Charlotte is the owner of Bamburg Ltd. She requires advice on the value added tax (VAT) flat rate scheme, the sale of a substantial item of machinery, and the alternative methods by which she can extract additional funds from the company.
– Is UK resident and UK domiciled.
– Owns 100% of the ordinary share capital of Bamburg Ltd.
– Earns an annual salary from Bamburg Ltd of £46,000 and has no other income.
– Has two ideas to generate additional cash in Bamburg Ltd.
– Wants to receive an additional £14,000 (after the payment of all personal taxes) from Bamburg Ltd on 30 June 2014.
– Is a UK resident trading company which pays corporation tax at the small profits rate.
– Is registered for VAT.
– Has budgeted sales revenue for the year ending 31 March 2015 of £120,000 excluding VAT.
– Makes wholly standard rated supplies apart from £6,000 of exempt supplies.
– Has a nil tax written down value on its main pool as at 31 March 2014.
– Will not purchase any plant and machinery in the year ending 31 March 2015.
Charlotte’s ideas to generate additional cash in Bamburg Ltd:
– ‘Bamburg Ltd should join the VAT flat rate scheme in order to save money.’
– ‘Bamburg Ltd should sell the ‘Cara’ machine and offset the resulting loss against its profits.’
The ‘Cara’ machine:
– Was purchased on 1 January 2012 for £94,000.
– Rollover relief was claimed in respect of this purchase to defer a chargeable gain of £13,000.
– The ‘Cara’ machine is currently worth £80,000.
– Following the sale of the ‘Cara’ machine, Bamburg Ltd will rent a replacement machine.
Alternative methods of extracting an additional £14,000 from Bamburg Ltd:
– Bamburg Ltd to pay Charlotte a bonus.
– Bamburg Ltd to pay Charlotte a dividend.
– Bamburg Ltd to make an interest-free loan of £14,000 to Charlotte.
(b) Explain the tax and financial implications of Bamburg Ltd selling the ‘Cara’ machine during the year ending 31 March 2015. (5 marks)