Nocturne Ltd, a partially exempt company for the purposes of value added tax (VAT), requires advice on the corporation tax implications of providing an asset to one of its shareholders; the income tax implications for another shareholder of making a loan to the company; and simplifying the way in which it accounts for VAT.
Nocturne Ltd:
– Is a UK resident trading company.
– Prepares accounts to 31 March annually and expects to pay corporation tax at the rate of 20%.
– Has four shareholders, each of whom owns 25% of the company’s ordinary share capital.
– Owns a laptop computer, which it purchased in October 2012 for £1,200, and which has a current market value of £150.
– Has purchased no other plant and machinery for several years and the tax written down value of its main pool at 31 March 2015 was £nil.
Provision of a laptop computer to one of Nocturne Ltd’s shareholders:
– Nocturne Ltd is considering two alternative ways of providing a laptop computer in the year ending 31 March 2016 for the personal use of one of its shareholders, Jed.
– Jed is neither a director nor an employee of Nocturne Ltd.
– Option1: Nocturne Ltd will buy a new laptop computer for £1,800 and give it immediately to Jed.
– Option 2: Nocturne Ltd will gift its existing laptop to Jed and will purchase a replacement for use in the company for £1,800.
Loan from Siglio:
– Siglio will loan £60,000 to Nocturne Ltd on 1 October 2015 to facilitate the purchase of new equipment.
– Siglio is both a shareholder of Nocturne Ltd and the company’s managing director.
– Nocturne Ltd will pay interest at a commercial rate on the loan from Siglio.
– Siglio will borrow the full amount of the loan from his bank on normal commercial terms.
VAT – partial exemption:
– Nocturne Ltd is partially exempt for the purposes of VAT.
– Nocturne Ltd’s turnover for the year ended 31 March 2015 was £240,000 (VAT exclusive).
– Nocturne Ltd’s turnover for the year as a whole for VAT purposes comprised 86% taxable supplies and 14% exempt supplies.
– The input VAT suffered by Nocturne Ltd on expenditure during the year ended 31 March 2015 was:
– Nocturne Ltd expects its turnover and expenditure figures to increase by approximately 25% next year.
– Siglio has heard about an annual test for computing the amount of recoverable input VAT during an accounting period and would like more information about this.
Required:
(ii) Advise Siglio of Nocturne Ltd’s eligibility for the annual test for computing the amount of recoverable input VAT for the year ending 31 March 2016 and the potential benefits to be gained from its use. (5 marks)