Question 2a
Your manager has sent you an email, with two attachments, concerning the Eet Ltd group. The attachments consist of extracts from the group’s files and a schedule of information from the group finance director. The email details the work your manager requires you to do. The three documents are set out below.
Attachment 1: Eet Ltd group – extracts from the group’s files
All seven companies are UK resident trading companies.
Fip Ltd was incorporated and began trading on 1 December 2018. There have been no other changes to the ownership of the group for many years.
Attachment 2: Schedule of information from the group finance director – dated 3 December 2018
Budgeted results for the year ending 31 March 2019 (as at 3 December 2018)
| Eet Ltd | Fip Ltd | Gos Ltd | Han Ltd | Ide Ltd | Jek Ltd | Kid Ltd | |
|---|---|---|---|---|---|---|---|
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Trading profit | 430 | 240 | 440 | 410 | 395 | 530 | 340 |
| Chargeable gain (notes 1 and 2) | 0 | 110 | 130 | 0 | 85 | 90 | 220 |
| Taxable total profits | 430 | 350 | 570 | 410 | 480 | 620 | 560 |
| Corporation tax paid to date | 19 | 0 | 31 | 23 | 18 | 32 | 24 |
Notes:
1. On 2 December 2018, Han Ltd sold the Po building. This sale resulted in a capital loss of £80,000. This loss is not reflected in the figures above.
2. Rollover relief will not be claimed in respect of any of the group companies’ chargeable gains.
Loj Co
Eet Ltd is planning to purchase 60% of the ordinary share capital of Loj Co in April 2019.
Loj Co has been a wholly-owned subsidiary of Typ Co since 1 January 2008. Both Loj Co and Typ Co are, and will continue to be, resident in the country of Shalia.
Jek Ltd – sale of the Mar building
Jek Ltd purchased the Mar building on 1 June 2012 for £450,000 plus value added tax (VAT) of £90,000. In the year ended 31 March 2013, and in all subsequent years, 72% of this building was used to make taxable supplies and 28% was used to make exempt supplies. The capital goods scheme applies to the Mar building.
Jek Ltd will sell the Mar building during the year ending 31 March 2020 for £700,000.
Email from your manager – dated 4 December 2018
Please carry out the following work in respect of the Eet Ltd group:
(a) Relief for the capital loss of Han Ltd
– Identify, with supporting explanations, those companies to which the capital loss on the sale of the Po building could be transferred, such that the group’s cash flow position would be improved.
Note: All of the companies in the group, apart from Fip Ltd, are required to pay corporation tax in quarterly instalments. This will be true regardless of how the capital loss on the sale of the Po building is relieved.
– On the assumption that the whole of the capital loss is transferred to Jek Ltd, calculate the quarterly payment of corporation tax due on 14 January 2019 from that company. Please carry out this calculation in £’000s.
Note: On each instalment payment date, each group company pays the amount of corporation tax necessary in order to ensure that it has paid the correct total amount of tax based on the latest budgeted figures.
– Explain the potential advantage to the Eet Ltd group of entering into group payment arrangements for corporation tax.
Tax manager
Required:
Prepare the notes as requested in the email from your manager. The following marks are available:
(a) Relief for the capital loss of Han Ltd. (11 marks)