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Question 2c

Softapp Ltd is a software developer. The company’s summarised statement of profit or loss for the year ended 31 March 2013 is as follows:
Note £
Operating profit 1 & 2 519,300
Other income
Income from property 3 36,700
Loan interest receivable 4 8,100
Profit on disposal of shares 5 64,900
Finance costs
Interest payable 6 (67,200)
Profit before taxation
561,800

Note 1 – Operating profit
The operating profit excludes the results from Softapp Ltd’s overseas branch (see note (2) below).
Depreciation of £10,170 and amortisation of leasehold property of £2,500 have been deducted in arriving at the operating profit of £519,300.

Note 2 – Overseas branch
Softapp Ltd’s overseas branch made a trading profit of £25,600 for the year ended 31 March 2013. Overseas corporation tax of £5,500 was paid in respect of the overseas branch’s trading profit. Softapp Ltd has not made an election to exempt the profits of its overseas branch.

This is the first time that the overseas branch has made a profit, having made a trading loss in each of the previous five years of operation.

Note 3 – Income from property
Since 1 November 2012, Softapp Ltd has let out one floor of a freehold office building which is surplus to requirements. The income from property figure of £36,700 is made up of the following income and expenditure:

Date received/paid £
23 October 2012 Advertising for tenants (600)
25 October 2012 Security deposit of two months rent 10,400
25 October 2012 Rent for the quarter ended 31 January 2013 15,600
1 November 2012 Insurance for the year ended 31 October 2013 (1,200)
2 February 2013 Rent for the quarter ended 30 April 2013 15,600
20 March 2013 Repairs following a flood (12,800)
4 April 2013 Insurance claim in respect of the flood damage 9,700

36,700

Note 4 – Loan interest receivable
The loan was made for non-trading purposes on 1 July 2012. Loan interest of £5,600 was received on 31 December 2012, and interest of £2,500 was accrued at 31 March 2013.

Note 5 – Profit on disposal of shares
The profit on disposal of shares is in respect of the sale of Softapp Ltd’s entire (2%) shareholding in Networked plc on 28 February 2013. The disposal resulted in a chargeable gain of £61,300. This figure is after taking account of indexation.

Note 6 – Interest payable
The interest payable is in respect of the company’s 4% debenture loan stock. Interest of £33,600 was paid on 30 September 2012 and again on 31 March 2013. The loan stock was used to finance the company’s trading activities.

Additional information

Leasehold property
On 1 January 2013, Softapp Ltd acquired a leasehold office building, paying a premium of £100,000 for the grant of a ten-year lease. The office building was used for business purposes by Softapp Ltd throughout the period 1 January to 31 March 2013.

Plant and machinery
The tax written down value of Softapp Ltd’s plant and machinery as at 1 April 2012 was nil.

During October 2012 Softapp Ltd had an extension constructed adjacent to its existing freehold office building, which is used by the company’s employees as a staff room. The total cost of £100,000 is made up as follows:

£
Integral to the building
Building costs of extension 61,000
Heating system 3,600
Ventilation system 4,600
Not integral to the building
Furniture and furnishings 29,400
Refrigerator and microwave cooker 1,400

100,000
The full annual investment allowance of £25,000 is available to Softapp Ltd.

Subsidiary company
Softapp Ltd owns 100% of the ordinary share capital of Byte-Size Ltd. On 4 March 2013, Byte-Size Ltd disposed of its entire (1%) shareholding in Cloud Ltd, and this resulted in a capital loss of £48,200. For the year ended 31 March 2013, Byte-Size Ltd made no other disposals and will pay corporation tax at the small profits rate of 20%.

Required:
(c) State what factors Softapp Ltd should take into account when deciding whether to make an election to exempt the profits of its overseas branch. (2 marks)