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Question 4b ii

The management of the Spetz Ltd group requires advice on the tax position of a company incorporated and trading overseas.

The Spetz Ltd group of companies:
– Spetz Ltd has a large number of subsidiaries, such that they all pay corporation tax at the main rate.
– Novak Ltd and Kraus Co are two of the 100% subsidiaries of Spetz Ltd.
– Novak Ltd has a VAT year end of 30 September.
– Spetz Ltd acquired Kraus Co on 1 October 2012.
– Meyer, an employee of Spetz Ltd, has been seconded to work for Kraus Co.

Kraus Co:
– Is incorporated in, and trades through, a permanent establishment in the country of Mersano.
– Has no taxable income or chargeable gains apart from trading profits.
– Has taxable trading profits for the year ended 30 September 2013 of £520,000, all of which arose in Mersano.
– Is not a controlled foreign company.
– Has not made an election to exempt its overseas trading profits from UK tax.

The tax system in the country of Mersano:
– It can be assumed that the tax system in the country of Mersano is the same as that in the UK.
– However, the rate of corporation tax is 21%.
– There is no double tax treaty between the UK and Mersano.

Required:
(b) (ii) Explain, with supporting calculations, the UK corporation tax liability of Kraus Co for the year ended
30 September 2013 on the assumption that it is resident in the UK, and discuss the advantages and
disadvantages of making an election to exempt its overseas profits from UK tax. (5 marks)