Rose Inc., Tim Ltd, and Spot Ltd
Group structure
The three companies include Rose Inc., Tim Ltd, and Spot Ltd. For the company to be included in Plc’s global capital gains tax and loss relief groups the entity must hold 75% of the parent company or it must be 75% of the subsidiary of the parent company or both. Second, the holding company must have at least 75% effective interest in the subsidiary common share capital. In addition the holding company must have the right to get at least 75% of the subsidiary profit distributable to shareholders as well as net assets in case the company winds up.
Therefore Amber Plc will include Rose Inc to its global capital gain tax and loss relief. The parent company owns more than 75% in Rose Inc.
Amber Plc does not have the necessary 75% share capital or shareholding in Tim Ltd and therefore the branch is excluded to the parent company global capital gains tax and loss relief groups. (100% x90% x75% = 67.5%)
Further Spot Ltd is not included in Amber Plc’s global capital gains tax and loss relief groups as it does not meet 75% holding criteria. (100% x 90% x75% x 70% =47.25%)
Explain how the profits of Top SA may be included in the UK tax charge. You should discuss the Controlled Foreign Company (CFC) rules and how and why they may be applied to Top SA.
Non-United Kingdom firms established in low tax nations (tax havens) for instance Utopia can be controlled by foreign corporation’s legislation if the company is controlled from the United Kingdom. Utopia resident companies are not chargeable it the UK tax unless their operation is performed through a branch or permanent establish company in the United Kingdom. Top SA is a Utopian resident. Further Top SA does not operate in the United Kingdom neither does it operates through a permanent establishment or UK company branch. Based on this argument Top SA is not chargeable to tax in the United Kingdom.
Explain the tax treatment of the capital transactions in Amber Plc for the year ended 31 March 2020 stating any available reliefs that Amber Plc may be able to claim
The first transfer was made between Amber Plc and Pat Ltd which is permanently established in the UK. Being a UK residence and subsidiary of Amber Plc we can say the transfer was done within the company and hence no tax charged. The second transfer of capital asset was factory sold to an independent third party for £320,500. As the factory was sold to a third party the company had the right to claim for capital gain. In this case the company suffered a loss on disposal and hence no capital gain. The company will claim relief for loss on disposal.
Finally, Amber Plc sold its holding to Pat Ltd for £1,120,000. This is a loss of £30,000. As the part is established in the UK and is part of the parent company there is no tax charged on the transaction.
Amber Plc’s corporation tax liability for the year ended 31 March 2020
| £ | |
| Trading profits | 11,760,200 |
| Less trading interest | (8,000) |
| Transfer Pricing Adjustment | (335,000) |
| Net foreign rental income (90/100 x 750000) | (657,000) |
| Taxable income | 1,0760,200 |
| Group relief from disposal of capital assets | 45,3000 |
| Taxable profit | 10,714,900 |
| Tax payable | 2,035,831 |
The tax is due 9 m and 1 day that is January 1, 2021
Top SA – £600,000 x 5% = £ 30,000
Payable January 1, 2021
:
£
Cost of goods from Rose Inc (Note 2) 335,000
Sales to Top SA (Note 3) 440,000
Net foreign rental income received (Note 4) 750,000
Explain the VAT consequences of sales made by the UK group companies to Rose Inc. If the American branch of Rose Inc sells goods to Tim Ltd explain the UK VAT consequences.
Sale made by UK companies Rose Inc is considered to be an export. VAT is applied for goods sold in the UK and European Union, hence for goods sold outside the United Kingdom and European Union you are not required to charge value-added tax. The sale of goods to Rose Inc. is considered as zero-rated sales as long as the company is able to keep the required evidence and comply with export laws. The sale made to Rose Inc. reduces the value-added tax chargeable. The sale of goods from Rose Inc to Tim Ltd will not have any consequence to UK VAT. This is because the two companies are American and are not regulated by UK VAT law.
Advise the visiting directors on their UK tax residence status in 2020/21 and explain how any overseas income will be taxed in the UK.
For non-UK residents with a source of in the UK they will be required to complete tax return even if the doesn’t owe any tax. since the two are directors of a UK company it is necessary for them to file tax returns in the UK. Since they are visiting director they will be treated as non-residence for their entire stay in the UK and hence the salary received from overseas will not be taxable in the United Kingdom.
Question 2
Explain whether the group should consider making a group registration for VAT purposes
Group VAT registration assist more than one limited company or bodies corporate to be treated as singe taxable individual for VAT purpose. The group is able to file a single VAT return each period.
The corporate can register as a VAT group if:
It is established in the United Kingdom
The group must satisfy the control meaning that one company should control others and the person should be registered as body corporate. Further the group should satisfy the ant-avoidance provision. Chad Plc trading group meets the above-mentioned requirement and therefore it should be registered as a VAT group.
If Chad Plc does not make a group relief claim explain the amount of tax and the relevant due dates that arise as a result of Chad Plc’s profit.
| £ | |
| Trading profit in the UK | 480,000 |
| Trading profit in Utopia (gross) (before deduction of 14% Utopian tax) | 70,000 |
| Taxable total profits | 550,000 |
| Add back Mark up | 60,000 |
| Adjusted taxable profit | 490,00 |
| Less 14% Utopian tax | 9,800 |
| Taxable total profits | 480,200 |
| Tax liability | 144,060 |
Total tax = 144,060 +9,800 =£153,860
The payment of corporate tax is due within 9 months and one day from the ended of the financial period. £144,060 is due on January 1, 2021.
Group relief group
It is good to note that group relief does not depend on the shareholding percentage. In case the subsidiary suffers a loss of 100% of the loss will be claimed as group relief by the holding company.
| Taxable total profits | 550,000 |
| Less group relief (intergroup transaction) | 200,000 |
| Trading profit in Utopia | 70,000 |
| Taxable total profits | 28,000 |
| Corporation tax at 30% | 6,000 |
| Less: Double tax relief | (6,000) |
| Corporation tax liability | nil |
Pricing policy used by Royce Inc
Royce Inc applies a full cost-plus approach to sell goods to the group companies. The approach increases the transfer by adding the mark-up. The approach motivates the subsidiary as the company making an additional profit for the sale made. The full cost plus mark-up increases the tax payable by the company as the company is perceived to make more revenue as well as catering to the cost of production. In the long run the tax payable by the company increases. Given the fact that the tax payable is based on the profit made Royce Inc. will pay more or less tax.
Question 3
The consideration of the substantial shareholding exemption allows a gain on disposal share by the company to be exempted from the corporation tax. The provision is criticized as the loss that arises from the disposal of shares is not allowable.
The substantial shareholding exemption requirement is much detailed and for an exemption to apply some conditions must be satisfied. To make a decision on the best date when Major Ltd should dispose of the reaming 5% shareholding in Venus Ltd its recommended to access the legislation. First for the exemption to apply the company disposing shares must be trading entity or must be a member of a trading company.
Second, the investing firm must also be a trading entity or the parent entity of the trading group. The investing company must have a substantial shareholding of at least 10% interest in the investee company. Finally the shares been disposed of were part of total holding of at least 10% that are held continuously for a period of 12 months beginning not more than 2 years prior to the disposal. Disposal of less than 10% is eligible for the shareholding exemption if the shares been disposed of are piecemeal and satisfy the condition mention above.
Major Ltd holds 5% of the share capital in Venus Ltd before the disposal. The two years before the disposal from 1 January 208 to 31 December 2020 the company did not hold at least 10% of Venus Ltd. As a result of this the company is not eligible for substantial share exemption hence gain or allowable loss will arise. Based on this I recommend that the sale of shares to be delayed to 31 December 2020.
Prepare calculations to help Ashok decide whether he should make a remittance basis claim for the tax year 2019/20.
There is no capital gains tax in Pakistan and income tax is charged at a flat 30% rate. There is no double tax treaty between the UK and Pakistan.
Being a UK residence Pakistan pays tax on oversee and domestic income but claim capital gain for any capital asset sold.
| Annual salary | Dividend income | Total | ||||
| £80,000 | £60,000
| £140,000 | ||||
| 24,500 | |||||
| 19,500 | |||||
| Remittance changed | 2,000 | |||||
| Capital Gains Tax Gain on UK shares: 20,000 x 10% Residential property : 240,000x 18% Total = 260,000 | 45,200 | |||||
| Less Annual exemption | (12,000 | |||||
| Remittance | 100,000 | |||||
| Tax payable | 178700 | |||||