Revision College – Day 1:

Question 16 – Maple Ltd

>TTP Calculation (don’t calc tax liability)

Note ref Maple Ltd Ash Ltd

£ £
Profit per FSs 8,533,326 4,147,520
Add back:
Depreciation 1 250,000 350,000
Loss on sale of sub 2 700,000
Jeep lease 3 1,050
Loan waiver 4 150,000
Fine for breach of h+s 6,750
Web dev W2 10,200
Less:
Loan waiver 4 (150,000)
Interest received (263,000) (38,008)
Adjusted profit 8,687,276 5,012,562
Capital allowances W2/ W1 (2,822,523) (2,051,741)
Trading profit 5,864,753 2,960,821
NTLR 263,000 38,008
TTP 6,127,753 2,996,829
Notes:

1) Depreciation is not an allowable deduction, instead capital allowances are given.

2) When the property is transferred from Oak to Ash it remains within the group so transferred
at NGNL. Depr transaction: 6,000,000 – 2,582,500 = 3,417,500 however cannot turn a loss of
700,000 into a gain, so restricted to 0. This will be chargeable as SSE will not apply to the sale
of Oak as it has not been owned for more than 12months over the last 6 years, no DGC as
asset remains in group.
3) 15% of the amount spent on the lease of the jeep is disallowed
4) As the loan between Ash and Maple is between connected parties, any write-off should not
be taxable.
5) The change in ownership of Maple will likely be considered a major change in the nature and
conduct of the trade, so likely HMRC will not allow use b/f losses

W1) CAs – Ash:

MP SRP Allowance
TWDV b/f 11,349,228
Additions
Bentley 85,000
Honda 21,000
Sub-total 11,370,228 85,000
WDA @ 18% / 6% (2,046,641) (5,100) 2,051,741
TWDV c/f 9,323,587 7,900

No AIA is given to Ash, as all additions in the year were cars, so all AIA can be allocated to other
group companies
W2) CAs – Maple:

MP Allowance
TWDV b/f 15,235,125
Additions:
Other P+M 70,000
AIA (70,000) 70,000
Website development 10,200
AIA (10,200) 10,200
Sub-total 15,235,125
WDA @ 18% (2,742,323) 2,742,323
TWDV c/f 12,492,802
Total 2,822,523

The equipment and crockery will not be eligible for Capital allowances, as they have been used solely
for client entertainment which is disallowable. So only the remaining p+m will qualify, and AIA will
also be available for these.

Question 13 – Repton Ltd

>SDLT – It is assumed on the original transfer between Ashbourne and Barrow a claim for SDLT
group relief was made, as in a 75% group. However this would be withdrawn if the transferee group
(barrow) leaves the group within 3yrs of transfer.

SDLT is calc on the MV in Feb 2019: (0%*150k)+(2%*100k)+(5%*325k)=£18,250

The transfer of the freehold commercial property between Ashbourne and Barrow will take place at
NGNL as both of these companies are in a gains group. Thus the deemed proceeds are cost+ IA
(£132,010):

£
Deemed proceeds (B) 132,010
Cost (25,000)
Extension (35,000)
IA (278.1- (72,010)
92.8/92.8)=1.997*25k +
(278.1-
170.5/170.5)=0.631*35k
Gain/loss 0

The sale of fixed p+m by Repton will give a chargeable gain of:

£
proceeds 100,000
cost (25,000)
IA (278.1-192.2/192.2)= (11,175)
0.447*25,000
Gain 63,825
This gain can partly be rolled over using holdover relief where the base cost of the newly acquired
p+m will be reduced by the gain, less any proceeds not spent on the new p+m (25k), which will be
immediately chargeable. This is possible as it was bought within 3 years of the sale of the old p+m.
This would mean that the gain would however crystalise at the earliest of:

-10 years

-the sale of the p+m

-the p+m is no longer used for trade purposes

Or another option which may be more beneficial is for Repton to rollover the gain using rollover
relief when the new trading property is purchased. They can provisionally claim for ROR (to be done
within 4 years) as the plan is to purchase this building in early 2022 (within 3yrs of the sale of the
p+m). This will then reduce the base cost of the property by the gain of 63,825, assuming more than
100,000 will be spent of the property.

For SSE to apply on the sale of Barrow the following conditions must be met:

-There must have been 10% ownership of Barrow held for at least 12m over the last 6 years

-Barrow is a trading company over that 12m period.

To figure out if Barrow is a trading company or not, we have to find out if there is substantial non-
trading activity, if more that 20% of the companies activity related to non-trade then it is not
considered a trading company. As 1/3 of the directors time is spent on managing investment
properties and ¼ of the turnover is derived from investments, Barrow will not be treated as a trading
company for SSE purposes.

As SSE does not apply, there will be a DGC as Barrow will be leaving the group within 6years of an
intra-group transfer with the asset:

DGC = Market value at date of transfer – deemed proceeds

=575,000 – 132,010 = £442,990

This will be added to the offer of £25m in the capital gains comp once Barrow is sold.

However where a degrouping charge arises for a company leaving a group, a claim can be made for
the degrouping charge to be reduced. This claim can be made in cases where it would be
unreasonable for such a charge to apply on the basis that some or all of the degrouping charge has
been reflected in the proceeds from disposal of the shares, i.e. the value of the company increased
as a result of the no gain/no loss transfer.

This is the case here as adding the DGC would result in double taxation, thus claim can be made to
reduce the DGC to nil (as 575k-100k > DGC).

Calc:

£
Proceeds 25,000,000
DGC 0
cost (4,000,000)
IA – (pre-Apr 1985) (156,000)+(8,038,383)
Gain 12,805,617
 CT @19% 2,433,067
SDLT group relief withdrawal 18,250
Total tax due 2,451,317

Question 51 – Alpha Limited

2020 Alpha £m Beta £m Gamma £m Delta £m

TTP 7.2 0.3 1.2 0.6
Current year loss (0.3) (0.9)
relief
Adjusted TTP 7.2 0 0.3 0.6
Group relief from (7.2) 0 (0.3) (0.6)
Beta
Final TTP 0 0 0 0

2021
TTP 8.0 1.5 1.3 0.5
Current year loss (0.1)
relief
Adjusted TTP 8.0 1.5 1.2 0.5
b/f loss relief (1.5)
b/f group loss (5.75) (0.6) (0.25)
relief (3.5 + (8-
3.5/2))
Final TTP 2.25 0 0.6 0.25

Loss memorandum - Beta:

2020 £m
Trading loss 21.5
CY relief (0.3)
Group relief (7.2+0.3+0.6) (8.1)
Loss c/f 13.1

2021
b/f loss 13.1
b/f relief (1.5)
b/f group relief (6.6)
(5.75+0.6+0.25)
Loss c/f 5

Loss memorandum - Gamma

2020 £m
NTLR debit 0.9
CY relief (0.9)
Loss c/f 0

2021
 NTLR debit 0.1
CY relief (0.1)
Loss c/f 0

£5m deductions allowance split for 2021:

Beta - £1.5m

Alpha - £3.5m

To be stated in allowance nomination made by each group member. (Shows agreed amongst them)

We give the rest of the deductions allowance to Alpha as for QIPS the 10m limit/4 cos = 2.5m, this is
the only company with augmented profits over the 2.5m limit.

>Overseas topics more likely to come up in Nov sitting

>Discovery assessments likely to come up

Question 59 – ANCL Utilities Ltd

ANCL Financing Ltd and ANCL Electrics Ltd would both be considered CFCs of ANCL Utilities Ltd, as
they are resident outside the UK and controlled by persons resident in the UK.

As ANCL Electrics Ltd pays CIT on its profits at a rate of 20%, no tax will be due in the UK as the
company is exempt under the tax exemption, as >75% of corresponding UK tax will be due in Ireland.

The interest income on the loan from ANCL Finance to ANCL Water has incorrectly been subject to a
reduced CFC apportionment through the application of the Finance company partial exemption. The
exemption may only apply in relation to a loan where the debtor is not within the charge to UK tax.

Furthermore, it is not permitted to offset tax losses of ANCL Utilities against any CFC profits
apportioned to it.

CT has therefore been underpaid by it in the past 4 years (4y*400m*5%*19%), disclose this asap to
minimise penalties.

The group must prepare transfer pricing documentation in support of the pricing of its inter-group
transactions. The policy must outline a methodology for determining an arm’s length price rate of
interest and the amount lent.

This requires periodic benchmarking against similar debt for the utilities sector and loans by the
private equity house.

Where a company is deemed to have excess debt above what it can borrow externally from an
unrelated party it will be considered thinly capsized. Where this is the case, a proportion of any
interest expense will be disallowed to the extent it relates to ‘excess debt’. Interest will also be
disallowed to the extent the interest rate is deemed excessive.
ANCL Water may have migrated its tax residence from the UK to the Netherlands from 1 Jan 2020 in
view of Mr and Mrs de Groot emigrating to the Netherlands.

At this point the company was incorporated in the UK so would be considered tax resident here,
however the company is also deemed tax resident in Netherlands if managed and controlled there,
so may be a dual resident company.

Thus the UK/Netherlands DTT should be consulted. ANCL Water’s residence will be decided by a
MAP conducted by the tax authorities of both countries.

If the company ceased to be UK tax resident, it is deemed to dispose of and immediately reacquire
all its assets and IFAs at MV for CT purposes.

Consequently a chargeable gain of £5 (£10m - £5m) arises. The tax exposure to the company is
£950k (19%*5m).

As the potential migration is to a territory in EEA, the company may apply to pay the tax in 6 equal
instalments, starting 1 Oct 2021.

Companies are required to give post-transaction notification of certain transactions, including: Issues
of shares or debentures by foreign subsidiaries where the value exceeds £100 million, which is the
case for ANCL Utilities Ltd who subscribed for £400m of ordinary shares. This report will due within
6m of the event.

The report should state the name of the sub issuing the shares, details of the relevant transaction
and explain the UK tax consequences. Failure to report a transaction will give rise to a penalty of
£300 plus £60 per day of default.

Question 15 – Expando Inc.

Options for setting up in the UK There are three options: a) establish a representative office; b)
establish a UK permanent establishment; or c) set up a separate UK subsidiary company.

Representative Office

A representative office is not subject to UK tax on its activities. The term ‘representative office’ is
used to describe an office that advertises and promotes the business of an overseas company or its
head office. To maintain its status as a representative office, the people who staff the office should
not negotiate or conclude contracts directly with local customers and third parties.

UK Permanent Establishment

A company will have a permanent establishment if it has a fixed place of business in the UK through
which the business of the company is wholly or partly carried on. A non-UK resident company will be
subject to UK Corporation Tax on the profits and gains attributable to a trade carried on through the
UK permanent establishment.

UK Subsidiary Company

A UK tax resident company is subject to UK Corporation Tax on its worldwide profits and gains
(subject to double tax relief if it is carrying on activities outside the UK).
Both a PE carrying on a trade in the UK and a sub become liable to CT by acquiring a source of
income. They then have the duty to notify HMRC within 3m of becoming so liable.

PEs and companies pay CT on their taxable profits for an accounting period. A CT return must be
filed electronically within 12m of the end of the accounting period.

CT is generally payable 9m and 1day after the end of the accounting period, unless a PE or company
has taxable total profits more than 1.5m (QIP threshold). Where a company has augmented profits
between this amount and 20m it must pay tax in quarterly instalments.

Where a company has augmented profits over £20m it is required to pay its tax quarterly during the
accounting period itself.

The rate of CT is 19% for both PEs and companies.

>Calculating the profits of a PE

Chargeable gains:

UK companies pay CT on any chargeable gains made on the disposal of chargeable assets.

UK PEs pay CT on any gains made on the disposal of chargeable assets situated in the UK and used
for the PE.

>Trading losses

>Transfer pricing (financing loan used to create PE or company)

>Taxation of dividends

>Conclusion (consider DTR, Loss relief, admin)

The disposal of a PE would constitute the sale of all the assets of that PE, which would give rise to UK
CT @19%.

If the shares of a UK company are sold by an overseas company, there would be no UK CT

implications, although there maybe US tax implications.

Revision College – Day 2:

Question 31 – Shark Ltd

CT Liability calculation:

Notes Shark Ltd

EUR
Profit per accounts 11,890,000
Add back:
Depreciation 1 28,500,000
Impairment of amounts owed 3 962,000
by Tuna
Machinery repairs 6 150,000
Less:
Profit on disposal of property 2 (4,800,000)
Bonus accrual 4 (3,200,000)
 Capital allowance W2 (4,748,400)
Trading profits (EUR) 28,753,600
Trading profits (£) /1.3 22,118,153
Chargeable gains W1 210,743
TTP 22,238,896
CT liability @19% 4,242,490
Notes:

1) Depreciation is not an allowable expense, instead capital allowances are given.

2) This disposal is of the building will result in a chargeable gain/loss, so will be added in to the
computation as a capital gain/loss.
3) The impairment of 1% of all third party receivables is allowable, however the impairment of
amounts owed by Tuna is not allowable as it in reference to a connected party.
4) As no deduction for the bonus accrual was taken in previous years, this will be allowable as
deduction in this year.
5) As it was an employee that stole the stock from the warehouse, this will be an allowable
deduction.
6) This is added back as CAs are given here instead.

Workings:

W1) CG comp:

£
Proceeds (13,565,000/1.21) 11,210,743
Less:
Cost (8,320,000)
Enhancement expenditure (1,200,000)
Unindexed gain 1,690,743
IA (432,640)
(275.8-262.1)/262.1=0.052*8.
32m
IA (62,400)
(275.8-265.5)/265.5=0.052*1.
2m
Chargeable gain 1,126,823

As the company will be spending £11m on a replacement building within 3 years of selling the old
building, ROR is available. This will allow the company to reduce the CG chargeable for this year by
the amount that will be spent on the replacement building. So 11,210,743-11,000,000= £210,743
will be immediately chargeable, and the remaining capital gain will reduce the base cost of the new
building.

W2) Capital allowances:

Main pool SRP Allowance

TWDV b/f 13,134,000 437,333
Additions:
Welding machinery 105,000
Other machinery 6,300,000
Second-hand 210,000
 machinery
Compressed gas 379,000
system
Air conditioning 588,000
(840k*70%)
Electric shutters (on -
list A) – potential SBA
Fire alarm and 96,000
sprinklers
Disposal (530,000)
AIA (712,000) (588,000) 1,300,000
19,012,000 437,333
WDA @18%/6% (3,422,160) (26,240) 3,448,400
TWDV c/f 15,589,840 411,093
4,748,400

Note: AIA allowance for the year will be 1m*1.3 = EUR 1.3m. AIA should be given in preference to
the SRP.

As Manatee is a connected company to Shark, there will be no AIA available for the welding
machine. It should be bought into the accounts at the lower of: MV and Capex

As 30% of the payment for the air conditioning system is due 4 months after installation, the amount
is treated as incurred when it is required to be paid. It is also considered an integral feature for CAs,
so proceeds are added to the SRP.

Question 49 – Dancon group plc

1)

Lemmys Holdings is a hybrid entity, as it is recognised as a taxable entity in its own right in the UK,
but in the US it is regarded as a branch of Symmel US Holdings.

From 1 Jan 17, the UK tax leg on hybrids has been effected to counter the tax advantage that can
arise using such a group structure.

Without the hybrid mismatch rules, the tax position would be as follows:

Symmel plc would be taxable on the interest receipt from Symmel US Holdings. Lemmys Holdings
would be able to claim a deduction for interest payments to Symmel US Holdings. These are
corresponding cr and dr, so no UK tax effect.

However, in the US, Symmel US Holdings would have a tax-deductible interest expense of $20m on
the loan from Symmel plc. But no interest income would arise from the interest flow between
Symmel US Holdings and Lemmys Holdings as they are regarded as one entity. So there would be an
overall net tax deduction of $20m within the group

Conditions for UK hybrid mismatch rules to apply:

• The payments are made under, or in connection with, an arrangement (there does not need to be
a tax avoidance motive)
• The payer is a hybrid entity.

• The hybrid payer or a payee is within the charge to corporation tax for a relevant

payment period.

• It is reasonable to suppose that there would be a hybrid payer deduction/non-inclusion mismatch

in relation to this payment.

• The payer and payee are in the same control group.

All of these conditions appear to have been met, so legislation is likely to apply.

Likely adjustment to be made under this legislation is a restriction to the interest claimed by the
hybrid payer i.e. Lemmys Holdings.

The UK company is responsible for making the necessary adjustments in its tax return.

2)

>CFC exemptions listed

The one to consider for Lemmys Holdings would be the excluded territories exemption.

The US is one of the 6 countries to which the simplified ETE applies. Under this provided all the
income of the company is taxed in the US and the company does not have a PE outside the US, then
the exemption applies.

>Conclusion

Question 27 – Underground group

The transfer of the freehold property between Jubilee and District would have taken place at NGNL,
as both of these companies are part of a gains group (common ownership). So deemed proceeds
would be cost + IA = £80,000.

The transfer of the registered trademark which is an IFA between Jubilee and Metropolitan will be
tax-neutral as once again both of these companies are in a gains group (common ownership). This
means that the transfer value should be considered as:

£50,000 – 1year*50,000/20years = £47,500

As Jubilee is considering purchasing further trademarks in the future there is potential for IFA ROR,
however we would need more detail to see if this will be available.

The sale of District and Metropolitan would result in a chargeable gain for Circle.

When Circle sells its entire interest in District it meets all of the condition for SSE:

-It has had ownership of more than 10% of District for the 12m within the past 6 years.

-District has been a trading company for those 12m.

This means that the degrouping charge (MV-deemed proceeds = 150k-80k = £70k) that would have
arisen from District leaving the group within 6yrs of an intra-group transfer does not arise.
However unlike District, Metropolitan does not qualify for SSE as it is not a trading company. Thus
there will be a chargeable gain arising here.

In addition there will be a DGC as Metropolitan is leaving the gains group within 6 years of an intra-
group transfer of a trademark:

£
MV 60,000
TWDV at transfer (47,500)
DGC 12,500
Extra amortisation deduction (1,974)
(2500 – (2500* 60k/47,500)*
3yrs
10,526

This DGC will be added to the 500k proceeds received in the CG comp. Or this DGC could be
allocated to another member of the group through a joint-election and then ROR available (only the
case for IFAs)

The capital losses bought forward within WCL would be considered pre-entry capital losses (PECLs).
These are allowed to be transferred to Northern (if 4 conditions are met) as it no carries on WCL’s
trade and they are both connected (common ownership).

CG when Northern sells building:

£
Proceeds 240,000
Cost (80,000)
Gain 160,000

Northern will be able to reduce this gain by £100,000 using the b/f losses from WCL. This will reduce
the CG to £60,000. Northern must claim £100,000 of the group’s £5m deductions allowance for this.

As Victoria transferred it’s T+A to Central succession rules (state these) will apply, as they are both
under common control, so no change in ownership.

This means Central may use b/f trading losses and the balance of the CA main pool of Victoria.

The trading losses that may be succeeded are however restricted to the extent that Victoria retains
more ‘relevant liabilities’ than ‘relevant assets’. (Working in answers)

Question 1 – Garment plc

As Makeit Pvt and Garment plc which is based in the UK and is large are connected parties (one is
wholly a sub of the other), transfer pricing rules will apply to any intra-company transactions.

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.

To set an appropriate arm’s length price of the finished clothing the CUP method is advisable
(description in answer). Not possible for India, so then would use cost plus method.
RPM should be used to get an appropriate price for distribution services.

Transfer pricing adjustments also apply to internal management services (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) and interest charges (for intra-group loans).

Where a UK company has benefited from prices that are not at arm’s length then HMRC may make
an adjustment to either increase taxable profits or reduce available losses. 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.

Detailed records of transfer pricing agreements and studies should be kept for 6years.A penalty of
up to £3,000 can be levied if the company fails to keep and preserve records.

>APA

Question 33 – White group Inc

The incorporation of White holdco Ltd will have no UK CT consequences. The company once it starts
trading will be liable to UK CT, and will be required to inform HMRC of this within 3months.

There should be no UK CG consequences in regard to the sale of the 3 UK sub-groups, as both sellers
are not UK tax resident. To check if any US tax implications.

After the acquisition of the UK sub-groups, Holdco will be in a loss group and gains group with the
other companies.

Any dividends receivable by Holdco from its UK subs should be exempt under the dividend
exemption for distributions from controlled companies. Similarly any dividends payable by Holdco to
its US parent will be non-deductible.

To the extent that interest on the loan is tax deductible it will be treated as being a NTLRD for tax
purposes (May be surrendered as group relief).

As White Holdco and White group are connected parties, the intra-group loan will be subject to
transfer pricing rules.

In considering whether a transfer pricing adjustment is necessary, HMRC will consider:

• whether the loan would have been made,

• the amount for which the loan would have been made, and

• the rate of interest or other terms that would have been agreed, in the absence of the
special relationship between the parties.

A company is thinly capitalised when its level of debt far exceeds its equity, this could be the case for
White Holdco.

Where a company is thinly capitalised, a proportion of any interest expense will be disallowed to the
extent it relates to ‘excess debt’. Interest will also be disallowed to the extent the interest rate is
deemed excessive.
>CIR (There are rules within the UK that restrict the amount of financing costs…)

>WHT

Since the loan is USD denominated, the periodic translation of the loan potentially gives rise to
taxable exchange gains and losses.

A UK resident investment company can elect – subject to conditions – for its profits or losses to be
computed in accordance with GAAP in a ‘designated currency’. This would avoid the retranslation
having a tax effect.

Question 45 – New Power plc

Main pool SRP RDA @100% Allowance

TWDV b/f 20,000,000 10,000,000
Additions:
Paint spray booth 1,000,000
Water systems + 4,000,000 1,000,000 1,000,0000
lift 80%/20%
AIA (1,000,000) 1,000,000
Equipment for 500,000 500,000
R+D
Building RDA 4,000,000 4,000,000
(25m – 5m)*20%
Floor 200,000
21,200,000 13,000,000
WDA @18%/6% (3,816,000) (780,000) 4,596,000
TWDV c/f 17,384,000 12,220,000
11,096,000

AIA should be given to the SRP in preference to the MP, as lower rate of WDA.

As half of the paint spray booth will be paid for after more than 4 months after the initial obligation
to pay arises only £1m will be accounted for in the year, the other 1m will be added to the CAs comp
next year.

100% FYA are available for capex on items used for the purposes of carrying out r+d.

Factory will get SBA for £25m (value of the building only). SBA is calculated from later of:

-the date that the structure comes into non-residential use

-the day on which the qualifying expenditure is incurred

So in this case SBA = 25m*2/12*3% = 125,000

(no new construction work being undertaken)

The finance lease agreement will be considered a long funding lease (state all conditions) as the PV
of the min lease payments > 80% of the cost (500k > 440k) and it is for >7yrs. So the lessee is able to
claim CAs based on the PV of the min lease payments.
Revision College – Day 3:

Question 55 – Amarinette Ltd

1)

TTP calculation:

Note ref £
Profit per accounts 7,248,000
Add back:
Depreciation 1 3,500,000
Gifts to customers 2 45,000
Donation 5 25,000
Loss on disposal 6 200,000
Interest payable 7 400,000
Less:
Pension 4 (750,000)
Adjusted profit 10,668,000
Capital allowances W1 (5,346,554)
Trading profit 5,321,446
NTLR deficit 7 (400,000)
NTLR deficit b/f (400,000)
Group relief: part 2)
2020 NTLR (400,000)
2021 Trading (500,000)
2021 NTLR (400,000)
QCD (25,000)
TTP 3,196,446

Notes:

1) Depreciation is not an allowable deduction, instead CAs are given.

2) Gifts to customers that is alcohol is not allowable.
3) The loan write-off is an allowable expense, as it related to a loan given to an employee.
4) Pension spreading rules apply to the pensions contribution expense in the accounts, as this
year to contribution of £5m made is > 210% of last year’s contribution of £2m. As the excess
over 110% is greater than 2m, the allowable deduction for the excess will be spread over 4
years, so 750k will be allowable in this year.
5) The donation should not be deducted as an admin expense, instead it will be a qualifying
charitable donation.
6) Disposals of plant should be accounted for in the CAs calculation.
7) As the loan to purchase shares is not related to trade, this should be accounted for as an
NTLR deficit, the loan to buy vans however is an allowable expense.
8) Assume deductions allowance of £5m has all been allocated to Amarinette.
W1) Capital allowances calculation:

MP SRP Allowance
TWDV b/f 15,087,330 1,822,248
Additions:
Fixtures 4,000,000
Machinery 1,000,000
Alterations to building 250,000
Lifts 750,000
New vans 1,250,000
New cars 500,000
FYA @100% (500,000) 500,000
New car 75,000
AIA @ 100% (250,000) (750,000) 1,000,000
Disposal (600,000)
20,737,330 1,897,248
WDA@18%/6% (3,732,719) (113,835) (3,846,554)
TWDV c/f
5,346,554

The price of fixtures will be restricted to £4m, as this is the lower of the original cost and TWDV of
the items.

Alterations to the building will be included in the CAs comp, as they were required for the plant to
be fitted.

Lifts are an integral feature, so will be added to the SRP.

The AIA of £1m will be given to the SRP in preference to the MP. AIA is not available for cars. AIA is
split among the group, but as Cranwellion did not purchase any P+M in the year, all the AIA is
available for Amarinette.

SBA will not be available as the building was constructed in 2010.

2)

The trading profits of £800k for the y/e 31 Mar 20 it is assumed would have been relieved by the
losses carried forward from earlier periods.

Group relief to Amarinette using losses from Cranwellion cannot be given until the company joins
the group. These losses will be ring-fenced for 5 years.

Summary of trade losses and NTLR position:

Trade losses NTLR deficit

£ £
y/e Mar 18 1,000,000 500,000
Claimed y/e Mar 20 (800,000)
y/e Mar 19 1,200,000 500,000
y/e Mar 20 400,000
B/f as at 1 Apr 20 1,400,000 1,400,000
y/e Mar 21 500,000 400,000
Surrendered y/e Mar 21 (500,000) (800,000)
 C/f Mar 21 1,400,000 1,000,000

Question 10 – Home Ltd

1)+2)

As Home Ltd is not a trading company, a liquidation demerger is often the most appropriate choice
of demerger to use. This is because the trading requirement for statutory demergers is likely to not
be met and as Alpha is anticipating a future flotation one of the other conditions may not be met if
one of the main reasons for the transaction is to enable a third party to control the company.

Key steps:

-Preliminary partition of Home’s shares (The OSC should be re-organised into 2 classes – Amy will
have A shares giving her the rights over Alpha Ltd and Debbie will have D shares giving her rights
over Delta Ltd)

>This is a reorganisation of share capital for tax purposes. There should be no adverse tax
implications on the shareholders, as their original shares and newly designated shared are treated as
the same asset.

-Incorporation of Amy Ltd and Debbie Ltd

>Tax neutral step

-Liquidation of Home (Place Home into Members’ voluntary liquidation, the liquidator distributes the
shares in Alpha to Amy Ltd, in satisfaction of Amy’s rights as a class A shareholder. In return Amy Ltd
issues new shares to Amy. The liquidator likewise distributes the shares in Delta Ltd to Debbie Ltd,
which issues new shares to Debbie in return. Home Ltd is then dissolved.)

>read answer (+4 conditions for scheme of reconstruction)

3)

Costs of liquidator should be taken into account when budgeting for the demerger.

A number of HMRC clearances are recommended, in particular, a transaction in securities clearance

should be sought, as should a clearance regarding the main purpose test.

Question 24 – Blue Buildings Ltd

The sale of Pink Properties Ltd will not qualify for SSE as the conditions required to be met are:

-At least 10% stake in the company should have been held for 12m in the past 6years

-The company being sold is a trading company

The latter of these is not met as Pink holds residential investment property, so it is assumed a
substantial amount of the activity in the company is non-trade related.

The transfer of the supermarket building would have taken place at NGNL, as both Pink and Purple
where in a 75% gains group (under common control), so the base cost would have been original cost
+ IA. When Pink leaves the group there will be no DGC as the supermarket still remains in the group
with Purple, even though pink was sold within 6yrs of the transfer.

Although there is a chance that the transaction would be considered as value shifting by HMRC as
the asset was transferred for £5m even though the MV was £15, therefore this could be seen as
materially reducing the value of the shares.

The main ‘filter’ is whether the main purpose, or one of the main purposes, of the arrangements is
to obtain a tax advantage, so commercial arrangements should be out of scope, which seems to be
the case here as Boutique buildings specifically did not require the building.

A taxable CG will arise on 31 Mar 2021, but as some of the consideration is in shares, a part disposal
will take place.

>Share for share will apply as >25% will be transferred (can apply for clearance to confirm this).

>’Earn out’ as not possible to calculate exactly how much further consideration will be received
(deferred and unascertainable consideration).

CG calc:

£
Proceeds (150m+60m) 210,000,000
Less: cost (35,000,000)
100m*(150+60/150+60+390)
IA (278.1-263.1)/263.1*35m (don’t round!) (1,995,439)
Gain 173,004,561

>Tax will be due in QIPS on 14 March 21, 14 June 21, 14 Sept 21, 14 Dec 21.

Question 57 – The Greason group

Grant of lease

The income element of the grant of the lease to Walburn:

£2.5m * 50 – (20-1) / 50 = £1.55m

Chargeable gain calc:

£
Proceeds (2.5m-1.55m) 950,000
Less:
Cost (1.75m * (511,538)
950k/2.5m+750k)
IA (93,100)
(278.1-235.2)/235.2=0.182*51
1,538
gain 345,362

Gain can be transferred to Greason if a joint election is made within 2yrs, as both companies are in a
75% gains group, so that bought forward losses can be utilised.
Disposal of shareholding in Sylviarm

>Read answer

Question 19 – Ramcourt plc

When the building is sold there will be a chargeable gain arising in Courtfoods Ltd:

£
Proceeds 6,070,000
(4m+500k+1.5m+70k)
Less:
Planning consultant fees (12,000)
Cost + incidental costs of (1,810,000)
purchase
(1.75m+7,500+52,500)
IA (1,095,050)
(278.1-173.3)/173.3=0.605*1.
81m
gain 3,152,950

Payment method 4 is contingent unascertainable consideration, which means it is chose in action, so

unlike for options 2 and 3 where if these are not received we can go back and amend the original CG
comp. Any change is the amount received will result in another disposal.

The TWDV of the p+m will now be £100k (900k-800k), therefore after the disposal, there will be a
balancing allowance of £25k remaining.

All the companies listed here form a gains group as they are all 75% companies. Thus it is possible to
utilise bought forward capital losses against the gain arising from the sale of the building. This will
however be restricted by the £5m deductions allowance.

>PECLs are also restricted

>ROR available + calc

Revision College – Day 4:

>Marion Hodgkiss – 07747098753

>John.Cunningham@kaplan.co.uk

Question 26 – Circle plc

Adjustment of profit for Circle plc:

£
Profit per accounts (2,687,917)
Add back:
Depreciation 517,500
Legal fees - capex 6,000
 Interest payable 54,000
Less:
Profit on disposal (135,000)
Interest receivable (200,000)
Capital allowances W1 (305,280)
Trading profit (2,741,697)

Workings:

W1)

MP SRP Allowance
TWDV b/f 350,000 220,000
Additions:
Heating system - IF 200,000
AIA (200,000) 200,000
Cars 106,000
Bentley 166,667
456,000 386,667
WDA @18%/6% (82,080) (23,200) 105,280
TWDV c/f 373,920 363,467
305,280

As none of the other companies have any balances b/f in their capital allowance pool and did not
acquire any fixed assets in the year, all the AIA can be given to Circle.

W2) Gain on sale of short lease:

£
Proceeds (135k+200k-35k) 300,000
Less:
Cost (200k*%32yrs/%40yrs – (187,213)
restriction for wasting asset)
IA (0.115*187,213) (21,529)
Gain 91,258

TTP calc for group:

Circle plc District Ltd Jubilee Ltd Oveg Ltd

£ £ £ £
Trading profit/ (2,741,697) (1,168,000+10,000) (2,142,000+18,000) (621,080)
(loss) =1,178,000 =2,160,000
NTLR (200k- 146,000
54k)
Capital gain 91,258
Property (237,258)
income loss
 QCD (10,000)

>Look at errata sheet for correct loss use!

Oveg is a consortium company as circle only owns 70% shareholding

Question 20 – Pizza Ireland Ltd

As the company plans to expand to the UK through a newly incorporated UK tax resident subsidiary
company they will become liable to UK tax on their worldwide profits and gains.

As they will be opening a series of restaurants this will likely constitute a trade meaning trade profits
will be liable to CT tax at a rate of 19%, calculated in line with GAAR or IFRS.

It must notify HMRC of ‘coming within the charge’ to CT within 3 months of doing so. Failure to
notify could result in a penalty being charge.

A tax return will be due for the company electronically within 12months of the end of the first
accounting period.

CT is generally payable 9 months and 1 day after the end of the accounting period. Where a
company is large/ very large (augmented profits > £1.5m) tax is paid in QIPs.

>Exceptions to this

>Fines/ penalties for late filings/ payment

The ‘Pizza Ireland’ trademark will be considered as an IFA (Intangible fixed asset) in the UK, so would
fall under the IFA regime that applies to IFAs acquired or created on or after 1 Apr 2002.

The company will therefore obtain tax relief for both capital and revenue costs in respect of the
license. The cost of acquiring the license will typically be deductible in line with the accounting
amortisation of the cost over its UEL. However it is possible to elect to obtain relief on a straight-line
basis over 25 years. The annual royalty payments will be deductible in line with the accounts.

No WHT will need to be deducted from these payments given they are being made to an associated
company in a member state of the EU.

The investment by Pizza Ireland Ltd in shares will be a capital transaction. As a result any associated
costs incurred by UK Newco will be non-deductible for tax. The company will not be entitled to any
relief for any dividends paid on the shares (will however be free of UK WHT).

Rent would be an allowable expense on an accruals basis for CT purposes if the units are to be used
wholly and exclusively for trade purposes.

Depreciation is not an allowable expense in the CT calc, instead capital allowances are given.

Any kitchen equipment donated by Pizza Ireland limited will be considered a gift, thus should be
bought into the calculation at MV (CAs available but will not qualify for AIA).

The new purchases will get relief in the following ways:

1) New walls – These will get SBA @3%

2) Electrical wiring – IF so should be added to SRP to get WDA @6%
 3) Air conditioning – IF so should be added to SRP to get WDA @6%
4) Large refrigeration units – MP to get WDA @18%
5) Tables and chairs – MP to get WDA @18%
6) Artwork – MP to get WDA @18% (As this is creating an ambience for a restaurant business)

An AIA of £1m is given to a group in the UK, this should be allocated to the items being added to the
SRP in preference to the MP, so maximum deductions will be available.

Question 14 – Sunderland Ltd

1)

>Notify HMRC when become chargeable to CT again as was dormant, within 3 months

>Penalties apply if not done

There are 3 separate accounting periods for Sunderland:

-1 Mar 20 to 31 May 20 (receive a source of income)

-1 Jun 20 to 31 May 21 (starts trading)

-1 Jun 21 to 30 Jun 21

Returns for all above periods will be due electronically on 30 June 2022, after 1 year of end of
period.

2)

For first period:

Interest income 200k*5%*3/12 = £2,500

Tax payable 2,500@19% = £475

The augmented profits fall in the range £750 (1.5m/500*3/12) to £10k (20m/500*3/12), which
makes it a large company, however this is the first period in which the company is large and so tax
will be due in 9months and 1 day after the end of the accounting period.

For second and third periods:

Adjusted trading profit calc:

Note £
Profit per accounts 243,333
Add back:
Amortisation 1 20,000
Depreciation 2 50,000
Legal fees 3 10,000
Less:
Interest income (13,333-2,500) (10,833)
Adjusted trading profit 310,000

Notes:
 1) The amortisation is not an allowable expense as the goodwill was transferred to Sunderland
from Mersey, which is a connected company.
2) Depreciation is unallowable instead capital allowances are given.
3) Fees for company set up and trade transfer are capital in nature so are added back

W1) Capital allowances:

y/e 31 May 21 MP SRP Allowance

TWDV b/f 100,000 50,000
Addition: machinery 50,000
150,000 50,000
WDA @18%/ 6% (27,000) (3,000) 30,000
TWDV c/f 123,000 47,000
m/e 30 Jun 21
WDA @18%/6% *1/12 (1,845) (235) 2,080
TDWV c/f …

No AIA available for Sunderland as it has been allocated to other companies within the group.

TTP calc:

y/e 31 May 21 Month ended 30 Jun 21

Trading profit (12:1) 286,154 23,846
Capital allowance (30,000) (2,080)
NTLR 10,000 833
Taxable profit 266,154 22,599
CT @19% 50,569 4,294

Company is v.large in y/e 31 May 21 > QIPS due 14 Aug, 14 Nov 20, 14 Feb, 14 May 21.

Also v.large for 1month > due 14 Jun 21

Question 46 – Capital Electronics

1)

The sale of existing shares would give a chargeable gain of £14m – (12.5m*80%) = £4m

However this gain would be exempt if SSE applies to the sale, this would be the case if the below
conditions are met:

- A holding of at least 10% has been held for a period of 12m over the past 6 years
- The company being sold was a trading company during the 12m up to the date of the
disposal

So both of these conditions are met as Capital has owned all of the share capital of CEUK since 1 Feb
2013, and CEUK is a trading company.
The original transfer of the department store would have taken place at NGNL as both companies
are in the same gains group, thus base cost would have been = 13m. However, as CEUK will be
leaving the gains group within 6years of the transfer with the asset there will be a DGC arising. DGC
= MV at time of transfer – base cost = 9m – 13m = (4m)

>IA cannot create/increase a loss

So there is in fact a de-grouping loss that arises. However as SSE applies to the sale, the company will
not be able to utilise this loss.

So there will be no CT consequences on the 1).

2)

If CEUK were to issue new shares this would not be a disposal, thus there will be no CG arising.

However a DGC will still arise as CEUK is no longer part of the gains group. The de-grouping loss of
£4m will arise in CEUK at 1 Jan 22, so it will not be possible for Capital Electronics to benefit from the
loss.

However a joint election can be made by both CEUK and Electrosales to reallocate the loss to Capital
Electronics, to use against the gain of £10m expected to rise on the sale of its UK retail business.

Question 47 – Unicomms group

>Read answers

Question 4 – Berlin GmbH

The distribution of funds following the appointment of a liquidator for Berlin GmbH will be treated in
the UK as a capital disposal by London Ltd if its share in Berlin GmbH. This will give rise to a CG in
London Ltd, SSE will not be available as Berlin GmbH appears to be an investment company.

The repatriation of EUR 10m will be treated as a part disposal by London, CG should be calc in £, as it
is London’s functional currency:

£
Disposal proceeds (EUR 8,000,000
10m*0.8)
Base cost (EUR (800,000)
2m*0.6)*EUR10m*0.8/EUR
10m+5m*0.8
Gain 7,200,000

IA will also be available to further reduce the gain.

A further gain will arise when the remaining proceeds, with interest, are repatriated to London.
Based on current values there would be a gain of:
 £
Disposal proceeds (EUR 4,000,000
5m*0.8)
Base cost (EUR2m*0.6)-£800k (400,000)
Gain 3,600,000

Movements in exchange rates may increase or decrease the gain.

>Loan relationship created

London will be taxed on all profits arsing from the loan as well as any interest receivable.

UK transfer pricing rules need to be considered, as the loan is between connected parties and is
interest-free.

As the companies are connected, the loan relationship profits will be calculated under the amortised
cost basis of accounting and no relief will be available for any impairment losses should the debt
become impaired.

The loan is denominated in US dollars and is being made by a company with a sterling functional
currency, as a result the loan amount will have to be retranslated in the accounts of London at each
balance sheet date. Exchange gains and losses will therefore arise and will be taxed or relieved as
part of London’s profits or losses from the loan. These will be bought into the account under the
loan relationship rules as non-trading credits and debits.

>Compensating adjustment available in US? Look at DTT

>How NTLR deficit can be used

>Berlin is a CFC for UK tax purposes, do any exemptions apply?

>Loss relief for Germany in UK?