company issues

Question 1

what is transfer pricing

Answer 1

companies within a group (related entities) may transact with each other at a non arms length basis (non market terms)

this may be done to transfer profits and losses to each other by doing over/under pricing.

this is done to avoid paying tax. tax rules of for eg. 75% group may be ignored

Question 2

what has tax dept done as anti avoidance rule?

Answer 2

tax dept converts these transactions to arms length basis.
i.e restated to normal market rates.

Question 3

Anti avoidance rule for large company

Answer 3

if large company transacts with anyone - AA will apply. Transaction must always be done at arms length basis.

Question 4

If UK SME transacts with another UK SME

Answer 4

no anti avoidance. Over/under pricing is allowed

Question 5

If UK SME transacts with overseas SME

Answer 5

Qualifying territory: no anti avoidance. Over/under pricing is allowed

Non qualifying territory: AA will apply. Transaction must always be done at arms length basis.

Question 6

qualifying territory meaning

Answer 6

means UK has a double tax treaty

Question 7

when would a medium sized entity face anti avoidance

Answer 7

if over/under pricing is done persistently

Question 8

what are the tax reliefs for research and development costs

Answer 8

100% allowed expense on capital expenditure (deduct from trading PnL in same year)

100% allowed expense for revenue expenditure + additional relief for qualifying outflows

Question 9

capital expenditure

Answer 9

Capital expenditure means expenditure on assets which have life of more than 1 year.

-Land does not qualify for RnD relief (even though life >1 year)
-Software purchase will be revenue expenditure (even though life >1yr)

Question 10

if capital asset is sold

Answer 10

100% proceed will be chargeable in trading PnL.

Question 11

Revenue expenditure

Answer 11

all those RnD expenses which dont fall under capital expenditure will fall under revenue expenditure

all RnD revenue exps will get 100% allowed expense

some qualifying outflows will get additional allowed expense of 86%

Question 12

what are qualifying outflows

Answer 12

1- R&D Staff salaries
2- 65% cost of outsourced staff
3- Software purchased
4- Consumables
5- Utility expenses

186% allowed expense.

Question 13

what are specially non qualifying outflows

Answer 13

1- market research cost
2- admin dept cost (including rent)
3- independent outsourced research cost
4- subsidized research

no additional relief on this. normal 100% allowed exp is given

Question 14

additional relief is only for

Answer 14

small and medium companies

for large entities additional relief is different but not part of ATX course

Question 15

if due to RnD, a company suffers trading loss, what relief options do they have?

Answer 15

1- normal trading loss relief
2- option to surrender loss and take 10% cash of amount of surrenderable loss

surrenderable loss will be lower of:
1) un relieved trading loss after all possible current yr, carry back and group relief claims
2) 186% of qualifying RnD activities

this option will be taken by those who have no income hope in future, as normal relief gives 19% benefit that is usually the better option.

Question 16

how is tax assessed on intangible assets

Answer 16

in individuals - CGT
in companies - under trading income. yearly amortization is given as an allowed expense. no amortization concept in individuals

Question 17

amortization allowed expense amount

Answer 17

will be higher of
-cost/ life
-cost*4%

Question 18

how will gain/loss be assessed when intangible asset is sold

Answer 18

gain/loss will be calculated using book value rather than cost

gain/loss = DP-Book value
book value: cost less amortization claimed

no indexation allowance as that is available for CGT only

this gain/loss will be assessed in trading PnL

Question 19

will rollover relief be available if the company reinvests proceeds in another intangible asset?

Answer 19

yes

if full proceed reinvested:
proceeds less cost of old asset

if partial reinvestment:
reinvested amount less cost of old asset

reinvestment period requirement (1-3 rule) must be met

Question 20

tax rules for goodwill

Answer 20

goodwill is not liked by tax department
no amortization on goodwill

gain on goodwill: trading PnL
loss on goodwill: capital loss

Question 21

if a company develops its own Patents through trading PnL, then sells them or lets them out…

Answer 21

the profit from sale or letting is taxed at 10% rather than normal rate of 19%.

Question 21

in a capital gains group, intangible assets are transferred at

Answer 21

book value

no gain no loss