due Diligence Report

I have reviewed the information that you provided me with in relation to the proposed
acquisition of CDE Ltd and subsidiaries (“the Target Group”) by ABC plc. I set out below a
draft due diligence report outlining the UK tax risks inherent in the Target Group.

Please note that this report solely focuses on UK tax issues and I understand the findings of
this report will be integrated into an overall report to cover all relevant jurisdictions.

Issue: Summary of tax risks:

1) CDE Ltd becoming CDE Ltd should be regarded as UK tax resident effective 1
a UK tax resident January 2015 as central management and control has been
company. exercised in the UK since that date.

The company will be treated as an “Investment Company” for

UK tax purposes and will also be a “Dual Resident Investment
Company” (“DRIC”). As a consequence, CDE Ltd will not be
able to group relieve losses arising from interest expense to
IJK Ltd or OPQ Ltd
.

2) Chargeable gain on The gain arising on the disposal by CDE Ltd of a minority
disposal of shareholding in Drug Smart Inc will be subject to UK
shareholding Corporporation Tax.

The UK substantial Shareholding Exemption will not apply as

the shareholding is less than 10%. A chargeable gain of US
$35,151,050 (£27,808,500) arises (after indexation allowance,
a relief to take account of inflation).

This may result in a Corporation Tax Liability of £5,353,136,

subject to the availability of brought forward tax losses.

3) Possible restriction Anti-avoidance legislation exists to prevent a purchaser of an

on offset of brought Investment Company injecting new investments to use existing
forward tax losses tax losses for sheltering future income and gains from those
of CDE Ltd. investments.

It is unclear how the rules may impact at this stage but broadly
relief for brought forward non-trade deficits on loan
relationships (unrelieved interest expense) and expenses of
management will be denied where:
• After the change there is a significant increase in the
amount of CDE Ltd’s capital, or
• Within the period of six years – beginning three years
before and ending three years after the change in
ownership – there is a major change in the nature of
investments held by CDE Ltd, or
• The change in ownership occurs at any time after the scale
of the activities in the business carried on by the CDE Ltd
has become small or negligible and before any
considerable revival of the business.
You should consider the potential impact of these rules
carefully in view of the chargeable gain and seek
indemnification for any Corporation tax arising where an action
of the Target Group may result in a restriction to the losses
carried forward.
4) Transfer pricing Transactions between related parties should be on “arm’s
length” terms. Transfer Pricing legislation requires tax specific
adjustments to be imputed where transactions are on non
arm’s length terms. We note the following as potential areas of
concern in relation to pre-acquisition periods:

• The cost plus arrangements between group companies

should be reviewed to determine whether margins on sales
and manufacturing can be regarded as being at arm’s
length.

• The calculation of the rate of royalty paid by OPQ Ltd to

FGH AG.

5) Controlled Foreign There is a risk that the profits of FGH AG may be subject to
Companies CFC apportionment as the company is unlikely to meet any of
(“CFCs”) – FGH AG the entity level exemptions. The Temporary Period Exemption
will not apply in view of CDE Ltd having become UK tax
resident effective 1 January 2015.

The “motive test” could be met such that the profits do not pass
through the trading profits gateway as the original intention
was not to avoid UK tax via the structure.

Losses of CDE Ltd may be partially offset against any CFC

apportionment for the year ended 31 December 2015.

A CFC apportionment arising in respect of the two years ended

31 December 2017 will be subject to Corporation Tax with no
relief available for any brought forward or current year losses in
CDE Ltd.

6) Diverted Profits Tax There is risk that some profits realised by FGH AG may fall
(“DPT”) within the scope of the DPT rules effective 1 April 2015.

The outsourcing arrangement with IJK Ltd will result in sales

revenue in excess of the 5% margin the company receives on
costs being recognised in Switzerland. This profit may be
subject to DPT where the arrangements can be construed as:

• Lacking economic substance; and/or

• Having a main purpose of seeking to avoid UK tax.

There appears a significant risk here and this should be

analysed further.

Any DPT exposure is computed as follows:

• Tax Diverted Profits x 25% [DPT rate] + Tax Interest

[currently 3%]
• Tax Interest runs from 6 months after a chargeable
accounting period up to the date of issuance of a notice.
• DPT is to be “self-assessed” so we recommend you review
this further.
7) Corporation Tax • CDE Ltd first came within the charge to Corporation Tax on
compliance 1 January2015 and should notify HMRC immediately.
• Late filing penalties will be due in respect of the FY 2015
Company Tax Return outstanding for CDE Ltd fixed at
£1,000 and a further penalty equal to 10% of any tax due
(e.g. in respect of the chargeable gain).
• A tax geared penalty of up to 30% of any outstanding tax
due in FY 2015 may be applied where any tax payments
were outstanding at 31 December 2016 with scope to
reduce to 10% for unprompted notification.
• Interest will be applied to any tax not paid by the due dates
at applicable rates and indemnification should be sought for
all interest and penalties.
MARKING GUIDE

TOPIC MARKS
Tax residency:
Note that CDE Ltd has become UK resident effective 1 January 2015 1
Comment CDE Ltd should be treated as an Investment Company 0.5
State the CDE Ltd is a DRIC and related tax consequences 1.5
Chargeable gain:
Calculate chargeable gain on disposal and potential Corporation Tax Liability 2
Note importance of offsetting brought forward tax losses 0.5
Possible restrictions on loss relief:
Identify risk that s.677 – s.684 CTA 2010 may apply to limit use of brought 1
forward non-trade loan relationship deficits on change in ownership
Set out circumstances under which relief for losses would be denied 2
Transfer pricing:
Comment on appropriateness of cost plus arrangements 1
Comment on appropriateness of royalty rate 1
Possible CFC apportionment:
Note that no entity level exemptions will apply 1
Comment why Temporary Period Exemption cannot apply 0.5
Note that “motive test” in trading profits gateway may be met 1
State that losses cannot cover any CFC apportionment for FY 2016 and FY 0.5
2017
Diverted Profits Tax (“DPT”):
Identify the risk DPT could apply to UK to activity undertaken in the UK by 0.5
FGH AG and profits realised above limited returns in IJK Ltd and OPQ Ltd
State conditions to be met for DPT to apply 1.5
Outline how DPT charge computed 1.5
Corporation Tax compliance:
Note CDE Ltd within the charge to Corporation Tax effective 1 January 2015 0.5
[s.9(2) CTA 2009]
Note late filing penalties due for FY2015 Company Tax Return of CDE Ltd 0.5
Note penalty for any late payment of tax due in CDE Ltd FY 2015 Company 0.5
Tax Return and scope to reduce this with unprompted notification
Comment that interest payable on overdue tax 0.5
Presentation and higher skills 1
TOTAL 20
Answer 3

Briefing Note – Use of General Anti Abuse Rule

Background
Finance Act 2013 introduced a General Anti Abuse Rule (“GAAR”), the scope of which covers
not only Corporation Tax but also Income Tax, Inheritance Tax, CGT, Stamp Duty Land Tax,
National Insurance Contributions, and Diverted Profits Tax.

The purpose of the GAAR is to deter (a) taxpayers from entering into “abusive arrangements”,
and (b) advisers from promoting arrangements. An abusive arrangement is one which
achieves a tax advantage and “cannot reasonably be regarded as a reasonable course of
action” (the “double reasonableness test”).

A “tax arrangement” is one in which it would be reasonable to conclude that the main
purpose, or one of the main purposes is the obtaining of a UK tax advantage.

The definition of a “tax advantage” is not limited to merely the reduction in the amount of tax
payable – it can cover a repayment or increased repayment; the deferral of a tax payment or
the advancement of a repayment; the relief or increased relief from tax; the avoidance of an
assessment; and the avoidance of the obligation to deduct or account for tax.

HMRC’s published guidelines give indicators of abusive tax arrangements being in place, for
example:
• Arrangements resulting in income, profits or gains for tax purposes that is significantly
less than the amount for economic purposes; or
• Arrangements resulting in deductions or losses for tax purposes that are greater than
the amount would be for economic purposes.

However, these indicators do not apply to situations where the arrangement was well-
established practice.

The Corporation Tax Self-Assessment regime means that the GAAR should be considered
when signing the Company Tax return and if necessary, adjustments should be made to the
Corporation Tax liability.

There is no statutory or non-statutory clearance procedure available in relation to the GAAR

applying to any particular transaction. However, it is possible to obtain advance clearances for
certain transactions and if such a clearance has been provided, the GAAR cannot then be
later invoked in respect of the arrangements that were the focus of the clearance.

Counteraction
HMRC can invoke the GAAR, for example, as part of an open enquiry into a company’s tax
affairs. The HMRC officer conducting the enquiry must notify the company that they believe
the GAAR to apply, the reasons why, together with what counteraction is proposed.

However, before HMRC can proceed to counteraction, the case must be submitted to the
GAAR advisory panel, which is independent of HMRC, and will give an opinion as to the
arrangement. If the panel agrees that the arrangement was not a reasonable course of action,
then the HMRC officer will proceed with the counteraction, which will involve amending
assessments, claims “or otherwise”. Normal interest and penalties would apply.

Where the GAAR applies it operates to counteract the tax advantage in a way that is just and
reasonable. If any counteraction adjustments give rise to double taxation, the company can
apply for consequential amendments to be made.

If the company believes that the arrangement was not abusive, it can still appeal in the normal
way to the tribunal.
Payment of disputed tax
If HMRC raise an enquiry, they can seek to collect the disputed tax paid upfront with the issue
of an Accelerated Payment Notice.

Impact of Tax Treaties

Multinational groups will be subject to tax in the countries in which they have permanent
establishments. Treaties exist between the UK and many other fiscal jurisdictions to prevent
the double taxation of profits. Use of these treaties, even where they result in a lower tax rate,
are not considered to be abuse, and GAAR is not applicable in these circumstances. This
could be the position with the Hammersmith group. Equally, Hammersmith may do business
in genuinely low tax countries, or are making us of generous tax exemptions, including the
use of losses, which do not amount to tax avoidance. If, however, arrangements exist which
are specifically designed to exploit any tax beneficial provision of a treaty, then the GAAR can
be used to counteract the abusive arrangements.

Application to the Hammersmith group acquisition

The transactions undertaken by the Hammersmith group may have resulted in a tax
advantage, and although it is not clear if that is the main purpose of any transactions, it would
be prudent to consider them in the context of GAAR, noting that the GAAR only applies to
transactions entered into on or after 17 July 2013.

Further details of the arrangement are needed and these should be available during the due
diligence process. Petersfield Enterprises plc should take the opportunity to assess whether
any transactions entered into by any of the companies within the Hammersmith group could
be deemed to be abusive by HMRC for any accounting periods in which the enquiry window
is still open.

Should the acquisition go ahead, the Sale and Purchase Agreement should address these
issues under the tax warranties, and any potential additional tax liability should be covered by
the tax indemnity.
MARKING GUIDE

TOPIC MARKS
Opening comments, background, taxes effected 1.0
Explanation of GAAR
• Purpose 0.5
• Tax Advantage 0.5
• Meaning of Arrangement 0.5
• Abusive and examples 1.5
• Double reasonableness 1.0
Self assessment 1.0
No clearance 1.0
GAAR invoked – procedure
• HMRC enquiry 0.5
• HMRC officer notifies; reasons; counteraction 1.5
• Advisory panel 1.0
• Consequential adjustment 0.5
• Apply to Tribunal 0.5
Payment
• Accelerated Payment notices 1.0
Multinational aspect
• Double tax treaties 0.5
Conclusion
• Tax advantage /main reason 0.5
• Due diligence providing more information 0.5
• Commencment date 0.5
• Sale & Purchase Agreement – warranties and indemnities 1.0

TOTAL 15
Answer 4

Memo
To: Michael Robins
From: Tax Manager
Subject – Corporation Tax consequences of property and plant disposals

Thank you for the information you recently provided to me.

I have calculated that the gain potentially chargeable to Corporation Tax in the year ended 31
December 2017 relating to the sale of the building is £3,044,350 (see Appendix A). However,
it is possible that this gain can be covered by the use of reliefs, as explained below.

Calculation of chargeable gain

Indexation Allowance is given on the cost of purchasing the building and on the incidental
costs of purchase but not on the incidental costs of disposal, such as the consultant’s fees.

The deferred consideration contingent upon the application for, and the grant of, planning
permission is taxable upfront, as the amount to be received is known (an “ascertainable”
sum). Hence, despite these amounts being receivable in future years, they will form part of
the chargeable gain calculation for 2017.

The further consideration which could be received if the building is sold on to a gym operator
is both contingent – because it is depends on the development and the onward sale - and is
unascertainable - because the amount payable is based on a possible future value which is
unknown. However, the right to receive that consideration does have a value, which you
have indicated to be £70,000, and this right is known as a “chose in action”. That value should
be brought into the gain calculation and essentially taxed in 2017. You should be aware that
HMRC may wish to examine the basis upon which you valued the chose in action.

If the building is redeveloped and sold to the gym operators for more than £12 million, the
company will receive a further sum. In the year of receipt, a further chargeable gain should be
calculated as follows:

£
Consideration X
Cost (i.e. value at December 2017) (70,000)
Indexation from December 2017 to date (X)
of receipt of further payment
Gain chargeable X

Should the planning permission not be applied for or granted, or the onward sale not be
achieved, no further consideration would be received by the company. As Corporation Tax
will have been paid on the basis that these amounts are receivable, a claim can be made to
HMRC to revise the original assessments and obtain a refund of any Corporation Tax
overpaid. Should the contingent consideration be receivable over a period exceeding 18
months, an application to pay the tax relating to these receipts in instalments can be made.

Plant and Machinery

In the year a balancing allowance of £25,000 will arise on the sale of the plant and machinery
(total allowances given being of £825,000). Although it is sold at a loss this will be reduced by
the net allowances given (including any balancing losses/allowances). This will result in an
overall no gain/no loss position.

Possible mitigation of the gain arising on the sale of the building

Capital Losses
It is possible to utilise capital losses within a chargeable gains group. This is defined as a
principal company and its 75% subsidiaries, and their 75% subsidiaries; but every subsidiary
must be an effective 51% subsidiary of the principal company. The Ramcourt group meets
this definition, assuming that other conditions for ownership, such as the right to profits for
assets on a winding up, are met. It is possible to elect to have the gains or losses allocated
from one group company to another (or part of a gain/loss). Therefore, the gain on the sale of
the building can be elected to be transferred to Court Manufacturing Ltd and RM Machines
Ltd and offset by the brought forward losses in those companies

The losses in Courtpackage Ltd are “pre–entry losses”, i.e. capital losses that arose in
Courtpackage Ltd before it joined the Ramcourt group. Legislation exists to restrict the use of
pre-entry capital losses such that they can only be used against gains arising on assets which
Courtpackage Ltd owned prior to acquisition by the Ramcourt group or against assets bought
from third parties, so the capital losses brought forward in Courtpackage Ltd cannot be used
against the gain on the sale of the building.

Re-investment
Rollover relief for the gain is available if the disposal proceeds are invested in new assets.
The gain can be rolled over into replacement assets that are bought within one year before
and three years after the sale of the building. The purchase of the new warehouse and fixed
plant and machinery should qualify, assuming that the P&M become part of the building. A
claim needs to be made within four years of the accounting period in which the gain is made,
or the replacement asset is purchased (whichever is the latest) but a provisional claim can be
made first.

If the replacement asset is a wasting asset (i.e. has a life of 60 years or less) the gain is not
rolled over but merely deferred until the replacement asset is sold or 10 years after the
replacement if earlier. The gain then crystallises. (This could be the case with the Plant and
machinery if not fixed)

If the full disposal proceeds are not reinvested, a gain will still arise on the disposal of the
building, being the lower of:
i. The gain on the disposal of the building; and
ii. The amount not reinvested.

This calculation is shown at Appendix B.

Conclusion
At present there is insufficient reinvestment to reduce the gain arising.

However, the gain can be fully offset by capital losses in Court Manufacturing Ltd and RM
Machines Ltd.

Regards

Tax Manager
Appendix A– Calculation of chargeable gain before reliefs

Consideration £ £
- Received 31 December 2017 4,000,000
- When planning permission applied for 500,000
- When planning permission granted 1,500,000
Current value of future contingent consideration 70,000
Less incidental costs
-Planning consultant (12,000)
(no indexation)
6,058,000
Allowable costs
- Cost of building 1,750,000
- Professional fees 7,500
- Stamp duty 52,500

Total purchase (1,810,000)

Indexation allowance (1,203,650)

RD-RI 272.0-163.4 x £1,810,000
RI 163.4
Chargeable gain 3,044,350

Appendix B – calculation of rollover relief and capital loss offset

Amount not reinvested

£
Disposal proceeds (less expenses) 5,988,000
Reinvestment in warehouse (3,500,000)
Reinvestment in fixed plant and machinery (500,000)

Amount not reinvested 1,988,000

Gain arising
Lower of
Gain on disposal of the building 3,044,350
OR
Amount not reinvested 1,988,000

Gain Offset by losses

Gain not rolled over 1,988,000

Less losses in group ( 1,988,000)

Gain chargeable to Corporation Tax NIL

MARKING GUIDE

TOPIC MARKS
Calculation of gain and explanation
Consideration inc. contingent 1.0
Base cost 1.0
Indexation 1.0
s.48 revision of calculation if not received 1.0
s.280 instalments 1.0
Plant and Machinery 1.0

Consideration for onward sale

Contingent and unascertainable taxed now 1.0
Chose in action /valuation – agree with HMRC 1.0
Future calculation on receipt of payment 1.0
Mitigation
Capital losses
- definition of a group 1.0
- s 171A group election 1.0
Pre entry losses
- identify 1.0
- use 1.0
Rollover relief
-replacement period; reinvest proceeds 1.0
-rollover – reduces base cost 1.0
- claim period and provisional claim 1.0
- depreciating asset – gain deferred & crystallises 1.0
- Partial rollover & calculation 1.0
- Conclusion 1.0
Presentation and higher skills 1.0
TOTAL 20
Answer 5

[Name]
Complex Tax Solutions LLP
[Address]
Paul Smith
Group Tax Director
Jupiter plc
[Address]

X November 2017

Dear Paul

Corporation Tax implications of proposed transaction

At our recent meeting, you outlined three potential ways that Venus LLC may be classified for
tax purposes by HM Revenue & Customs (“HMRC”); the tax implications will depend on the
classification.

a) Body corporate with issued share capital:

It is possible that the transfer of the shares by Jupiter plc of Venus LLC in exchange for the
issue of ordinary shares by Mercury BV will be exempt from tax by virtue of the Substantial
Shareholdings Exemption (“SSE”). SSE applies automatically where the following conditions
are satisfied:

1) The shares being disposed of qualify as “ordinary share capital” – this condition should
be satisfied;
2) Greater than 10% of the shares are disposed of – this condition should be satisfied;
3) The shares have been owned continuously for a period of 12 months out of the
previous 24 months – this condition should be satisfied;
4) The investor company (Jupiter plc) meets the definition of a trading company or a
member of a trading group; and
5) The investee company (Venus LLC) qualifies as a trading company or a holding
company of a trading group or subgroup.

The investee company should qualify as a trading company as Venus LLC will have traded in
the 12-month period up to the proposed date of disposal and is expected to be trading
immediately thereafter.

As Jupiter plc is the parent of the group, it is necessary to consider the trading activity of the
wider group. HMRC has published guidance on the interpretation of “substantial” stating that
in excess of 80% of the revenue, asset base and employees of the “SSE group” should relate
to trading activity. It is unclear whether this requirement is met in view of the investment
property portfolio owned by Pluto GmbH. Half of the trading activity of the joint venture
company is treated as arising in Pluto GmbH for the purposes of this analysis.

In summary, there is insufficient information to conclude on whether SSE will apply to the
disposal and this should be further reviewed. If SSE does not apply to the disposal, it may still
qualify as a tax-free reorganisation provided that it meets the following conditions.

1) The new shares issued by Mercury BV are in proportion to the shares previously issued
by Venus LLC;
2) Mercury BV will hold in excess of 25% of the shares of Venus LLC; and
3) The transaction must be effected for bona fide commercial reasons and not form part of
a scheme or arrangements of which the main purpose, or one of the main purposes, is
avoidance of liability to Corporation Tax.
In the event that all conditions are satisfied, Jupiter plc will not be regarded as making a
disposal of the shares in Venus LLC and acquiring a new shareholding in Mercury BV.
Instead, the application of “share for share” relief means that the original shares in Venus LLC
and the new shareholding in Mercury BV are treated as the same asset for Jupiter plc as
acquired when the original shares in Venus LLC were acquired. As a consequence, any
chargeable gain inherent in the shares of Venus LLC is effectively rolled into the new
shareholding in Mercury BV.

It seems likely that that these provisions would apply and therefore the transfer of the shares
in Venus LLC by Jupiter plc to Mercury BV should not be treated as a chargeable disposal,
rather the transaction should instead qualify as a tax free reorganisation on the basis that the
corporate reorganisation is required in order to enable Mercury BV to raise external finance.

b) Body corporate without issued share capital:

In this scenario, the disposal will not qualify for SSE or as a tax free reorganisation due to
Venus LLC not having ordinary share capital resulting in a taxable disposal. A chargeable
gain or loss will arise based on the difference between the fair market value of Venus LLC
(assumed to be £60 million) less the amount of capital invested in the company.

c) Overseas branch of Jupiter plc

The sale of assets by Jupiter plc is a taxable transaction and it will be necessary to distinguish
between different classes of asset ordinarily being those falling in the chargeable gains rules,
loan relationships and derivative contracts, intangibles assets and assets qualifying for capital
allowances.

Taxable gains and losses will broadly arise based on the difference between the fair market
value of the assets at disposal and Jupiter plc’s base cost for tax purposes in the assets. It
should be possible, however, to claim holdover relief as the US branch is transferred to a non-
UK company provided:

• The consideration for the transfer is wholly securities; and

• Jupiter plc owns more than 25% or the ordinary shares of Mercury BV.

This relief represents a deferral of any chargeable gains with gains crystallising on a
subsequent disposal of shares in Mercury BV or any disposal of interests in the LLC by
Mercury BV in the next six years.

Other considerations

In scenarios (a) and (b) there is a risk of a tax charge arising on the transaction subject to
further analysis. In view of this, you may consider having Earth XL Ltd acquire the interest in
Venus LLC such that the no gain / no loss provisions can apply to prevent a chargeable gain
arising. Similar provisions would also apply to prevent any clawback capital allowances or
relief in respect of intangible assets.

Please contact me if you have any queries.

Yours sincerely

[Name]
MARKING GUIDE

TOPIC MARKS
Transfer of Venus LLC to Mercury BV:
Body corporate with issued share capital:
Note that any chargeable gain or loss will be exempt if the Substantial 0.5
Shareholdings Exemptions applies to the disposal
Outline the conditions to be met in order for SSE to apply 2.5
State that Venus LLC should meet the “investee” company requirement 0.5
Note that necessary to review the trading status of the wider group to 0.5
determine whether Jupiter plc meets the “investor” company requirement
State that investment property portfolio is a tainted asset 0.5
Note that 50% of the trading activity in Saturn Ltd may be deemed to arise in 0.5
Pluto GmbH
Conclude that there is a risk SSE may not apply and further analysis to be 0.5
undertaken
Note that s.135 TCGA 1992 may apply to share for share exchange and 2.5
state relevant conditions
Comment that relief likely applicable in view of rationale for transaction 1
Body corporate without issued share capital:
State that SSE and s.135 TCGA 1992 cannot apply to transaction as no 1
issued ordinary share capital
Note that taxable transaction and outline how any gains or loss to be 1
computed
Overseas branch of Jupiter plc:
Note that taxable transaction and outline how any gains or loss to be 2
computed
Note that s.140 TCGA 1992 may apply and relevant conditions 1
State conditions under which held over gain crystallize after claiming relief 2
under s.140 TCGA 1992
Other considerations:
Note that a transfer to Earth XL Ltd could be preferable in view of relief under 2
s.171 TCGA 1992, s.941 CTA 2010 and s.775 CTA 2009
Presentation and higher skills 2
TOTAL 20
Answer 6

E-mail

To: Chris.Wallace@omnicorp.co.uk
From: SeniorTaxAdviser@whitecross.accountants.com
Date: X November 2017
Subject: Omnicorp plc – UK Tax losses

Dear Chris,

It was good to meet with you recently and I set out below key considerations regarding how
tax losses may be relieved during the year ended 30 September 2017.

Cross-border group relief

OmFraud Ltd may claim group relief from OS Sarl as a resident of an EEA member state
provided certain conditions are satisfied. The loss needs to be recomputed applying UK tax
principles and as OS Sarl would be regarded as having ceased trading on 1 January 2017;
the maximum group relief available for surrender would be restricted to £7.5 million.

OmFraud Ltd must conclude that no tax relief can be claimed overseas for the loss either now
or in the future (which seems likely given the cessation of operations). Loss relief will be
denied where obtaining tax relief for the loss is a main purpose to ceasing business, which
should not be the case.

Terminal loss relief

TeleIndex Ltd can elect to carry back the £50 million trading loss against taxable profits
arising in the 36 months prior to 30 June 2017. This is better than surrendering the loss by
group relief because due to restrictions in the amount of losses that may be surrendered in
view of overlapping accounting periods.

Such claim would extinguish all of the profits for the year ended 30 September 2016 and
would require TeleIndex Ltd to withdraw the £15 million group relief claim submitted in the
year ended 30 September 2015 in order to offset the remaining unrelieved loss. The deadline
for withdrawal of the group relief claim was 30 September 2017 but HMRC have some
discretion to extend this time limit in circumstances such as this.

As a consequence of withdrawing the group relief claim, Omnicorp plc will have an additional
£15 million of tax losses to carry forward for offset in future accounting periods.

Loss refresher provisions

Legislation exists to counteract situations where groups undertake artificial transactions to

effectively convert brought forward tax losses into current year tax losses that are far more
versatile in nature. If applicable, tax relief for brought forward losses is prohibited against such
income.

These rules are relevant to the know-how transferred by TeleSales Ltd to Omnicorp plc. This
transaction may result in royalty income being sheltered by brought forward losses of
Omnicorp plc with a current year deduction for Telesales Ltd. The brought forward losses of
Omnicorp plc may not offset the royalty income where the loss refresher provisions apply.
The rationale for the transaction is unclear and you will need to demonstrate that the main
purpose, or one of the main purposes of the arrangement was not to obtain a tax advantage
and that the tax value of such advantage does not exceed the non-tax value to avoid loss
relief being denied in Omnicorp plc.

Kind regards,

[Name]
Senior Tax Adviser
Whitecross Accountants LLP

MARKING GUIDE

TOPIC MARKS
Group relief:
Note that OmFraud Ltd may claim group relief from OS Sarl as a company 0.5
resident in an EEA member state provide certain conditions are met
State that loss must be computed applying UK tax principles 0.5
Comment on overlapping period and reduced group relief of £7.5 million 1
State obligation of OmFraud Ltd to determine no tax relief may be claimed 1
overseas for the loss
Concluded that obtaining loss relief should not be a main purpose associated 1
with the claim
Terminal loss relief:
Comment that TeleIndex Ltd may make a terminal loss relief claim under 1
s37(3)(b) CTA 2010 and the time limit for carrying a loss back
States why loss carry back claim optimal to surrendering group relief 0.5
Note that additional loss relief can be claimed where prior group relief claim 1
Refer to time limit for withdrawal and HMRC discretion to extend this 1
Loss refresher provisions:
State function of loss refresher provisions in Part 14B, CTA 2010 1
Comment that loss refresher provisions may apply following transfer of the 1
know-how from TeleSales Ltd to Omnicorp plc
Note that insufficient information available to conclude whether transaction 0.5
has a main purposes of securing a tax advantage
TOTAL 10