Corporation Tax

Question 1

Sale and leaseback of property

Answer 1

Chargeable gain on disposal

If reinvest proceeds then there’s chance for rollover relief

Annual revenue deduction in relation to the lease premium [LP x (50-14)/50]/15 assuming a 15 year leaseback

Interest and depreciation would be charged to the SPL, and is deductible for CT purposes

Purchaser pays SDLT on purchase of factory, and seller pays SDLT on the lease premium and lease rentals

Question 2

Thin capitalisation

Answer 2

Loan finance provided to a connected company exceeds the amount a third party would be willing to provide.

The interest charged on the amount of the loan that excesss an amount that a third party would lend, is not allowable for tax purposes and a disallowance must be made.

A further disallowance may also be required if the level of interest charged on a loan is not at arms length, such that a tax advantage is obtained in the UK

Question 3

Corporate Interest Restrictions (CIR)

Answer 3

Where a company’s net-interest expense is greater than £2m, the interest allowance should be calculated.

If net-interest expense > interest allowance, then the excess is disallowed deduction for CT purposes.

Interest allowance = lower of:
30% x group aggregate tax-EBITDA
Fixed ratio debt cap (or ‘ANGIE’)

An election can be mass to apply the group ratio method if this gives a higher interest allowance. This interest allowance is the lower of:

Group ratio % of the aggregate tax-EBITDA
Group ratio debt cap

Question 4

Benefits given to directors of a close company

Answer 4

Directors take loans / benefits from the company, a s.455 charge applies whereby 32.5% of the loan amount is paid by the company to HMRC

Loan repaid = charge repaid
Loan w/off = charge repaid, but taxed as a dividend

In addition, a Benefit In Kind charge will apply if the rate of interest on the loan =/= official rate of interest

If employee receiving a benefit, no special close company rules. If non-employee receiving a benefit, tax as dividend

[background is that in the 70s, higher rate income tax was c. 83%, and investment income surcharge c. 15%, meaning their marginal rate of tax was 98%, so people used close companies to get benefits]

Question 5

Group relief of IFA

Answer 5

Any post-acquisition capital or trading losses can be used to group relief

Any pre-acquisition capital losses cannot be used for group relief.

Any pre-acquisition trading losses can only be used if they are post-Apr 17, after waiting 5 years (as long as there’s no major change in trade)