THE CHARTERED INSTITUTE OF TAXATION
APPLICATION AND PROFESSIONAL SKILLS
Taxation of Larger Companies and Groups
May 2021
TIME ALLOWED
3 HOURS 30 MINUTES
• In order to secure a pass in this exam, you will be required to demonstrate competence in
each of three skills.
You will be assessed across your answer as a whole for Structure. A pass or fail grade will
be awarded.
You will be assessed for competence in a number of broad topics for the following skills:
• Identification and Application
• Relevant Advice and Substantiated Conclusions
For each topic for each of these two skills, a grade will be awarded. The grades for those
topics will be weighted and averaged to produce a final grade for each skill of 0, 1, 2, 3 or
4. A grade of 3 or 4 is required to demonstrate competence.
• All workings should be shown and made to the nearest month and pound unless the
question specifies otherwise.
• Candidates who answer any law elements in this paper in accordance with Scots law or
Northern Ireland law should indicate this where relevant.
• Scots Law candidates may provide answers referring to Land and Buildings Transaction
Tax rather than Stamp Duty Land Tax.
• Except as set out below or indicated by additional information in the question, you may
assume that 2020/21 legislation (including rates and allowances) continues to apply for
2021/22 and future years.
1) You MUST assume that the UK remains within the European Union.
2) You MUST ignore all temporary Covid related legislation including furlough, grants, loans
and the reductions in VAT and SDLT rates.
Except in relation to points 1) and 2) above, candidates answering by reference to more
recently enacted legislation or tax cases will not be penalised.
• You must type your answer in the space on the screen as indicated by the Exam4 guidance.
,You are Tracy Stevens, a tax manager at Smith and Stevens LLP. Smith and Stevens LLP
provides tax and accounting services to Woodley Adams Ltd, a subsidiary of Woodley Adams
Corp, which is headquartered in Ruritania.
Your tax partner, James Smith, has been contacted by Olivia Peters, the Finance Director of
Woodley Adams Ltd. Woodley Adams Corp is considering expanding its UK activities and Olivia
has asked for tax advice on the proposed expansion.
James has asked you to draft a report for his review in response to Olivia’s request. He has
said that although Woodley Adams Ltd will be seeking separate advice on the Ruritanian tax
implications, you should assume that the rules there are similar to the UK rules for the purposes
of providing the report. The UK and Ruritania have a Double Tax Agreement that is in
accordance with the OECD Model Convention and the corporate tax rate in Ruritania is 12%.
The following exhibits are provided to assist you:
EXHIBIT A: Email from Olivia Peters to James Smith
EXHIBIT B: Extracts from the Design and Build proposal
EXHIBIT C: Extracts from a report prepared by Olivia Peters for the Board of Woodley Adams
Ltd concerning Harrington Products Ltd
EXHIBIT D: Pre-seen information
Requirement:
Prepare a draft report for the Finance Director of Woodley Adams Ltd recommending
how they should proceed in relation to establishing a factory in the UK, the potential
acquisition of Harrington Products Ltd, and how the expansion should be financed.
Continued
Page 2 of 9 APS TOLC
,Continuation
EXHIBIT A
Email from Olivia Peters to James Smith
From:
To:
Date: 1 May 2021
Subject: Proposed expansion of the UK business
James
As discussed, I would like your advice in connection with a proposed expansion of our UK
business.
UK manufacturing facilities
As you are aware, most of our current products are manufactured overseas by other group
companies. In line with our global expansion plans, we plan to start manufacturing in the UK
and to extend our product range to take advantage of the increased demand for adult crafting
supplies within the UK market. With rents currently low for High Street shops, we are also
considering opening our own shops and selling directly to customers.
We have identified two options to obtain the necessary manufacturing and storage facility:
Option 1) Construct a new building
We have identified an appropriate plot of land that is currently on the market for £6 million. An
initial proposal for constructing a building on that land has been obtained – see attached
(EXHIBIT B).
Option 2) Acquire an existing factory and adapt it to meet our needs
We have identified a factory that is currently on the market for £10 million. It is owned by
Harrington Products Ltd, a UK incorporated and tax-resident company which manufactures and
retails children’s educational toys and activity kits. This factory is surplus to the company’s
requirements and is currently tenanted on a short-term let, with a break clause that can be
exercised with 30 days’ notice, meaning that vacant possession would be available. We are
aware that the factory was refurbished in 2019 at a cost of £2.5 million, of which £1 million was
capitalised and the balance of £1.5 million was expensed for accounts and tax purposes as
repairs. Although the factory has been suitably modernised, we will need to spend £5 million to
convert it so that it can produce our required product ranges. This will primarily entail purchasing
and installing new manufacturing plant.
Other expansion opportunities
During our site visit to look at the Harrington Products Ltd factory, we met with the Managing
Director who is the majority shareholder. He has been considering retirement for some time,
and the recent commercial challenges faced by the business have resulted in him further
reviewing his plans. He would consider a sale of the business of Harrington Products Ltd if
commercial terms could be agreed.
As well as the surplus factory, Harrington Products Ltd owns another factory and a warehouse
as well as a number of retail premises on long leases. These leases have been renegotiated in
the past 12 months and are on reasonable commercial terms. These retail premises are in
several of the locations we have identified as suitable for our business. Acquiring the business
of Harrington Products Ltd would allow us to expand quickly without the need to identify suitable
retail premises in each target location and negotiate separate rental agreements with different
Continued
Page 3 of 9 APS TOLC
, Continuation
landlords. In addition, children’s educational toys and activity kits would sell well alongside our
adult crafting supplies.
We have, therefore, decided to make an offer to buy the business of Harrington Products Ltd.
While further negotiation is necessary, the initial indication is that, given the losses incurred in
recent years, the shareholders would not require a premium for the business above the net
asset value of £6.5 million. I have compiled a report for the Board concerning Harrington
Products Ltd (EXHIBIT C). Clearly further work and full due diligence would be undertaken if
we were to proceed with an acquisition of the business.
We will also need to decide how to finance the expansion. Woodley Adams Corp has surplus
funds in Ruritania that could be made available to us. Alternatively, we could borrow up to £20
million from an external UK bank at an interest rate of 6%.
We will take advice from our Ruritanian tax advisers regarding the impact in Ruritania of our
proposed UK expansion. Subject to that, we would like your advice on:
1) whether Woodley Adams Ltd should buy the factory from Harrington Products Ltd or
construct our own factory;
2) whether Woodley Adams Ltd should buy the trade and assets or the shares of Harrington
Products Ltd; and
3) how Woodley Adams Ltd should finance the expansion.
I look forward to hearing from you.
Regards
Olivia
Continued
Page 4 of 9 APS TOLC
APPLICATION AND PROFESSIONAL SKILLS
Taxation of Larger Companies and Groups
May 2021
TIME ALLOWED
3 HOURS 30 MINUTES
• In order to secure a pass in this exam, you will be required to demonstrate competence in
each of three skills.
You will be assessed across your answer as a whole for Structure. A pass or fail grade will
be awarded.
You will be assessed for competence in a number of broad topics for the following skills:
• Identification and Application
• Relevant Advice and Substantiated Conclusions
For each topic for each of these two skills, a grade will be awarded. The grades for those
topics will be weighted and averaged to produce a final grade for each skill of 0, 1, 2, 3 or
4. A grade of 3 or 4 is required to demonstrate competence.
• All workings should be shown and made to the nearest month and pound unless the
question specifies otherwise.
• Candidates who answer any law elements in this paper in accordance with Scots law or
Northern Ireland law should indicate this where relevant.
• Scots Law candidates may provide answers referring to Land and Buildings Transaction
Tax rather than Stamp Duty Land Tax.
• Except as set out below or indicated by additional information in the question, you may
assume that 2020/21 legislation (including rates and allowances) continues to apply for
2021/22 and future years.
1) You MUST assume that the UK remains within the European Union.
2) You MUST ignore all temporary Covid related legislation including furlough, grants, loans
and the reductions in VAT and SDLT rates.
Except in relation to points 1) and 2) above, candidates answering by reference to more
recently enacted legislation or tax cases will not be penalised.
• You must type your answer in the space on the screen as indicated by the Exam4 guidance.
,You are Tracy Stevens, a tax manager at Smith and Stevens LLP. Smith and Stevens LLP
provides tax and accounting services to Woodley Adams Ltd, a subsidiary of Woodley Adams
Corp, which is headquartered in Ruritania.
Your tax partner, James Smith, has been contacted by Olivia Peters, the Finance Director of
Woodley Adams Ltd. Woodley Adams Corp is considering expanding its UK activities and Olivia
has asked for tax advice on the proposed expansion.
James has asked you to draft a report for his review in response to Olivia’s request. He has
said that although Woodley Adams Ltd will be seeking separate advice on the Ruritanian tax
implications, you should assume that the rules there are similar to the UK rules for the purposes
of providing the report. The UK and Ruritania have a Double Tax Agreement that is in
accordance with the OECD Model Convention and the corporate tax rate in Ruritania is 12%.
The following exhibits are provided to assist you:
EXHIBIT A: Email from Olivia Peters to James Smith
EXHIBIT B: Extracts from the Design and Build proposal
EXHIBIT C: Extracts from a report prepared by Olivia Peters for the Board of Woodley Adams
Ltd concerning Harrington Products Ltd
EXHIBIT D: Pre-seen information
Requirement:
Prepare a draft report for the Finance Director of Woodley Adams Ltd recommending
how they should proceed in relation to establishing a factory in the UK, the potential
acquisition of Harrington Products Ltd, and how the expansion should be financed.
Continued
Page 2 of 9 APS TOLC
,Continuation
EXHIBIT A
Email from Olivia Peters to James Smith
From:
To:
Date: 1 May 2021
Subject: Proposed expansion of the UK business
James
As discussed, I would like your advice in connection with a proposed expansion of our UK
business.
UK manufacturing facilities
As you are aware, most of our current products are manufactured overseas by other group
companies. In line with our global expansion plans, we plan to start manufacturing in the UK
and to extend our product range to take advantage of the increased demand for adult crafting
supplies within the UK market. With rents currently low for High Street shops, we are also
considering opening our own shops and selling directly to customers.
We have identified two options to obtain the necessary manufacturing and storage facility:
Option 1) Construct a new building
We have identified an appropriate plot of land that is currently on the market for £6 million. An
initial proposal for constructing a building on that land has been obtained – see attached
(EXHIBIT B).
Option 2) Acquire an existing factory and adapt it to meet our needs
We have identified a factory that is currently on the market for £10 million. It is owned by
Harrington Products Ltd, a UK incorporated and tax-resident company which manufactures and
retails children’s educational toys and activity kits. This factory is surplus to the company’s
requirements and is currently tenanted on a short-term let, with a break clause that can be
exercised with 30 days’ notice, meaning that vacant possession would be available. We are
aware that the factory was refurbished in 2019 at a cost of £2.5 million, of which £1 million was
capitalised and the balance of £1.5 million was expensed for accounts and tax purposes as
repairs. Although the factory has been suitably modernised, we will need to spend £5 million to
convert it so that it can produce our required product ranges. This will primarily entail purchasing
and installing new manufacturing plant.
Other expansion opportunities
During our site visit to look at the Harrington Products Ltd factory, we met with the Managing
Director who is the majority shareholder. He has been considering retirement for some time,
and the recent commercial challenges faced by the business have resulted in him further
reviewing his plans. He would consider a sale of the business of Harrington Products Ltd if
commercial terms could be agreed.
As well as the surplus factory, Harrington Products Ltd owns another factory and a warehouse
as well as a number of retail premises on long leases. These leases have been renegotiated in
the past 12 months and are on reasonable commercial terms. These retail premises are in
several of the locations we have identified as suitable for our business. Acquiring the business
of Harrington Products Ltd would allow us to expand quickly without the need to identify suitable
retail premises in each target location and negotiate separate rental agreements with different
Continued
Page 3 of 9 APS TOLC
, Continuation
landlords. In addition, children’s educational toys and activity kits would sell well alongside our
adult crafting supplies.
We have, therefore, decided to make an offer to buy the business of Harrington Products Ltd.
While further negotiation is necessary, the initial indication is that, given the losses incurred in
recent years, the shareholders would not require a premium for the business above the net
asset value of £6.5 million. I have compiled a report for the Board concerning Harrington
Products Ltd (EXHIBIT C). Clearly further work and full due diligence would be undertaken if
we were to proceed with an acquisition of the business.
We will also need to decide how to finance the expansion. Woodley Adams Corp has surplus
funds in Ruritania that could be made available to us. Alternatively, we could borrow up to £20
million from an external UK bank at an interest rate of 6%.
We will take advice from our Ruritanian tax advisers regarding the impact in Ruritania of our
proposed UK expansion. Subject to that, we would like your advice on:
1) whether Woodley Adams Ltd should buy the factory from Harrington Products Ltd or
construct our own factory;
2) whether Woodley Adams Ltd should buy the trade and assets or the shares of Harrington
Products Ltd; and
3) how Woodley Adams Ltd should finance the expansion.
I look forward to hearing from you.
Regards
Olivia
Continued
Page 4 of 9 APS TOLC
