Your manager has sent you a schedule prepared by Claire Falkner concerning her company, Plad Ltd, and a new company, Quil Ltd, which she intends to incorporate on 1 July 2019. The covering email from your manager details the work he requires you to do. The two documents are set out below.
Attachment: Schedule from Claire Falkner – dated 3 June 2019
I have owned the whole of the ordinary share capital of Plad Ltd since 2004. Plad Ltd trades mainly in the UK and is a UK resident company. It purchases components from third parties to be assembled into finished products. It also has a permanent establishment in the country of Chekka. The profits realised in Chekka are subject to 14% Chekkan business tax. There is no double tax treaty between the UK and the country of Chekka.
The budgeted taxable profits of Plad Ltd for the year ending 30 June 2020 are set out below. Plad Ltd’s profitability is very stable, so please assume that the figures for the following year will be the same.
|Trading profit in the UK||48,000|
|Trading profit in the country of Chekka (before deduction of 14% Chekkan tax)||7,000|
|Taxable total profits||55,000|
Quil Ltd will be incorporated, registered for value added tax (VAT) and commence trading on 1 July 2019. It will trade in the UK and be a UK resident company.
From a commercial standpoint, my intention was to own Quil Ltd personally. However, if there is a sufficient tax advantage, I will consider establishing the company as a wholly-owned subsidiary of Plad Ltd.
The first two years of budgeted results of Quil Ltd are set out below. The trading profit/(loss) figures are before the deduction of capital allowances, but have otherwise been adjusted for the purposes of corporation tax. The chargeable gain will not qualify for rollover relief.
|Year ending 30 June 2020 – trading loss||£(15,000)|
|Year ending 30 June 2021 – trading profit||£162,000||chargeable gain||£16,000|
|Machinery and equipment||£160,000 (excluding VAT)|
|Building used for manufacturing and storage||£600,000 (excluding VAT)|
The cost of the building includes £230,000 in respect of thermal insulation and air cooling equipment in order to create the appropriate conditions for manufacturing.
Value added tax (VAT)
I would like the two companies to register as a group for VAT purposes (to avoid the need to charge VAT on intra group supplies and to generally reduce administration) and for the group to continue to use the annual accounting scheme currently used by Plad Ltd. I appreciate this would mean that the two companies would be jointly and severally liable for the group’s VAT liability.
Plad Ltd – unreported chargeable gain
I have just discovered that a chargeable gain of £21,600 realised by Plad Ltd in the year ended 30 June 2015 was omitted from its corporation tax return. However, because the gain arose in respect of the sale of land, it was reported for the purposes of stamp duty land tax. Accordingly, I assume we do not need to do anything and that HM Revenue and Customs (HMRC) will contact us about this at some point.
Extract from the email from your manager – dated 4 June 2019
Please carry out the following work:
(a) Group relief
In order to help Claire make her decision on the ownership of Quil Ltd, advise her of the tax advantage of Quil Ltd being a wholly-owned subsidiary of Plad Ltd, such that the two companies form a group relief group. You should carry out this work in three stages:
(i) Explain, with supporting calculations, the maximum amount of group relief which Plad Ltd would need to receive for the year ending 30 June 2020 such that none of its double tax relief in respect of the Chekkan tax would be wasted and its UK corporation tax payable would be £nil. You should assume the rate of corporation tax is 19% for all accounting periods.
(ii) Prepare calculations of the corporation tax liabilities of the two companies for the two years ending 30 June 2021. Your calculations should be on the basis that the trading loss of Quil Ltd will be used as soon as possible whilst restricting the amount of group relief in an accounting period to the maximum figure you calculated in part (i).
You SHOULD NOT provide any explanations of these calculations.
(iii) Conclude by explaining the tax advantage of Quil Ltd becoming a wholly-owned subsidiary of Plad Ltd, as opposed to being owned personally by Claire.
When carrying out this work, you should be aware of the following:
– in the year ending 30 June 2020, the whole of the annual investment allowance will be available to Quil Ltd, and Quil Ltd will claim the maximum capital allowances available;
– neither of the two companies will be required to pay corporation tax in quarterly instalments. This will be true regardless of who owns Quil Ltd.
Prepare the notes as requested in the email from your manager. The following marks are available:
(a) Group relief. (17 marks)