ACCA ATX ^UK Syllabus A4. Corporation Tax - Substantial shareholding exemption - Past Papers ^{1 / 1}

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.

Achiote Ltd – sale of equipment to, and proposed sale of shares in, Caraway Inc:
– Achiote Ltd acquired its 80% shareholding in Caraway Inc on 1 January 2017 for £258,000.
– Achiote Ltd is now proposing to sell an 8% shareholding in Caraway Inc to an unconnected company on 1 October 2017 for £66,000.
– An item of equipment owned by Achiote Ltd and used in its trade was sold to Caraway Inc on 1 March 2017 for its market value of £21,000.
– The item of equipment had cost Achiote Ltd £32,000 in May 2016.

Required:
(c) Advise Achiote Ltd of the chargeable gains implications arising from (1) the sale of the item of equipment to Caraway Inc; and (2) its proposed sale of the shares in Caraway Inc. (5 marks)

Cinnabar Ltd requires advice on the corporation tax treatment of expenditure on research and development, the sale of an intangible asset, and a proposed sale of shares. Cinnabar Ltd has also requested advice on the potential to claim relief for losses incurred in a new joint venture.

Cinnabar Ltd:
– Is a UK resident trading company.
– Has one wholly-owned UK subsidiary, Lapis Ltd.
– Is a small enterprise for the purposes of research and development expenditure.
– Prepares accounts to 31 March each year.
– Expects to pay corporation tax at the main rate for all relevant accounting periods.
– Intends to enter into a joint venture with another UK company, Amber Ltd. This joint venture will be undertaken by a newly incorporated company, Beryl Ltd.

Research and development expenditure – year ended 31 March 2015:
– The expenditure on research and development activities was made up as follows:

– The staff costs include a fee of £10,000 paid to an external contractor, who was provided by an unconnected company.

– The remainder of the staff costs relates to Cinnabar Ltd’s employees, who are wholly engaged in research and development activities.

– The rent is an appropriate allocation of the rent payable for Cinnabar Ltd’s premises for the year.

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.

Sale of shares in Garnet Ltd:
– Cinnabar Ltd acquired a 12% shareholding in Garnet Ltd, a UK resident trading company, in July 2009 for £120,000.

– Cinnabar Ltd sold one third of this shareholding on 20 October 2014.

– Cinnabar Ltd intends to sell the remaining two thirds of this shareholding on 30 November 2015 for £148,000.

– It would be possible to bring forward this sale to October 2015 if it is beneficial to do so.

Beryl Ltd:
– Will be incorporated in the UK and will commence trading on 1 January 2016.

– Is anticipated to generate a trading loss of £80,000 in its first accounting period ending 31 December 2016.

– Will have no sources of income other than trading income.

Alternative capital structures for Beryl Ltd:
– Two alternative structures have been proposed for the shareholdings in Beryl Ltd:

– Structure 1: 76% of the shares in Beryl Ltd will be held by Amber Ltd, with the remaining 24% held by Cinnabar Ltd;

– Structure 2: 70% of the shares will be held by Amber Ltd, 24% by Cinnabar Ltd and the remaining 6% held personally by Mr Varis, the managing director of Amber Ltd.

Required:
(b) Calculate the after-tax proceeds which would be received on the proposed sale of the Garnet Ltd shares on 30 November 2015 and explain the potential advantage of bringing forward this sale to October 2015.

Note: The following indexation factor should be used where necessary:
July 2009 to November 2015 – 0·1903 (5 marks)

Your manager is due to attend a meeting with the finance director of Opus Ltd. A schedule of information obtained from the client files and an email from your manager in connection with the Opus Ltd group are set out below.

Schedule of information

Opus Ltd — acquisition of the holdings in other companies
- Opus Ltd acquired Akia Ltd and the shareholding in Ribe Ltd (together with its subsidiary Lido Ltd) on 1 January 1999.
- Venere Ltd has an issued share capital of 1,000,000 ordinary shares. Opus Ltd acquired 170,000 ordinary shares in Venere Ltd on 1 July 2004 for £65,000. It sold 120,000 of these shares on 1 October 2013 for £150,000. The indexation factor from July 2004 to October 2013 is 0216.

Email from your manager 
Please carry out the following work in preparation for the Opus Ltd meeting.

(b) Sale of the shares in Venere Ltd

Opus Ltd has received an offer of £80,000 for its remaining 50,000 ordinary shares in Venere Ltd. If the sale were to go ahead, it would take place on 30 June 2014. However, the management of Opus Ltd are of the opinion that the results of Venere Ltd for the year ending 31 March 2015 will be such that the shares could be worth as much as £100,000 if the sale were to be delayed until 30 April 2015.

Set out the matters which the management of Opus Ltd should consider in order to decide on which of the two dates it would be more financially advantageous to sell the shares in Venere Ltd. When calculating the indexation allowance, use an approximate indexation factor of 0400 for the period from 1 July 2004 until the date of sale.

Required: