Question 1a
Your manager has had a meeting with Bryce, the managing director of Grand Ltd. Extracts from the email prepared by your manager following the meeting, together with a schedule of information from Bryce, are set out below.
Extract from the email from your manager – dated 3 September 2018
Grand Ltd group of companies
Grand Ltd has two wholly owned subsidiaries, Colca Ltd and Sautso Ltd, and also owns shares in a number of other companies. All of the group companies are UK resident trading companies, which prepare accounts to 31 March each year. All supplies made by the group are subject to value added tax (VAT) at the standard rate.
Sautso Ltd has been a member of the Grand Ltd group for many years.
Sale of Colca Ltd
Grand Ltd purchased the whole of the ordinary share capital of Colca Ltd for £800,000 on 1 November 2011. The value of Colca Ltd has fallen and the company is to be sold on 1 December 2018. Two separate offers have been received: offer A and offer B.
Offer A – in respect of a sale of the company’s shares
– The purchaser will pay £730,000 for the whole of the ordinary share capital of Colca Ltd. This amount will be reduced by any tax liabilities payable by Colca Ltd arising as a result of the company being sold.
Offer B – in respect of a sale of the company’s trade and assets
– The purchaser will pay £695,000 for the trade and assets of Colca Ltd.
| £ | |
|---|---|
| Oribi building | 410,000 |
| Atuel building | 230,000 |
| Items of machinery | 25,000 |
| Net current assets (at cost) | 30,000 |
695,000 |
There is further information in respect of these assets in the attached schedule from Bryce.
The value of Colca Ltd’s goodwill is negligible and should be ignored for the purposes of this work.
Please prepare a memorandum for the client file.
Note: When calculating the post-tax proceeds in respect of the two offers, you should assume that tax relief at the rate of 19% will be obtained in respect of any allowable capital losses.
The memorandum should cover the following:
(i) Offer A – in respect of a sale of the company’s shares
– An explanation of whether or not tax relief will be available in respect of the capital loss arising on the sale of the shares.
– An explanation of the tax implications of Colca Ltd leaving the Grand Ltd group whilst still owning the Atuel building. This explanation should not include any calculations.
– A calculation of the expected post-tax proceeds.
(ii) Offer B – in respect of a sale of the company’s trade and assets
– A calculation of the expected post-tax proceeds. For this purpose you should ignore any chargeable gains or allowable losses arising on the sale of the items of machinery.
– In relation to the sale of the items of machinery, an explanation as to whether or not they will result in chargeable gains or allowable capital losses and of the availability of rollover relief.
– An explanation of the companies to which Colca Ltd can transfer any capital losses arising on the assets sold.
(iii) Offer B – value added tax (VAT)
– In respect of offer B: an explanation as to whether or not Colca Ltd should charge VAT on the sale of its buildings and/or its machinery.
Tax manager
Schedule of information from Bryce – dated 3 September 2018
Colca Ltd – details of assets
Colca Ltd uses both the Oribi and Atuel buildings in its trade.
| Oribi building | Atuel building | Machinery | |
|---|---|---|---|
| Date of purchase | 1 February 2012 | 1 April 2016 | N/A |
| Purchase cost | £320,000 (note 1) | £255,000 (note 2) | (note 3) |
| Value added tax option to tax made? | No | No | N/A |
Notes
1. On 1 December 2011, Colca Ltd sold a machine for £74,000 resulting in a chargeable gain of £17,000. This gain was rolled over against the purchase of the Oribi building.
2. Colca Ltd purchased the Atuel building from Sautso Ltd for £255,000, its market value at that time. As Colca Ltd and Sautso Ltd are both 100% subsidiaries of Grand Ltd, the transfer of the building took place at no gain, no loss.
Sautso Ltd had purchased the Atuel building, new and unused, for £340,000 on 1 January 2016.
3. All of the items of machinery are moveable. The sale of the machinery will give rise to a balancing charge of £12,100.
Most of the items of machinery are worth less than their original cost. However, a small number of items are particularly specialised, such that their current market value exceeds their original cost.
Required:
(a) Prepare the memorandum as requested in the email from your manager. The following marks are available:
(i) Offer A – in respect of a sale of the company’s shares. (8 marks)
(ii) Offer B – in respect of a sale of the company’s trade and assets. (11 marks)
(iii) Offer B – value added tax (VAT). (7 marks)