ACCA ATX ^UK Syllabus A4. Corporation Tax - Purchase by a company of its own shares - Past Papers ^{5 / 5}

Jordi is a director and shareholder of Traiste Ltd. He has asked for your advice in connection with the forthcoming redundancy of an employee, the sale of shares in Traiste Ltd by his sister, Kat, and the payment implications for Traiste Ltd of alternative ways for Jordi to extract profits from the company.

Traiste Ltd:
– Is a UK resident unquoted trading company.
– Has two shareholders, Jordi and Kat, who each own 50% of the 1,000 £1 shares in issue.

Kat:
– Is resident and domiciled in the UK.
– Is 58 years old.
– Is a director and shareholder of Traiste Ltd.
– Will receive employment income of £34,000 from Traiste Ltd and dividends from other UK companies of £4,000 in the tax year 2017/18.
– Has already used her annual exempt amount for capital gains tax purposes for the tax year 2017/18.

Kat – proposed sale of shares:
– Kat subscribed for her 500 shares in Traiste Ltd at par on the incorporation of the company on 1 March 2013.
– She wishes to sell all of her shares before the end of 2017, and retire from the company.
– Kat’s brother, Jordi, has offered to buy these shares for £47 each. He is not prepared to sign any tax election in
relation to this offer.
– Alternatively, Traiste Ltd will buy these shares for their market value of £52 each.

Required:
(b) Explain, with reference to the after-tax proceeds in each case, why Kat should accept Jordi’s offer to buy her shares in Traiste Ltd, rather than sell her shares back to Traiste Ltd. (8 marks)

Your firm has been asked to provide advice to Granada Ltd, and one of its shareholders, Maria. Maria wants advice on the tax consequences of selling some of her shares back to Granada Ltd.

Shares in Granada Ltd:
– Maria subscribed for 10,000 £1 ordinary shares in Granada Ltd at par in June 2006.
– Maria is one of four equal shareholders and directors of Granada Ltd.
– Maria intends to sell either 2,700 or 3,200 shares back to the company on 31 March 2016 at their current market value of £12·80 per share.
– All of the conditions for capital treatment are satisfied, except for, potentially, the condition relating to the reduction in the level of shareholding.

Required:
(a) (i) Explain, with the aid of calculations, why the capital treatment WILL NOT apply if Maria sells 2,700 of her shares back to Granada Ltd, but WILL apply if, alternatively, she sells back 3,200 shares. (4 marks)

Your firm has been asked to provide advice to Granada Ltd, and one of its shareholders, Maria. Maria wants advice on the tax consequences of selling some of her shares back to Granada Ltd.

Maria:
– Is resident and domiciled in the UK.
– Is a higher rate taxpayer and will remain so in the future.
– Has already realised chargeable gains of £15,000 in the tax year 2015/16.

Shares in Granada Ltd:
– Maria subscribed for 10,000 £1 ordinary shares in Granada Ltd at par in June 2006.
– Maria is one of four equal shareholders and directors of Granada Ltd.
– Maria intends to sell either 2,700 or 3,200 shares back to the company on 31 March 2016 at their current market value of £12·80 per share.
– All of the conditions for capital treatment are satisfied, except for, potentially, the condition relating to the reduction in the level of shareholding.

Required:
(ii) Calculate Maria’s after-tax proceeds per share if she sells:
(1) 2,700 shares back to Granada Ltd; and alternatively
(2) 3,200 shares back to Granada Ltd. (4 marks)

Your manager has had a telephone conversation with Burt, the Group Finance Director of the Epon Ltd group of companies. Extracts from both a memorandum and an email from your manager are set out below.

Extract from a memorandum from your manager

On Thursday 6 June I spoke to Burt, the Group Finance Director of Epon Ltd. He is coming to the office on Monday to appoint us as tax advisers to the group, and possibly to the individual directors, and to discuss the group’s affairs.

The Epon Ltd group
Epon Ltd is owned by a large number of unrelated individuals. Epon Ltd owns 100% of the ordinary share capital of Wahzah Ltd, Yoko Ltd and NewCo Ltd. All four companies are UK resident and prepare accounts to 30 June each year. It is the policy of the group to maximise the tax saved when relieving losses and only to carry losses forward if there is no alternative relief available.

The purchase of the Aquapower business
NewCo Ltd is currently dormant. It was incorporated on 1 May 2013 in order to purchase the assets of the Aquapower business (Aquapower) from an unincorporated trader. It was intended that NewCo Ltd would purchase Aquapower on 1 July 2013. However, Burt has now decided that he would prefer the business to be purchased by Yoko Ltd, provided that this is not more expensive from a tax point of view. Under this option, Yoko Ltd would then be carrying on two separate trades.

Aquapower’s business is the distribution of bottled drinks. The budgeted trading profit of Aquapower for the year ending 30 June 2014 is £60,000. None of the assets of the Aquapower business qualifies for rollover relief.

The purchase of equipment from the country of Candara
A new supplier of equipment for the fitness clubs has been identified in Candara. Wahzah Ltd intends to purchase equipment from this supplier in July 2013. The country of Candara is not a member of the European Union.

The purchase of Kari’s shares
The planned changes to the Epon Ltd group have resulted in a dispute with Kari, the Group Sales Director. In order to resolve this, it has been proposed that Epon Ltd will carry out a purchase of its own shares on 31 July 2013 and acquire the whole of Kari’s shareholding.

Kari subscribed £10,000 for 10,000 £1 ordinary shares in Epon Ltd on 1 December 2008. It has been agreed that Epon Ltd will purchase all of these shares on 31 July 2013 for £90,000. Kari has been advised that the money she will receive will be treated as a dividend. Kari’s annual taxable employment income (before deducting her personal allowance) is £72,000. In the tax year 2013/14, she will not receive any other income or make any disposals for the purposes of capital gains tax.

Extract from an email from your manager

Please prepare a memorandum for the client file that addresses the following issues:

(c) The purchase of Kari’s shares

I want you to:
(i) review each of the conditions for capital gains tax treatment in order to determine the reason(s) why the amount received will be treated as a dividend. I can confirm that Epon Ltd satisfies the condition of being an unquoted trading company.

Tax manager

Required:
Prepare the memorandum requested in the email from your manager. The following marks are available.

(c) The purchase of Kari’s shares.
(i) Review of each of the conditions for capital gains tax treatment; (5 marks)

Your manager has had a telephone conversation with Burt, the Group Finance Director of the Epon Ltd group of companies. Extracts from both a memorandum and an email from your manager are set out below.

Extract from a memorandum from your manager

On Thursday 6 June I spoke to Burt, the Group Finance Director of Epon Ltd. He is coming to the office on Monday to appoint us as tax advisers to the group, and possibly to the individual directors, and to discuss the group’s affairs.

The Epon Ltd group
Epon Ltd is owned by a large number of unrelated individuals. Epon Ltd owns 100% of the ordinary share capital of Wahzah Ltd, Yoko Ltd and NewCo Ltd. All four companies are UK resident and prepare accounts to 30 June each year. It is the policy of the group to maximise the tax saved when relieving losses and only to carry losses forward if there is no alternative relief available.

The purchase of the Aquapower business
NewCo Ltd is currently dormant. It was incorporated on 1 May 2013 in order to purchase the assets of the Aquapower business (Aquapower) from an unincorporated trader. It was intended that NewCo Ltd would purchase Aquapower on 1 July 2013. However, Burt has now decided that he would prefer the business to be purchased by Yoko Ltd, provided that this is not more expensive from a tax point of view. Under this option, Yoko Ltd would then be carrying on two separate trades.

Aquapower’s business is the distribution of bottled drinks. The budgeted trading profit of Aquapower for the year ending 30 June 2014 is £60,000. None of the assets of the Aquapower business qualifies for rollover relief.

The purchase of equipment from the country of Candara
A new supplier of equipment for the fitness clubs has been identified in Candara. Wahzah Ltd intends to purchase equipment from this supplier in July 2013. The country of Candara is not a member of the European Union.

The purchase of Kari’s shares
The planned changes to the Epon Ltd group have resulted in a dispute with Kari, the Group Sales Director. In order to resolve this, it has been proposed that Epon Ltd will carry out a purchase of its own shares on 31 July 2013 and acquire the whole of Kari’s shareholding.

Kari subscribed £10,000 for 10,000 £1 ordinary shares in Epon Ltd on 1 December 2008. It has been agreed that Epon Ltd will purchase all of these shares on 31 July 2013 for £90,000. Kari has been advised that the money she will receive will be treated as a dividend. Kari’s annual taxable employment income (before deducting her personal allowance) is £72,000. In the tax year 2013/14, she will not receive any other income or make any disposals for the purposes of capital gains tax.

Extract from an email from your manager

Please prepare a memorandum for the client file that addresses the following issues:

(c) The purchase of Kari’s shares

I want you to:
(ii) calculate the increase in tax cost for Kari as a result of the sale of the shares being subject to income tax as opposed to capital gains tax. You should assume that entrepreneurs’ relief would be available and would be claimed.

Tax manager

Required:
Prepare the memorandum requested in the email from your manager. The following marks are available.

(c) The purchase of Kari’s shares.
(ii) Calculation of the increase in tax cost for Kari. (6 marks)