ACCA Paper P6 (UK) Advanced Taxation (ATX) Class Notes September/December 2015 © Interactive World Wide Ltd, May 2015 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Interactive World Wide Ltd w w w s t ud yi nt e r a c t i ve o r g Contents PAGE INTRODUCTION TO THE PAPER CHAPTER 1: FUNDAMENTALS OF CORPORATION TAX 15 CHAPTER 2: OUTLINE OF INHERITANCE TAX 111 CHAPTER 3: INHERITANCE TAX AND THE DEATH ESTATE 149 CHAPTER 4: STAMP TAX 197 CHAPTER 5: FUNDAMENTALS OF TAXING CAPITAL GAINS 205 CHAPTER 6: VARIATIONS TO CAPITAL GAINS TAX 231 CHAPTER 7: CAPITAL GAINS TAX – SHARES AND SECURITIES 245 CHAPTER 8: CAPITAL GAINS RELIEFS AND EXEMPTIONS 265 CHAPTER 9: ETHICS AND THE TAXATION OF TRUSTS 319 CHAPTER 10: INCOME TAX, INVESTMENT ADVICE AND OVERSEAS ASPECTS 331 CHAPTER 11: PROPERTY BUSINESS PROFITS 387 CHAPTER 12: EMPLOYMENT INCOME AND CLOSE COMPANIES 399 CHAPTER 13: NATIONAL INSURANCE AND SELF - ASSESSMENT 449 CHAPTER 14: INCOME FROM SELF EMPLOYMENT 463 CHAPTER 15: TRADING LOSSES AND PARTNERSHIPS 509 CHAPTER 16: VALUE ADDED TAX 547 CHAPTER 17: CORPORATION TAX – GROUPS AND OVERSEAS ASPECTS 589 w w w s t ud y i nt e r a c t i v e o r g w w w s t ud yi nt e r a c t i ve o r g Introduction to the paper w w w s t ud y i nt e r a c t i v e o r g IN T R O D U C T I O N T O T H E P A P E R AIM OF THE PAPER To develop knowledge and skills relating to the tax system as applicable to individuals, single companies, and groups of companies OUTLINE OF THE SYLLABUS Taxation of individuals Income tax Capital gains tax Tax on death Tax of trusts Tax for companies Stamp duty and Stamp duty land tax Value added tax Interaction of the taxes and the mitigation of tax FORMAT AND BACKGROUND OF THE EXAM PAPER Background about the P6 Exam and the P6 Examiner Rory Fish, the P6 examiner, has now set eighteen Advanced Taxation exams including the old syllabus 3.2 exams for the December 2006 and June 2007 exams, the pilot paper and the P6 exams from December 2007 to December 2014 inclusive The only way to pass this very challenging exam is to practice as many past exam questions set by Rory Fish as possible The examiner has written several articles and has stated that students should not expect questions to be set based on any articles he has written Format and content of the P6 Exam The only area of the syllabus that the examiner has stated will be tested for certain in every P6 exam is the topic of Ethics and this will appear in all papers and will be worth at least marks The rest of the syllabus can be tested anywhere in section A or B The examiner has stated, however, that those areas of the syllabus which are new to P6 (not tested in F6) are likely to feature more frequently in P6 exams Section A Two compulsory questions, with a total of 60 marks in this section Question (35 marks) and question (25 marks) The examiner has stated that questions in this section will concentrate on application, evaluation and explanation skills Questions will often require a letter, report or memorandum (2 marks will be awarded for answering in the appropriate format) w w w s t ud yi nt e r a c t i ve o r g IN T R O D U C T I O N T O T H E P A P ER Section B Two questions out of a choice of three A total of 40 marks in this section with each question being 20 marks The examiner has stated that questions in this section will be more structured than the questions in section A, with headings and more guidance Tax rates and allowances given in P6 to be used for the June 2015 and December 2015 exams SUPPLEMENTARY INSTRUCTIONS You should assume that the tax rates and allowances for the tax year 2014/15 and for the financial year to 31 March 2015 will continue to apply for the foreseeable future unless you are instructed otherwise Calculations and workings need only be made to the nearest £ All apportionments should be made to the nearest month All workings should be shown Income tax 2014/15 Normal rates Dividend rates Basic rate Higher rate £1 to £31,865 £31,866 up to £150,000 % 20 40 % 10 32.5 Additional rate £150,001 and above 45 37.5 A starting rate of 10% applies to savings income where it falls within the first £2,880 of taxable income Personal allowances £ Born on or after April 1948 10,000 Born between April 1938 and April 1948 10,500 Born before April 1938 10,660 Income limit Personal allowance Personal allowance (born before April 1948) 100,000 27,000 Car benefit percentages The base level of CO2 emission is 95 grams per kilometre The percentage rates applying to petrol cars with CO2 emissions up to this level are: % 75 grams per kilometre or less 76 - 94 grams per kilometre 11 95 grams per kilometre 12 w w w s t ud y i nt e r a c t i v e o r g IN T R O D U C T I O N T O T H E P A P E R Car fuel benefit The base level figure for calculating the car fuel benefit is £21,700 Authorised mileage allowance payments (AMAP) First 10,000 business miles 45p per mile Any business miles above 10,000 25p per mile Pension scheme limits Annual allowance 2014/15 £40,000 2011/12 to 2013/14 £50,000 Lifetime allowance £1,250,000 The maximum contribution that can qualify for tax relief without any earnings is £3,600 New individual savings accounts (NISAs) New individual savings accounts – the investment limit £15,000 Child benefit income tax charge Where income is between £50,000 and £60,000, the charge is 1% of the amount of the child benefit received for every £100 of income over £50,000 Residence: number of ties needed to be UK resident Days in UK Previously UK resident Not previously UK resident Less than 16 days Automatically not UK resident Automatically not UK resident 16 to 45 Resident if UK ties Automatically not UK resident 46 to 90 Resident if UK ties Resident if UK ties 91 to 120 Resident if UK ties Resident if UK ties 121 to 182 Resident if UK tie Resident if UK ties 183 days Automatically UK resident Automatically UK resident w w w s t ud yi nt e r a c t i ve o r g IN T R O D U C T I O N T O T H E P A P ER Capital allowances Plant and machinery Main Pool 18% Special rate pool 8% Motor cars CO2 emission up to 95 grams per kilometre 100% CO2 emission between 96 and 130 grams per kilometre 18% CO2 emission over 130 grams per kilometre 8% Annual investment allowance First £500,000 of expenditure 100% Enhanced capital allowances (ECA) 100% Corporation tax Financial year 2011 2012 2013 2014 Small profits rate 20% 20% 20% 20% Main rate 26% 24% 23% 21% Lower limit (£) £300,000 £300,000 £300,000 £300,000 Upper limit (£) £1,500,000 £1,500,000 £1,500,000 £1,500,000 3/200 1/100 3/400 1/400 Standard fraction Marginal relief (U – A) × N/A × Standard fraction Patent box deduction Net patent profit x 70% x [(MR-10%)]/MR Where MR is the main rate of corporation tax Value added tax Registration limit Deregistration limit £81,000 £79,000 Standard rate 20% w w w s t ud y i nt e r a c t i v e o r g IN T R O D U C T I O N T O T H E P A P E R Inheritance tax: nil rate bands and tax rates Rate of tax on excess over nil rate band - Lifetime rate 20% - Death rate 40% April 2014 to April 2015 £325,000 April 2013 to April 2014 £325,000 April 2012 to April 2013 £325,000 April 2011 to April 2012 £325,000 April 2010 to April 2011 £325,000 April 2009 to April 2010 £325,000 April 2008 to April 2009 £312,000 April 2007 to April 2008 £300,000 April 2006 to April 2007 £285,000 April 2005 to April 2006 £275,000 April 2004 to April 2005 £263,000 April 2003 to April 2004 £255,000 April 2002 to April 2003 £250,000 April 2001 to April 2002 £242,000 April 2000 to April 2001 £234,000 Taper relief % Reduction Years before death Over years up to years 20 Over years up to years 40 Over years up to years 60 Over years up to years 80 Over years 100 Rates of interest Official rate of interest 3.25% Rate of late payment interest 3% Rate of repayment interest 0.5% 10 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Relief for the foreign tax suffered Income from abroad maybe taxed in the country of origin and in the UK Relief for the double tax may be given unilaterally or bilaterally Bilateral relief In recent years the UK has concluded many treaties with other countries in order to reduce the burden of double tax These treaties exist between the UK and the overseas country either exempting certain income or all income from taxation in one country Unilateral relief This is where no treaty exists between the UK and the overseas country Double tax relief is still in principle available in the UK In the P6 exam you will be examined on the rules which apply where no double tax treaty exists between the UK and the foreign company Foreign tax Withholding tax A direct tax imposed by the overseas country and withheld by the paying company when income is remitted to the UK The rate of withholding tax is always given in the question Relief for withholding tax is always potentially available Underlying tax (UT) Equivalent to UK corporation tax in the overseas country Overseas dividends - reforms There has been a major reform to the treatment of overseas dividends Overseas dividends are exempt from UK corporation tax and are treated in exactly the same way as UK dividends received Exempt overseas dividends are included as franked investment income in exactly the same way as UK dividends, unless they are group income In this case they are completely ignored for tax purposes w w w s t ud y i nt e r a c t i v e o r g 619 C H A P T E R – C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Exam technique for questions involving overseas income Compute the corporation tax liability for the UK company using columns Once the corporation tax liability has been determined the double tax relief (DTR) for each source of overseas income is computed and deducted from the UK liability and must be treated as a tax reducer The double tax relief is determined as: Lower of (1) Overseas tax suffered (2) UK tax on the overseas income Approach to DTR questions If asked to calculate the corporation tax of a UK company with profits from an overseas branch, you should layout your corporation tax computation in column format as follows: A Ltd CT computation Total UK income £ Overseas income (1) (Utopia) £ Overseas income (2) (Ruritania) £ £ Trading income x x - - Interest income x x - - x _ x x x x x _ x (X) _ x _ (X1) _ Nil _ (X2) _ x _ (X3) _ x _ x Nil x x suffered and UK corporation tax (x) (x) (x) UK corporation tax liability X/nil nil X/nil X/nil Overseas income Total profits Less: Qualifying charitable donation Taxable total profits CT @ 21%, 20% Less: DTR (lower of foreign tax (1) Set up basic corporation tax computation (with a separate column for each source of overseas income) and put in easy numbers, e.g trading income, interest income Then set up a working to calculate gross overseas income figure (2) Any qualifying charitable donations or trading losses should be deducted firstly from the UK income column (down to nil), then from the overseas branch suffering foreign tax at the lowest rate, this will allow the company to maximise the available double tax relief (3) If the company has elected to exempt the overseas branch profits from UK corporation tax, the above proforma will not be relevant as the profits and losses of the overseas branch will be ignored in the UK company’s corporation tax computation 620 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Key point In computing the corporation tax attributable to an overseas source, qualifying charitable donations and general loss reliefs (S.37, group relief) can be set off in the most beneficial manner (i.e firstly against UK sources then against the source suffering the lowest rate of overseas tax) Example – Zorro plc and Zen Ltd Zorro plc is a UK resident trading company and has a large number of wholly owned UK resident trading companies and so it should be assumed that all companies pay corporation tax at the main rate One of the UK resident trading company’s is Zen Ltd and it has the following results for the year ended 30 June 2015 £ Trading profit 100,000 Overseas profits of a branch 140,000 Qualifying charitable donations (2,000) The branch is trading from a permanent establishment situated in Zowata and you should assume that the corporation tax rate is 18% in that country Some of the other companies in the Zorro plc group are expected to make losses in the future and the finance director wants to make sure that these losses are used in the most tax efficient manner Required: (i) Explain with supporting calculations the maximum amount of trading loss that can be surrendered to Zen Ltd from the Zorro plc group, if relief in respect of the tax suffered in Zowata is not to be wasted You should assume that Zorro plc has not elected to exempt the overseas branch profits from UK corporation tax (ii) Zorro plc is considering making an election to exempt its overseas branches profits from UK corporation tax Explain when it is advantageous and disadvantageous to make this election Your answer should also state the maximum amount of trading loss that can be surrendered to Zen Ltd by the Zorro plc group if this election is made w w w s t ud y i nt e r a c t i v e o r g 621 C H A P T E R – C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Answer grid – Zorro plc and Zen Ltd The maximum loss that can be surrendered to Zen Ltd by Zorro plc group Compute the corporation tax liability of Zorro plc if the maximum amount of loss is surrendered to Zorro plc The disadvantage of surrendering the maximum amount of loss is that DTR maybe be wasted UK £ Trading profits O/S £ 100,000 Overseas profits 140,000 Qualifying charitable donation Group relief Taxable total profits FTS £ (2,000) 98,000 ( ) 25,200 _ 140,000 ( ) _ _ ( ) _ _ CT @ 21% Less: DTR It is beneficial to restrict the group relief claimed in order to maximise the DTR The maximum amount of loss which should be transferred to Zen Ltd is £ UK £ Trading profits O/S £ FTS £ 100,000 Overseas profits 140,000 25,200 Qualifying charitable donation (2,000) 98,000 _ 140,000 Group relief ( ) ( ) _ _ ( ) _ _ Taxable total profits CT @ 21% Less: DTR 622 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Anti-avoidance legislation, controlled foreign companies A company which is resident in the UK who wishes to set up an overseas company will be attracted to overseas countries which have low rates of tax; these countries are called tax havens If a UK company has an overseas subsidiary the normal treatment is that the UK company will not pay UK corporation tax on the overseas dividend remitted to the UK However if the overseas company is a controlled foreign company then special rules will apply to the taxing of the overseas company’s Taxable total profits Controlled foreign company definition The controlled foreign company rules apply to owners of non-UK resident companies where UK profits have been artificially diverted out of the UK corporation tax net A company is a CFC if it satisfies all of the following conditions:  Condition – A foreign resident company controlled from the UK  Condition – It is a foreign company resident overseas  Condition – It is a foreign company with chargeable profits (income profits but not chargeable gains, calculated using UK tax rules which have been artificially diverted out of the UK corporation tax net) If it is established that a foreign company is a CFC it maybe necessary for any UK resident company who owns at least 25% of the shares in the foreign company to pay a CFC charge (additional corporation tax) to HMRC in respect of the chargeable profits of the foreign company (chargeable profits are defined as income profits but not chargeable gains, calculated using UK tax rules which have been artificially diverted out of the UK corporation tax net) Calculation of the CFC charge payable by UK resident companies who own at least 25% of the shares in the CFC [%xChargeable profits of the CFC x Main rate] – Foreign tax suffered on the % of chargeable profits Excludes chargeable gains The CFC charge can be avoided by a UK resident company when the following conditions are met: If the foreign company satisfies one of the exceptions listed below applies; or If the foreign company did not have any chargeable profits (income profits but not chargeable gains, calculated using UK tax rules which have been artificially diverted out of the UK corporation tax net) w w w s t ud y i nt e r a c t i v e o r g 623 C H A P T E R – C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Avoiding the CFC charge If a foreign company satisfies the conditions to be a CFC it is possible to avoid the CFC charge (the general treatment) and the alternative treatment applies The alternative treatment exempts the chargeable profits of the foreign company from UK corporation tax The dividends from the controlled foreign company are treated as group income (if the UK company owns > 50% of the shares in the foreign company) or franked investment income (if the UK company owns ≤50% The alternative treatment applies if any one of the following exceptions listed below are satisfied: Low profits exception Low profit margin exception Excluded territory exception Tax rate is sufficiently high exception Exempt period exception This exception applies if the foreign company’s profits not exceed £500,000 and its non-trading income does not exceed £50,000 This exception applies if the foreign company’s accounting profits are less than 10% of its allowable expenditure This exception applies if the foreign company is resident in a country which is specifically listed as an excluded territory This exception applies if the foreign company pays corporation tax overseas at a rate which is at least 75% of the amount of tax that would have been paid if the company had been UK resident The first 12 months of the foreign company coming under the control of UK residents, the CFC charge is not applied This exemption will apply initially Key point If the examiner is discussing a UK company owning shares in a foreign company and the foreign company pays low rates of tax this is a clue that you need to discuss the rules applicable to CFCs 624 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Transfer pricing HMRC wants to ensure that companies cannot reduce the total UK corporation tax by substituting a transfer price which is below an arm’s length price for transactions between companies where one company controls the other or both are controlled by the same person The transfer pricing legislation covers not only sales but also lettings/hiring of property and covers loan interest Where transfer pricing policies are under review the basic aim is to produce an arms length price, i.e the price which might have been expected if the parties had been independent persons dealing with each other in a normal commercial manner unaffected by any special relationship between them The OECD model will direct that the UK taxable total profits are adjusted to reflect the arms length market value rather than the transfer price if using the transfer price results in an overall reduction in the UK tax liability UK companies must apply the transfer pricing legislation in respect of transactions between a resident and a non-resident company It must also apply if both companies involved are UK resident There are, however, exemptions from the transfer pricing rules The main exemption to the transfer pricing rules applies if the advantaged company is small or medium w w w s t ud y i nt e r a c t i v e o r g 625 C H A P T E R – C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Example – Transfer pricing Transaction A Ltd Subsidiary BLtd (1) A Ltd sells 5,000 units to B Ltd at £1.50 each when the MV = £3 each UK company (large) Foreign company (2) As for (1) UK company (medium/small) UK company (3) As for (1) UK company (large) UK company (4) A Ltd makes a loan of £200,000 to B Ltd and charges interest at 2% when the commercial rate is 8% UK company (large) Foreign company (5) As for (4) UK company (small/medium) UK company (6) As for (4) UK company (large) UK company Effect of OECD model Note that in transactions (1) and (4), the overseas country does not have a double tax agreement Required: Complete the table showing the effect of the OECD model on each transaction 626 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S ANSWERS Answer – The Iphone Ltd Group Iphone Ltd Trading loss (180,000) a = 12 months 1.4.14 31.3.15 c=3 months Web Ltd TTP = £224,000 TTP = £28,000 b=3 months 1.4.14 30.6.14 30.6.15 (1) Group relief is available to qualifying group companies Where the companies not have the same year end and/or have joined or left the group part way through the accounting period, group relief is restricted to ‘corresponding accounting periods’; i.e the extent to which the companies’ accounting periods overlap with each other (2) Loss relief is restricted to the lower of:  the taxable total profit in the corresponding accounting period and  the trading loss in the corresponding accounting period (3) Web Ltd’s three-month period ended 30 June 2014 overlaps with Iphone Ltd’s year ended 31 March 2015 by three months (1 April 2014 to 30 June 2014) Web Ltd’s year ended 30 June 2015 overlaps with Iphone Ltd’s year ended 31 March 2015 by nine months (1 July 2014 to 31 March 2015) w w w s t ud y i nt e r a c t i v e o r g 627 C H A P T E R – C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S (4) The maximum amount of trading loss that can be surrendered is calculated as follows: In Web Ltd’s period ended: 30 June 2014 £ Lower of: - Loss in corresponding period 3/12 × £180,000 45,000 Taxable total profits on corresponding period 28,000 Therefore £28,000 In Web Ltd’s year ended: 30 June 2015 £ Lower of: - Loss in corresponding period 9/12 × £180,000 - 135,000 Taxable total profit in corresponding period 9/12 × £224,000 168,000 Therefore £135,000 Answer – Quifs Ltd and Page Ltd Current period losses Part of Page Ltd’s trading loss for the year ended 31 March 2015 can be surrendered to Quif Ltd as it is a member of a 75% loss group with Page Ltd The loss that can be surrendered is restricted to the amount accruing during the period in which Page Ltd and Quif Ltd are members of the same 75% loss group For the purposes of group relief, Page Ltd will be regarded as having left the group on the day on which arrangements were entered into for it to leave Such arrangements will be regarded as existing once an offer for sale has been accepted even if it remains subject to contract Accordingly, Page Ltd will be treated as leaving the group on November 2014 at the latest The maximum loss that can be surrendered to Quif Ltd is the taxable total profits for the corresponding period from April 2014 until 31 October 2014 Accordingly, £31,500 (7/12 x 54,000) of the loss is available for group relief to Quif Ltd 628 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Answer – The Delta Ltd Group The following diagram relates to a group of companies and shows the trading profits and losses for the year ended 31 December 2014 Alpha Ltd £126,000 Loss Bravo Ltd £15,000 Loss 60% Charlie Ltd £64,000 Profit 20% 4% 16% Mr X Delta Ltd £190,000 Profit (a) Type of group - Consortium (b) Consortium owned company - Delta Ltd (c) Consortium members - A, B (d) What is the maximum loss which can be surrendered to D Ltd: (e) A Ltd to D Ltd - 60% × 190,000 = £114,000 B Ltd to D Ltd - £15,000 What are the taxable total profits of D Ltd assuming the maximum amount of loss is surrendered from Alpha Ltd and Bravo Ltd: Taxable total profit D Ltd 190,000 Consortium relief AD (114,000) BD (15,000) _ 61,000 Adjusted taxable total profits Answer – The A Ltd Group Companies are members of a 75% capital gains group provided the following conditions are met: (i) A Ltd is called the principal member as it is not a 75% subsidiary of another company (ii) Each other member must be a 75% subsidiary of another company (iii) The principal member must have an effective interest of more than 50% in all the subsidiaries indirectly Members with A Ltd include: B Ltd (75% subsidiary of A Ltd) C Ltd (64% indirect holding) D Ltd (51% indirect holding) E Ltd is not part of the 75% capital gains group as the indirect holding with A Ltd is only 40.96% (80%  80%  80% x 80%) w w w s t ud y i nt e r a c t i v e o r g 629 C H A P T E R – C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Answer – Kilo Ltd Gain on the sale of shares in Kilo Ltd From the perspective of the India Ltd group, there should be no corporation tax payable on the disposal of the shares This is because at least 10% of the shares have been held for a continuous period of at least 12 months in the last two years As a result, the substantial shareholding exemption applies, and no corporation tax will be payable on any chargeable gain realised on the disposal of shares Degrouping charge However, the departing company (Kilo Ltd) owns an asset which was transferred to it within six years prior to the company leaving the group As a result, a degrouping charge arises The asset is deemed to be disposed of and immediately re-acquired at the market value at the date of the original inter-group transfer As the asset was transferred on a no gain / no loss basis, the original cost is indexed up to the date of transfer (from India Ltd to Kilo Ltd) The degrouping charge is evaluated as the chargeable gain that would have been realised at the date when the property was originally transferred, if at that date the companies had not been members of the same 75% capital gains group The potential degrouping gain is therefore calculated as follows: £ Disposal proceeds (MV at date of inter group transfer) Less: Cost (February 1998) Less: Indexation to date of inter group transfer £300,000  0.377 Chargeable gain (degrouping charge) £ 510,000 300,000 113,100 –––––– (413,100) ––––––– 96,900 ––––––– Rules relating to the degrouping charge The degrouping charge should be added to the sale proceeds for the shares India Ltd is treated as having sale proceeds of £1,296,900 (1,200,000 + 96,900) This figure is then used to evaluate the chargeable gain on the disposal of the shares As the substantial share exemption (SSE) applies on the disposal of the shares in Kilo Ltd this means the degrouping charge is exempt from corporation tax 630 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Answer – Stormy Ltd Year ended 31 March 2015 There are two associated companies, therefore the statutory limits are: Upper Limit = £750,000 Lower Limit = £150,000 Rainy Ltd is therefore a medium company paying corporation tax at the marginal rate 21.25%, Stormy Ltd is a small company paying corporation tax at the small profits rate of 20% Stormy Ltd and Rainy Ltd should dispose of their chargeable assets realising their capital gain and capital loss The group should then net off the capital gain and loss and treat the net capital gain as being realised by Stormy Ltd The group will therefore suffer corporation tax at 20% on the £25,000 of net gain If the net gain had been assessable on Rainy Ltd the group would suffer corporation tax at 21.25% Stormy Ltd Trading profits Chargeable gain (100,000 – 75,000) Taxable total profits w w w s t ud y i nt e r a c t i v e o r g £ 30,000 25,000 ––––––– 55,000 ––––––– Rainy Ltd £ 250,000 ––––––– 250,000 ––––––– 631 C H A P T E R – C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Answer – Zorro plc and Zen Ltd (i) The recommended maximum loss that should be surrendered to Zen Ltd by the Zorro plc group It is beneficial to restrict the group relief claimed in order to maximise the DTR The maximum amount of loss which should be transferred to Zen Ltd is £118,000 (98,000 + 20,000) Year ended 30.6.15 Trading profits UK £ O/S £ FTS £ 100,000 Overseas profits 140,000 25,200 Less: QCD (2,000) 98,000 _ 140,000 Group relief (98,000) Nil (20,000) (balance) _ 120,000 (see working) _ Taxable total profits CT @ 21% Nil 25,200 21% × X = 25,200 X = £120,000 = Taxable total profits DTR Nil (25,200) _ Nil Working backwards, firstly setting the UK corporation tax (before DTR) at £25,200 for the overseas income column This means that the taxable total profits must be £120,000 (25,200 ÷ 21%), and the maximum amount of group relief should be restricted to £118,000 (£20,000 + 98,000) (ii) Advantageous or disadvantageous of making the election to exempt the overseas branch profits and losses to UK corporation tax It is possible for a company to make an election to exempt the profits and losses of an overseas branch from UK corporation tax Situation where the election is advantageous If the branch/ branches are making profits which results in additional UK corporation tax after deducting double tax relief Situation where the election is disadvantageous If the branch is making losses which will reduce the UK corporation tax if the election is not made The maximum amount of group relief that can be claimed is £98,000, if an election is made to exempt the profits of the overseas branch being taxed in the UK The election must be made before the start of the current accounting period 632 w w w s t ud yi nt e r a c t i ve o r g C H A P T E R - C O R P O R A T IO N T A X G R O U P S A N D O V ER S E A S A S P E C T S Year ended 30.6.15 Trading profits UK £ 100,000 Overseas profits (exempt) Nil Qualifying charitable dons (2,000) 98,000 Group relief (98,000) Nil Taxable total profits Answer – Transfer pricing The transfer pricing legislation applies - A Ltd must increase its taxable total profits to UK corporation tax by £7,500 (£1.50  5,000) The transfer pricing legislation does not apply The transfer pricing legislation applies, A Ltd must increase its taxable total profits by £7,500 and B Ltd may make an equal and opposite adjustment to its profits as it is UK resident The transfer pricing legislation applies - A Ltd must increase its taxable total profits to UK corporation tax by £12,000 (6%  200,000) The transfer pricing legislation does not apply The transfer pricing legislation applies A Ltd must increase its taxable total profits to UK corporation tax by £12,000 and B Ltd may make an equal and opposite adjustment to its profits as it is UK resident w w w s t ud y i nt e r a c t i v e o r g 633 ... of tax FORMAT AND BACKGROUND OF THE EXAM PAPER Background about the P6 Exam and the P6 Examiner Rory Fish, the P6 examiner, has now set eighteen Advanced Taxation exams including the old syllabus... of F6 ● New P6 knowledge ● New mind-set to answer P6 style questions Accordingly, each chapter of these notes has the following structure: Basics of F6 Most chapters of your Class notes begin... covered at P6 This stage then adds on the new P6 more involved extra knowledge This is indicated by non-italic headings in the class notes (these parts will be covered during the P6 lectures)