ACCA ATX ^UK Syllabus A4. Corporation Tax - Intangible fixed assets - Past Papers ^{3 / 5}

The finance director of Achiote Ltd would like your advice on the tax implications of the acquisition of two intangible fixed assets.

Achiote Ltd:
– Owns 100% of the ordinary shares in Borage Ltd and 80% of the ordinary shares in Caraway Inc.
– Achiote Ltd and Borage Ltd are resident in the UK. Caraway Inc is resident in the country of Nuxabar.
– All three companies are trading companies and prepare accounts to 31 March annually.

Borage Ltd – purchase of intangible fixed assets:
– Borage Ltd purchased the goodwill of an unincorporated business for £62,000 on 1 September 2016.
– Borage Ltd will amortise this goodwill in its accounts on a straight-line basis over a five-year period.
– Borage Ltd also purchased a patent from Achiote Ltd for £45,000 on 1 January 2017.
– Achiote Ltd had purchased the patent for £38,000 on 1 January 2014.
– The patent was being amortised in Achiote Ltd’s accounts on a straight-line basis over a ten-year period.
– Borage Ltd will continue to amortise the patent over the remainder of its ten-year life.

Required:
(a) Explain, with supporting calculations where appropriate, the corporation tax treatment in the year ended 31 March 2017, of the goodwill and the patent acquired by Borage Ltd. (4 marks)

Your firm has been asked to provide advice to Granada Ltd. Granada Ltd wants advice on the corporation tax implications of the recent acquisition of an unincorporated business.

Granada Ltd:
– Is a UK resident trading company which manufactures knitwear.
– Prepares accounts to 31 December each year.
– Is registered for VAT.
– Acquired the trade and assets of an unincorporated business, Starling Partners, on 1 January 2016.

Starling Partners:
– Had been trading as a partnership for many years as a wholesaler of handbags within the UK.
– Starling Partners’ main assets comprise a freehold commercial building and its ‘Starling’ brand, which were valued on acquisition by Granada Ltd at £105,000 and £40,000 respectively.

Required:
(b) (i) Describe the corporation tax treatment of the acquisition of the ‘Starling’ brand by Granada Ltd, if no charge for amortisation was required in its statement of profit or loss. (3 marks)

Cinnabar Ltd requires advice on the corporation tax treatment of the sale of an intangible asset.

Cinnabar Ltd:
– Is a UK resident trading company.
– Has one wholly-owned UK subsidiary, Lapis Ltd.

Sale of an intangible asset to Lapis Ltd:
– The intangible asset was acquired by Cinnabar Ltd in May 2010 for £82,000.

– The asset was sold to Lapis Ltd on 1 November 2014 for its market value on that date of £72,000, when its tax written down value was £65,600.

Required:
(ii) Explain the corporation tax implications for Cinnabar Ltd of the sale of the intangible asset to Lapis Ltd. (2 marks)