Definitions

Question 1

Question

Answer 1

Answer

Question 2

Portfolio holding

Answer 2

A holding of

Question 3

Associated companies

Answer 3

Companies where one has a >50% holding in the other; ortwo companies are under the common control of a third partyA company is associated with all of its associates’ associatesInclude: Overseas companies, companies joining/leaving the group during the accounting periodExclude: Companies dormant throughout the year, passive (non-trading) holding companies (companies with no other income or expenses other than receiving dividends from associated companies, where the shares are the only assets it holds.

Question 4

MCINOCOT examples

Answer 4

Change in: 
Service provided
Nature of customers
Assets traded in
location of premises
Suppliers, management, staff
Methods of manufacturing
Pricing or Purchasing policies

Question 5

Loss Group

Answer 5

75% group. Two companies are members where one company is a 75% sub of the other or both are 75% subs of a thirda 75% sub is one where 75% of the ord is directly or indirectly owned,
the owner has 75% of profits distributable to shareholders;
it has the right to 75% or more of net assets on a winding up;
The shares are not held as trading stock.

Question 6

Equity Holders

Answer 6

Holders or ords and

Loan creditors in respect of a loan which is not a “normal commercial loan”

Question 7

Link Company

Answer 7

A Consortium member that is also part of a losses group

Question 8

Connected Parties (Capital Gains)

Answer 8

Companies under the same control;
A company and the person who controls the company.
Transactions with connected parties (not in same gains group) are deemed to be at open market value

Question 9

Wasting Chattel

Answer 9

Exempt;

Question 10

Non wasting chattels

Answer 10

Exempt if proceeds and cost £6000, marginal if proceeds OR cost > £6,000

Question 11

Depreciating Asset

Answer 11

An asset with a life =

Question 12

Chargeable Gains Group

Answer 12

One company owns =>75% of another company;
Two companies under common =>75% control of a third company;
Companies can only be in one gains group, which must always start with the topco. There is no opting in or out;
Non-residents can act as links but can not participate.

Question 13

Pre-Entry Capital Losses

Answer 13

Designed to stop companies buying loss makers to use the relief;
Since 2011, apply to losses realised prior to a company joining a group and losses unrealised when the company joined the group but were realised before 19 July 2011.
Pre-entry capital losses can be used to offset gains:
from a disposal made before the company joins the group;
from the disposal of an asset owned when the company joined the group;
from the disposal of an asset acquired after the company joined the group where that asset was both acquired from outside the group and used by the company for the purposes of its business;
never against capital losses of the new group.

Question 14

Value shifting without a capital disposal

Answer 14

Involves manipulating values of assets without a diposal having occurred. The rules are to prevent value being extracted on a tax free basis and a disposal is then made at a loss because the asset has been reduced in value by the value shifting.Rules apply when:
a controlling shareholder of a company uses that control so that value passes out of shares that they (or persons connected with them) own into other shares in the company;
the owner of an asset) whether a property or other asset) sells the asset and leases it back, and there are arrangements in favour of the original owner;
rights or restrictions over any asset are reduced, or removed, by the person entitled to enforce them.The person who transfers value is deemed to make a disposal (or part disposal) at market value, and the recipient takes the asset with a base cost equivalent to that market value.

Question 15

Value shifting via tax free benefits

Answer 15

Stripping out value from an asset in form of tax free benefit then disposing of it. Eg, a dividend is paid which is free of tax in the hands of the receiving company.

Question 16

Value shiting on disposal of shares or securities by a company

Answer 16

Payment of a dividend out of an untaxed accounting profit rather than distributable reserves. Examples being:
capital gains consideration does not reflect the true value of the assets disposed of;
the creation of distributable reserces prior to disposal;
value passing from the company which is sold to the vendor group, typically by way of dividend;
dividend payments funded by way of a loan;
subscription for extra shares in order to increase the base cost of the overall holding and receives the value of the amount subscribed.

Question 17

Deprciatory Transactions

Answer 17

Applies to companies that are members of gains groups. Depreciatory transaction can be the payment of a dividend from profits that have not been taxed - for example an asset sold between members of a gains group where an accounting profit exists, but the asset was transferrred at NGNL.

Question 18

Informal winding up

Answer 18

When a liquidator is not appointed. Distributions to shareholders regarded as capital as long as they do not exceed £25,000 (this is all distributions since the ‘intention was formed’ to wind up the company. If > 25000 the whole is treated as income. Repayment of share capital is outside this and does not count towards the 25000 limit

Question 19

Mixed consideration share purchase

Answer 19

Apportion costs to the share and cash part of the deal. If the cash received is

Question 20

Group Share Exchanges

Answer 20

Where the reorganisation provisions would normally result in a transaction being treated as if it did not involve a disposal of shares, but
should there have been a disposal, any gain accruing on that disposal would have been exempt under SSE, the no disposal treatment is disapplied so that an exempt gain accrues instead.

Question 21

Scheme of reconstruction

Answer 21

If a merger qualifies as a scheme of reconstruction then assets are transferred at NGNL. The following must apply:
The successor company issues share capital to the holder of the other company; and
The scheme should confer all the shareholders of the same class an equal entitlement; and either:
There must be a continuity of business; or
The scheme is carried out in pursuance of a compromise arrangement to which Part 26 of CA 2006 applies, and no part of the original company is transferred to any other person.An application may be made for advance clearance that the transaction will be treated as a scheme of reconstruction.The new shares or debentures issued stand in the shoes of the old shares.If the old shares are cancelled, their cost becomes the cost of the new shares. If not, then the original cost is split over the two holdings based on mv.Scheme must be for bona fide commercial reasons.

Question 22

Cessation of trade

Answer 22

trading losses brought forward are lost;

Balancing adjustments may arise on assets qualifying for capital allowances.

Question 23

Significant Increase in capital

Answer 23

An increase of £1m or more or if capital doubles over a 3-year period.

Question 24

Ramsay Principles of tax avoidance

Answer 24

For the Ramsay principle to apply there must be a series of transactions:Which was, at the tim when the intermediate transaction was entered into, preordained in order to produce a given result;Which had no other purpose other than tax mitigation;Where there was at that time no practical likelihood that the pre-planned events would not take plance in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life;And the pre-ordained events did in fact take place

Question 25

Disclosure of Tax Avoidance Schemes (DOTAS)

Answer 25

A scheme promoter devises a tax avoidance scheme and sells that scheme to a client;The scheme promoter os required to disclose full details of the scheme to HMRC generally within 5 days of making the scheme available;HMRC provides the promoter with a Scheme Reference Number (SRN) which signifies the registration of the scheme, not that it has been approved;The promoter gives the SRN to everyone who uses the scheme. They myst provide HMRC with details of all of the clients including names and tax reference number every quarter;The scheme user must thereafter include the SRN on their tax return for the periods in which they use the tax avoidance scheme.

Question 26

Tax Arrangement

Answer 26

A tax arrangement must be disclosed where:it will, or might be expected to, enable any person to obtain a tax advantage;that tax advantage is, or might be expected to be, the main benefit, or one of the main benefits, of the arrangement;it is a tax arrangement that falls within one of the specified descriptions or ‘hallmarks’

Question 27

The Hallmarks

Answer 27

IF a scheme bears one of the following hallmarks, it falls within the disclosure regime:Confidentiality - where the promoter would want to keep it confidential from other promoters or HMRC;Premium fee - the fee charged depends largely on the success of the scheme;Standardisation - the product being sold can be adapted to the client without significant modification;Losses - the scheme involves manufacturing trading losses for wealthy individuals which can be offset against other tax liabilities;A leasing arrangement is involved with a cost of at least £10m for a period of at least 2 years;The regime also applies to stamp duty land tax schemes although in this case different hallmarks apply

Question 28

A Promoter

Answer 28

A person is a promoter if:he is to any extent responsible for the design of the proposed arrangements; orhe makes a firm approach to another person with a view to making the proposal available for implementation; orhe makes the notifiable proposal available for implementation by other persons.

Question 29

HMRC’s information powers

Answer 29

HMRC can require an introducer to identify the person who provided them with information about the scheme;Enquire why a promoter has not disclosed a scheme;Resolve disputes and, if necessary, enforce disclosure;Request more information if disclosure is incomplete;Require a promoter to provide information to identify a client if HMRC suspects that the reported parties are not the only parties to the scheme.

Question 30

Targeted Anti-Avoidance Rules

Answer 30

Aim is to prevent specific types of transactions that exploit loopholes in the legislation;May be used to address avoidance schemes identified under DOTAS;Transactions are only caught when obtaining a tax advantage is one of the main purposes.

Question 31

Transfer pricing applies to

Answer 31

Applies to companies under common control; orJV arrangements where control exercised by two persons, each having a >40% share; orcompanies where one party acts with others to provide financing arrangements and would have control if all those parties were taken into account.Payments can be made to the advantaged person by the disadvantaged person without tax impact as long as they do not exceed the compensating adjustment required as a result of the arm’s length price being used.Rules do not apply where the advantaged company is a small or medium sized enterprises. Companies are large if they are in a group which, as a whole, is large.Exceptions:An SME excepts the exemption;The transaction is with a party which is resident in a non-qual territory;a TP notice has been issued by HNMRC - medium sized enterprises where there has been manipulation and SMEs where the transactions involve patent box.

Question 32

Relevant Company (World Wide Debt Cap)

Answer 32

Resident in the UK

Question 33

Group (World Wide Debt Cap)

Answer 33

The ultimate parent of the worldwide group and its effective 75% subs

Question 34

TEA

Answer 34

Tested Expense Amount (worldwide debt cap)

Question 35

TIA

Answer 35

Tested Income Amount (worldwide debt cap)

Question 36

Long periods of account

Answer 36

If the company’s period of account is not more than 18 months long, the tax return will be made for 2 periods (first 12 months then balance).If the company’s period of account exceeds 18 months, two returns will be required - one for the first 12 months and the other for the balance. Return will be due on the later of 12 months from the end of the return period and 30 months for the beginning of the period of account.

Question 37

Allowable legal costs

Answer 37

Normal accountancy and tax compliance costs but not leval costs involved in appeals against tax assessments

legal costs incurred in terms of dealing with HMRC enquiries are allowable provided they do not give rise to increased tax liabilities or indicate discrepancies arising from negligent or fraudulent conduct.

Legal costs in connection with loan relationships are allowable in accordance with the loan relationship rules.

Others:
defence of title to fixed assets;
successful defence of breaches of contract;
termination of onerous trading contracts;
trade debt collection;
rating appeals;
renewal of short leases.