ADVANCED TAXATION- Corporation Tax FA _ 2018

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Finance Act Rate of Tax Profit Threshold
2018 19% £1500,000
2017 19% £1500,000
2016 20% £1500,000

Question 1
UUL Plc has the following income.
Business Income (trading profits) 280,000
Interest Income 20,000
Dividends from UK companies 45,000 (from a non-subsidiary)
Property Income 25,000
Qualifying charitable donations 5,000
Calculate Corporation Tax if results are for the year ended 31 March 2019?
Calculate Corporation Tax if results are for the year ended 31 December 2018?

Question 2
Flick plc holds 60% shares in Flack plc, 25% shares in Flock plc which are both UK Resident Companies.
Flick also holds 40% shares in Zack Ltd. (incorporated overseas). Flick plc has the following income for the year
ending 31 March 2019:
Business Income (trading profits) 320,000
Interest Income 30,000
Dividends from Flack plc 90,000
Dividends from Flock plc 45,000
Dividends from Zack Ltd. (gross) 25,000
Property Income 50,000
Required: Calculate Corporation Tax

Question 3 (Loan relationship rules)

B Ltd has one wholly owned UK subsidiary, F Ltd, and makes up its accounts to 31 December each year.
For the year ended 31 December 2018, it had the following results:
£
Trading profits before deducting interest and capital allowances 500,000
Capital allowances 19,900
Building society interest (BSI) received in the year 95,000
Chargeable gain on sale of office block 150,000
Interest received in the year on loan stock in C Ltd 61,400
Qualifying charitable donation 9,240
Interest payable on loan stock to D Ltd (Note 1) 100,000
Dividends received from F Ltd 50,000
Dividends received from Z Inc (Note 2) 20,000
Dividend paid 40,000
BSI Loan stock interest
£ £
Accrued income b/f 20,000 1,000
Accrued income c/f 25,000 3,600
Notes:
(1) The funds raised from the loan stock issued to D Ltd were used to acquire plant and machinery.
(2) B Ltd owns 5% of the ordinary share capital of Z Inc, an overseas resident trading company.
Requirement
Calculate B Ltd's corporation tax liability for the year ended 31 December 2018.

Question 4 (loan relationship)

Hutt plc will need to take out a loan to finance the purchase of Lucia Ltd. The company intends to borrow
£190,000 from BHC Bank Ltd on 1 July 2018. BHC Bank Ltd will charge Hutt plc a £1,400 loan arrangement fee
and interest at 7.25% per annum. Hutt plc only needs £130,000 of the loan to buy the share capital of Lucia Ltd
and intends to use the balance of the loan as follows: £45,000 to carry out repairs to Hutt Tower (an investment
property) and the remainder to help fund the company’s ongoing working capital requirements.
Required
Provide an explanation of the tax treatment of the loan arrangement fee and the interest payable on the loan of
£190,000 assuming Hutt plc continues to have bank interest receivable of £2,000 and a trading loss of (£105,000)
in the year ended 31 March 2019.

Question 5 (capital gain- overview)

Greenwood Ltd disposed of an investment property on 31 December 2018 legal costs and estate agents fees of
£5,000 were incurred in relation to the disposal.
Greenwood Ltd had purchased the property originally on 21 June 1986 for £15,000 and incurred acquisition costs
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of £1,500. Greenwood spent £25,000 on an extension to property on 31 May 2008.

Required
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Assuming the sale proceeds were:

(a) £105,000 (b) £45,000 (c) £53,500
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Compute the indexed gain assessable on Greenwood Ltd in the chargeable accounting period to 31 March 2019.
RPIs
Jun’86 97.79 May’08 154.7 Dec’17 220.5 Dec’18 226.4

d) What would be change to answer if the extension on property was made on 31 May 2018, rather
than 31 May 2008?

Question 6 (Substantial Shareholding exemption)

Particle Ltd has owned 100% of the shares in four companies Baryon Ltd, Kaon Ltd, Hadron Ltd and Electron Ltd
since 1 December 2005. Particle Ltd has been offered £650,000 for the whole of the company’s share capital in
Kaon Ltd. Particle Ltd has taxable total profits of £400,000 each year.
Required
Explain the corporation tax implications of selling the shares in Kaon Ltd and compute the after tax sales
proceeds as a result of selling Kaon Ltd on 31 January 2019
Question 7 (Long Period of Account)
Earth plc holds 30% shares in Neptune plc, 65% shares in Saturn plc, and 70% shares in Pluto plc. Earth plc has
the following income for the 18 months ending on 31 March 2019:
Trading profits (adjusted, before capital allowances) 1180,000
Dividends from Neptune plc (amount received on 31.12.17) 45,000
Dividends from Saturn plc (amount received on 31.12.18) 90,000

Opening balance of Plant & Machinery pool was 80,000 on 1st October 2017. A car was purchased on 21.4.18
for the CEO at a cost of £24,000. The car has CO2 emission of 120 g/km and is 70% used in business. A piece of
equipment was purchased on 15 May 2018 at a cost of £264,000. A computer was purchased on 31st December
2018 for £185,000.

Earth plc owns office premises, which was leased for a period of 20 years to Elixir plc at annual value of £48,000
starting from 1.12.18. Premium on lease received was £45,000.
Calculate Corporation Tax
Question 8 (Intangibles)
On 1 December 2019 Rom plc purchased the trade & assets of another company in the same business sector.
They paid £2million that included £35,000 for patent with ten-year life remaining. Goodwill is valued at £200,000.
The patent is capitalised and will be written off on a straight-line basis over 10 years on a month-by-month basis.
The goodwill is capitalised but not amortised. The acquisition is expected to significantly increase Rom’s
profitability. The company prepares its accounts to 31 March annually.
a) What relief is available to Rom plc for its intangible assets?
Rom plc decides to sell the business that it bought on 1 December 2019. The consideration includes £38,000 for
the patent and £250,000 for the goodwill. The sale is made on 1 April 2022.
b) State the effect for tax purposes of the disposal of the intangible assets.
c) What would be change to answer (b), if goodwill sold for £115,000?
Small And Medium Sized Company Large Company
230% expenditure allowed  claim a tax credit equal to 12% of the costs incurred
Can surrender against loss to get 14.5% tax No surrender option
repayment
Can claim relief for contributions to qualifying bodies i.e.
charities and universities
Question 9 (Eligible Expenditure)
Dax plc is manufacturing audio visual equipment. Dax plc is a small enterprise for the purposes of R&D.
The company has recently decided to investigate the market for a radically new type of classroom projection
equipment and has spent the following amounts in the year ended 31 March 2019 on the project:
£
Market research 8,000
Staff directly involved in researching the project 20,000
Administrative support for the R&D department 5,000
Heat and light in the R&D department 9,000
New software (to be used only by R&D) 4,000
An agency for temporary R&D staff 10,000
Advise the company of any tax relief available in respect of its expenditure.

Question 10
P Ltd is a small company. In the year to 31 December 2018, it has the following results:
Trading profit (before taking into account R&D expenditure) £162,500
Qualifying R&D expenditure £270,000
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Bank interest receivable £5,000

Chargeable gain £70,000
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Requirement
Compute the R&D tax credit that P Ltd may claim.
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Question 11 (R&D expenditure)
Rolly Ltd is a small company. It spends £20,000 on qualifying research and development expenditure in the year
ended 31 March 2019.
Rolly Ltd has a trading loss of £50,000 (before adjusting for the expenditure on research and development).
In the year to 31 March 2019 the company has realised a chargeable gain of £10,000.
Evaluate the amount of the R&D tax credit and the amount of trading loss available to carry forward.

Question 12 ((R&D) Small and Large co)

(1) Curzon plc is a large company for the purposes of R&D expenditure and pays corporation tax in installments.
In the year ended 31 March 2019 they have spent £60,000 on qualifying R&D expenditure.

(2) Gul Ltd is a small sized company for the purposes of R&D expenditure. In the year ended 31 December 2018
they spent £8,500 on qualifying R&D expenditure.
Advise the companies of any tax relief available in respect of their expenditure.

Patent Box
Patent box deduction formula: Net patent profit x (MR – 10%)/MR
Where MR = main rate of corporation tax

Question 13 (Patent Box)

Theta plc’s has profits attributable to patents of £500,000 (after all relevant deductions have been made), and
other trading profits of £1,000,000.
Calculate Theta plc’s corporation tax payable for the year ended 31 March 2019, assuming an
election has been made for the patent box rules to apply.

Question 14 (Patent Box)

For the year ended 31 March 2019 Blu Ltd has taxable profits of £1,800,000, of which the net patent profit is
£220,000 after all relevant deductions.
Calculate Blu Ltd corporation tax payable for the year ended 31 March 2019, assuming an election
has been made for the patent box rules to apply.

Question 15 (investment company)

The principal income of Beta Ltd is derived from investments in other UK companies. It also derives income from
rented properties and debenture interest. Beta Ltd's results for the eight months ended 31 March 2019 show the
following:
Dividends received from other UK companies £972,000
Rental income £59,400
Rental expenses £16,400
Debenture interest received £60,000
Beta Ltd incurs management expenses of £102,500 in the period. In addition, it has excess expenses of
management of £23,100 as at 1 August 2018.
Requirement Calculate the corporation tax payable by Beta Ltd for the eight months ended 31 March 2019.

Question 16
Year Ending 31.03.15 31.03.16 31.03.17 31.03.18 31.03.19
Business Income (90,000) 120,000 (75,000) (200,000) 80,000
Interest Income 15,000 5,000 - 5,000 5,000
Property Income 30,000 (25,000) 10,000 40,000 45,000
Capital Gains 20,000 10,000 15,000 20,000 10,000
Dividends – Non-Sub 15,000 - 25,000 25,000 -
Q. charitable donations (5,000) (5,000) (5,000) (7,500) (3,000)

Question 17
Year Ending Y/E 31.03.15 P/E 30.09.15 Y/E 30.9.16 P/E 31.03.17 Y/E 31.03.18
Business Income 120,000 (152,000) 680,000 90,000 (170,000)
Interest Income - 5,000 5,000 5,000 5,000
Property Income 7,000 10,000 12,000 10,000 15,000
Capital Gains 15,000 - 5,000 - 10,000
Q. charitable donations (5,000) (7,500) (3,000) (3,000) (7,000)

Question 18
Earth plc owns 80% shareholding in Jupiter Limited, 90% shareholding in Saturn Limited, and 85% shareholding
in Neptune Limited. The results for the year ended 31.3.19 are:
Earth plc: 200,000 Profit
Jupiter Limited: 220,000 Loss
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Saturn Limited: 60,000 Profit

Neptune Limited: 500,000 Profit
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Question 19
Neptune plc has 40% shareholding in Mars plc, 80% shareholding in Earth Limited, and 90% shareholding in
Mercury Limited. Earth Limited owns 75% shares of Jupiter Limited, while Mercury Limited owns 90% shares of
Saturn Limited.
The results for the year ending 31.03.19 are:
Neptune plc: 380,000 Loss
Earth Limited: 175,000 Profit
Mars plc: 200,000 Profit
Mercury Limited: 600,000 Profit
Jupiter Limited: 350,000 Profit
Saturn Limited: 55,000 Profit
Required: Set off losses in the group companies

Question 20
Q Ltd owns 100% of the share capital of a number of profitable UK resident companies. All companies
prepare accounts to 31 March.
Q Ltd’s results for the year ended 31 March 2019 are as follows:
£
Trading loss (150,000)
Interest income 1,600
Property business loss (18,000)
QCD (4,000)
Capital loss (15,000)
In addition Q Ltd has unrelieved trading losses brought forward at 1 April 2018 of £50,000.
What is the maximum amount of loss that Q Ltd can surrender to its 100% subsidiaries, using group relief,
for the year to 31 March 2019?

Question 21 (corresponding period)

S Ltd incurs a trading loss for the year to 30 September 2018 (150,000)
H Ltd makes taxable profits:
for the year to 31 Dec 2017 200,000 for the year to 31 Dec 2018 100,000
What group relief can H Ltd claim from S Ltd?

Question 22 (company joining and leaving)

Animal Ltd is the holding company for a group of companies. The results of each group company for the year
ended 31 March 2019 are as follows:
Tax adjusted trading Property Franked investment
profit/(loss) £ Income £ Income £
Animal Ltd 450,000 5,000 20,000
Bat Ltd 65,000 15,000 –
Cat Ltd 85,000 – –
Dog Ltd 100,000 – –
Elk Ltd – – –
Fox Ltd 60,000 – 5,000
Gnu Ltd (200,000) – –
Animal Ltd owned 100% of each subsidiary company’s ordinary share capital throughout the year ended 31
March 2019 with the following exceptions:

(1) Animal Ltd only owned 90% of Bat Ltd’s ordinary share capital.
(2) Animal Ltd’s shareholding in Cat Ltd was disposed of on 31 December 2018. The tax adjusted trading profit of
£85,000 is for the year ended 31 March 2019.
(3) Animal Ltd’s shareholding in Dog Ltd was acquired on 1 January 2019. The tax adjusted trading profit of
£100,000 is for the year ended 31 March 2019.
Elk Ltd was a dormant company throughout the year ended 31 March 2019.
Required:
(a) Explain the group relationship that must exist in order that group relief can be claimed.
(b) Explain how many associated companies in the Animal Ltd group of companies. Your answer should identify
the associated companies for the year ended 31 March 2019 and 2020.
(c) Assuming that relief is claimed for Gnu Ltd’s trading loss of £200,000 in the most favourable manner; calculate
the Taxable total profits of Animal Ltd, Bat Ltd, Cat Ltd, Dog Ltd and Fox Ltd for the year ended 31 March 2019.

Question 23 (consortium relief)

C Ltd is owned 60% by A Ltd, 30% by B Ltd and 10% by an overseas company X Inc. Results for the year ended
31 March 2019 are as follows.
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A Ltd B Ltd C Ltd

£ £ £
Trading profit/(loss) 200,000 75,000 (50,000)
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Property income 0 0 12,000

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No dividends are paid or received by C Ltd. Each company has no other associates.
Compute the corporation tax liabilities of all three companies, assuming that all possible consortium relief claims
are made but that C Ltd does not claim current period loss relief.

Question 24 (degrouping charge)

In May 2018, Top Ltd, a trading company, sold the whole of the share capital of Bottom Ltd, a 100% subsidiary,
to Take plc for £600,000. Bottom Ltd is an investment company and had been owned by Top Ltd since July 1991
when Top Ltd acquired the entire share capital for £50,000. The indexation allowance on the sale is £45,978.
Included in Bottom Ltd’s assets is a warehouse acquired by Side Ltd in January 1993 for £96,000. Side Ltd is
also a 100% subsidiary of Top Ltd. The warehouse was transferred by Side Ltd to Bottom Ltd in August 2012 for
£100,000. Its market value at the date of transfer was £310,000. The indexation allowance on a sale in August
2012 would have been £45,024.
a) What is the effect of Bottom Ltd leaving the group? Compute Top Ltd's corporation tax for the year ended 31
March 2019 if it has trading income of £2,000,000.
b) How would your answer be different if Bottom Ltd was a trading company?

Question 25 (Overseas Aspects)

Gong Ltd is a UK resident company with an overseas branch. The results of Gong Ltd for the year ended 31
March 2019 are as follows:
Total UK Branch
£ £ £
Trading profits 400,000 270,000 130,000
Overseas corporation tax of £26,000 was paid in respect of the overseas branch’s trading profit.
The corporation tax liability of Gong Ltd for the year ended 31 March 2019 will be?

Question 27 (Overseas Aspects)

Zing Ltd is a UK resident company with two overseas branches. The results of Zing Ltd for the year ended 31
March 2019 are as follows:
Total UK First Second
branch branch
£ £ £ £
Trading profits 180,000 8,000 92,000 80,000
During the year ended 31 March 2019 Zing Ltd paid gift aid donations of £20,000.
Overseas corporation tax of £9,200 was paid in respect of the first overseas branch’s trading profit, and overseas
corporation tax of £24,000 was paid in respect of the profits of the second branch.
The corporation tax liability of Zing Ltd for the year ended 31 March 2019 will be?

Question 28 (Election to exempt PE)

Brown Ltd is a UK resident company with two overseas PEs. It prepares accounts to 31 March each year. In the
year to 31 March 2019, Brown Ltd made a UK trading profit of £210,000, the first overseas PE made a trading
profit of £40,000 (overseas tax payable £6,000), and the second overseas PE made a trading loss of £25,000.
Compute the UK corporation tax payable for the year to 31 March 2019 by Brown Ltd if:
(i) no election has been made to exempt the profits and losses of the overseas PEs; or
(ii) an election was made prior to 1 April 2018 to exempt the profits and losses of the overseas PEs.

Question 29 (CFCs)
Bohemia Limited is resident for tax purposes in Atlantis. It is owned as follows:

Bohemia Ltd has chargeable taxable profits of £875,000 in the year to 31 March 2019. The tax rate in the
Atlantis on these profits is 13.5%. The UK tax rate would have been 19%.
Is Bohemia Limited a controlled foreign company?
In the question, how much profits would Ace Ltd be taxed on if Bohemia Ltd is a CFC?

Question 30 (Calculation of CFC Tax)

R Inc is a controlled foreign company owned 75% by J Ltd and 25% by Mr J. Its results for the year ended 31
March 2019 were:
Tax adjusted trading profits
– under UK legislation £650,000
– under overseas legislation (overseas tax rate 8%) £500,000
Show how the profits of R Inc will be apportioned to and taxed on J Ltd. J Ltd has other profits of £2 million.
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Personal Service Company- IR 35
The IR35 provisions apply where:
(a) an individual ('the worker') performs, or has an obligation to perform, services for 'a client', and
(b) the performance of those services is referable to arrangements involving a third party (eg the personal
service company), rather than referable to a contract between the client and the worker, and
(c) if the services were to be performed by the worker under a contract between himself and the client,
they would be regarded as employed by the client.
In relation to the last condition, the usual tests of whether an individual is employed or self-employed are
used.

Question 31
Brenda is the sole employee of Brenda Ltd. She also holds 99% of Brenda Ltd’s shares. Brenda Ltd hires out
Brenda on short term engagements. Brenda works from home and the assignments are classed as relevant
engagements for the purpose of the IR35 provisions.
In 2018/19 the total received by Brenda Ltd is £40,000. Brenda draws a salary of £8,000 pa. Tax and NIC are
paid as required. Brenda Ltd pays £4,000 into Brenda’s personal pension plan. It also pays £1,500 for Brenda to
travel from home to work. Brenda received a dividend of £15,000 from Brenda Ltd during the year.
Required
Calculate the deemed payment for 2018/19.

Question 32
Steve is a computer consultant trading through a personal service company, XYZ Ltd, in which he owns 99% of
the shares. During 2018/19 he is engaged by ABC Ltd under a contract between XYZ Ltd and ABC Ltd to the
value of £60,000.
During 2018/19 Steve draws a salary of £25,000 from XYZ Ltd which is taxed via PAYE and employer’s national
insurance of £2,417 is due.
If XYZ Ltd did not exist Steve would be treated as an employee of ABC Ltd.
Requirement
Calculate Steve’s deemed employment income payment and the income tax and the employee national
insurance contributions due thereon for 2018/19.

Exam Question December 2013 (Extract)

Horner:
– Horner owns all of the shares of Otmar Ltd.
– All of the income of Otmar Ltd is subject to the personal service company (IR 35) rules.
– Budgeted figures for Otmar Ltd for the year ending 5 April 2019 are set out below. Where applicable, these
amounts are stated exclusive of value added tax (VAT).
£
Income in respect of relevant engagements carried out by Horner 85,000
Costs of administering the company 3,900
Horner’s annual salary 50,000
Dividend paid to Horner 15,000
Contributions paid into an occupational pension scheme in respect of Horner 2,000

Required:
(i) Outline the circumstances in which the personal service company (IR 35) rules apply. (3 marks)
(ii) Calculate the deemed employment income of Horner for the year ending 5 April 2019. (4 marks)
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Sale of Trade & Assets vs Sale of Shares

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Impact of Different Level of Investments

* Note: It depends on ownership of remaining shares. For a consortium at least 75% of the shares in the
consortium company must be owned by companies, each of whom has at least a 5% stake.

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Overseas Branch Vs Overseas Subsidiary

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Salary Vs Dividend

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Operating as an unincorporated business vs as a company

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Comparison between the use of equity or debt

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Consequences of employed vs self-employed

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Scope of capital gains tax

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