THE CHARTERED INSTITUTE OF TAXATION
ADVANCED TECHNICAL
Taxation of Major Corporates
November 2021
TIME ALLOWED
3 HOURS 30 MINUTES
• 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.
,1. Derfel Ltd is a precision engineering company that has been consistently profitable for many years.
The directors are seeking opportunities to expand, both organically by developing new products
and by acquisitions.
Extract from the Income Statement for Derfel Ltd for the year ended 31 December 2020
Note
£’000
Turnover 361,995
Estimated Research & Development 100
Expenditure Credit
Cost of sales (344,823)
Gross profit 17,272
Administration expenses 1) (7,658)
Interest payable 2) (750)
Net profit 8,864
Notes
1) Administration expenses include:
£’000
Depreciation 5,000
Loss on disposal of cars 75
Legal expenses:
Acquisition of Nimment Ltd 80
Incidental costs of raising loan finance 40
2) Interest expenses:
£’000
Bank interest 600
Hire purchase interest 150
750
Acquisition of Nimment Ltd
On 1 April 2020, Derfel Ltd acquired the entire share capital of Nimment Ltd for £15 million. The
acquisition was funded out of a bank loan of £20 million, taken out by Derfel Ltd, at an interest rate
of 4%. The remaining £5 million was used as working capital and to fund the acquisition of plant.
All the bank interest incurred by the company relates to this loan.
Nimment Ltd specialises in new product innovation with several potentially lucrative projects
underway. The company commenced trading on 1 January 2019 and prepared accounts to 30
June 2019 and then to 30 June 2020. In order to bring its accounting date in line with Derfel Ltd, it
prepared accounts for the six months to 31 December 2020. Nimment Ltd’s results are as follows:
Profit/(loss)
£’000
Six months ended 30 June 2019 (1,000)
Year ended 30 June 2020 (4,000)
Six months ended 31 December 2020 (1,500)
Nimment Ltd has agreed to surrender the maximum amount of losses to Derfel Ltd.
Research & Development
Derfel Ltd undertook research and development activity during the year ended 31 December 2020,
although most of the personnel involved were provided by Nimment Ltd. Nimment Ltd first began
providing the workers on 1 July 2019. A breakdown of the qualifying expenditure for the year ended
31 December 2020 is provided below; these costs accrued evenly over the year:
£’000
In house qualifying expenditure 300
Externally provided workers (from Nimment Ltd) 1,200
Capital allowances
On 1 January 2020, the tax written down values of the general pool was £14,537,692 and the
,2. Denaustin Ltd was incorporated in England and Wales on 1 January 2012 and immediately
commenced trading. The company manufactures and sells fitness equipment both to gyms and to
home users in the UK. It also exports the equipment to third party retailers throughout Europe and
to JHSE SL, its overseas subsidiary.
JHSE SL is resident in Beavol, a state in Eastern Europe and a qualifying territory for UK transfer
pricing purposes. JHSE SL was established by Juan Herrera and remained wholly owned by Juan
until 15 January 2018. On that date, Denaustin Ltd issued new shares to Juan Herrera in exchange
for 60% of his shares in JHSE SL. Following the issue of shares to Juan Herrera, he held 40% of
the shares in Denaustin Ltd. Denaustin Ltd provides JHSE SL with a 10% discount on prices
charged to the other retailers.
Prior to 1 January 2021, Denaustin Ltd’s turnover did not exceed €40 million per annum, nor did its
average number of employees exceed 200. Since mid-2020, there has been a significant increase
in the demand for home gym equipment throughout Europe. By 31 December 2021, the company’s
average number of employees for the year will exceed 300 and the turnover for the year will exceed
€75 million.
Requirement:
Explain how the UK transfer pricing legislation applies to Denaustin Ltd for the year ended
31 December 2021. (15)
3. Kukua Enterprises Inc is a US headed group with diversified interests including a number of UK
subsidiary companies. One subsidiary is Kukua Homes SA, a non-UK resident company, which
only has a substantial portfolio of property, all of which is located in the UK.
Kukua Homes SA has funded its property purchases by bank loans. The company claims capital
allowances on plant and machinery used in the property business and its assets include goodwill.
The company recently moved into profit but has carry forward Income Tax losses at 5 April 2020.
It prepares accounts to 5 April each year.
On 6 June 2021, Kukua Homes SA sold a block of flats for £45 million to a third party. It had
purchased the block for £30 million on 6 April 2012. Since then, the block of flats has been let to
third parties and used for residential purposes. The value of the block of flats on 5 April 2015 was
£35 million, and on 5 April 2019 it was £40 million.
Requirement:
1) Explain how Kukua Homes SA is taxable in the UK for the year ended
5 April 2021. (8)
2) Calculate, with explanations, the chargeable gain arising from the disposal of the
building by Kukua Homes SA on 6 June 2021. (7)
Total (15)
, 4. Rummy Ltd is a UK incorporated and resident biscuit manufacturer, which makes up its accounts
to 31 October each year. The company is a wholly owned subsidiary of a US manufacturing group.
Factory
Rummy Ltd purchased its factory in Sheffield in February 1990 for £400,000 and in addition,
incurred legal fees of £7,000 and Stamp Duty of £4,000. In July 1990, it spent £25,000 on
improvements to the factory; this amount did not qualify for capital allowances.
On 1 February 2021, Rummy Ltd granted an option for £500,000 to a third party property developer
to purchase the Sheffield site for £5 million within the following 12 months. The developer exercised
the option on 31 October 2021 and plans to demolish the factory and build residential houses on
the site.
On 1 June 2021, Rummy Ltd bought a large building in Doncaster for £3 million, broken down as
follows in the sale and purchase agreement:
£
Freehold land 1,100,000
Building 1,400,000
Fixtures within building (original cost was £400,000) 500,000
The building was constructed in 2019 at a cost of £1.2 million. The vendor used the building for
storage and claimed structures and buildings allowances as well as pooling the fixtures within its
capital allowances computation, treating them as integral features.
Immediately upon acquiring the Doncaster site, Rummy Ltd started converting the building into a
new factory in which to manufacture its biscuits. Some manufacturing began at the new factory on
1 September 2021 and the company gradually moved all manufacturing from the old Sheffield
factory to the new Doncaster factory during the two-month period from 1 September to 31 October
2021.
Other assets
In January 2021, Rummy Ltd spent the following amounts on new equipment and vehicles for use
in its biscuit manufacturing trade:
£
Fixed plant and machinery (not qualifying as integral features) 1,050,000
Office furniture and IT equipment 158,000
Three lorries 150,000
Machinery costing £100,000 was scrapped on the move to the new factory
Capital allowance pool
Rummy Ltd’s capital allowance pool brought forward at 1 November 2020 was £58,000. The
original cost of the pool was £585,000.
Requirement:
1) Calculate, with explanations, the chargeable gain arising on the sale of the Sheffield
factory, assuming all available reliefs are claimed by Rummy Ltd. (11)
2) Calculate, with explanations, the maximum capital allowances that Rummy Ltd can
claim in the year ended 31 October 2021. (9)
Total (20)
ADVANCED TECHNICAL
Taxation of Major Corporates
November 2021
TIME ALLOWED
3 HOURS 30 MINUTES
• 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.
,1. Derfel Ltd is a precision engineering company that has been consistently profitable for many years.
The directors are seeking opportunities to expand, both organically by developing new products
and by acquisitions.
Extract from the Income Statement for Derfel Ltd for the year ended 31 December 2020
Note
£’000
Turnover 361,995
Estimated Research & Development 100
Expenditure Credit
Cost of sales (344,823)
Gross profit 17,272
Administration expenses 1) (7,658)
Interest payable 2) (750)
Net profit 8,864
Notes
1) Administration expenses include:
£’000
Depreciation 5,000
Loss on disposal of cars 75
Legal expenses:
Acquisition of Nimment Ltd 80
Incidental costs of raising loan finance 40
2) Interest expenses:
£’000
Bank interest 600
Hire purchase interest 150
750
Acquisition of Nimment Ltd
On 1 April 2020, Derfel Ltd acquired the entire share capital of Nimment Ltd for £15 million. The
acquisition was funded out of a bank loan of £20 million, taken out by Derfel Ltd, at an interest rate
of 4%. The remaining £5 million was used as working capital and to fund the acquisition of plant.
All the bank interest incurred by the company relates to this loan.
Nimment Ltd specialises in new product innovation with several potentially lucrative projects
underway. The company commenced trading on 1 January 2019 and prepared accounts to 30
June 2019 and then to 30 June 2020. In order to bring its accounting date in line with Derfel Ltd, it
prepared accounts for the six months to 31 December 2020. Nimment Ltd’s results are as follows:
Profit/(loss)
£’000
Six months ended 30 June 2019 (1,000)
Year ended 30 June 2020 (4,000)
Six months ended 31 December 2020 (1,500)
Nimment Ltd has agreed to surrender the maximum amount of losses to Derfel Ltd.
Research & Development
Derfel Ltd undertook research and development activity during the year ended 31 December 2020,
although most of the personnel involved were provided by Nimment Ltd. Nimment Ltd first began
providing the workers on 1 July 2019. A breakdown of the qualifying expenditure for the year ended
31 December 2020 is provided below; these costs accrued evenly over the year:
£’000
In house qualifying expenditure 300
Externally provided workers (from Nimment Ltd) 1,200
Capital allowances
On 1 January 2020, the tax written down values of the general pool was £14,537,692 and the
,2. Denaustin Ltd was incorporated in England and Wales on 1 January 2012 and immediately
commenced trading. The company manufactures and sells fitness equipment both to gyms and to
home users in the UK. It also exports the equipment to third party retailers throughout Europe and
to JHSE SL, its overseas subsidiary.
JHSE SL is resident in Beavol, a state in Eastern Europe and a qualifying territory for UK transfer
pricing purposes. JHSE SL was established by Juan Herrera and remained wholly owned by Juan
until 15 January 2018. On that date, Denaustin Ltd issued new shares to Juan Herrera in exchange
for 60% of his shares in JHSE SL. Following the issue of shares to Juan Herrera, he held 40% of
the shares in Denaustin Ltd. Denaustin Ltd provides JHSE SL with a 10% discount on prices
charged to the other retailers.
Prior to 1 January 2021, Denaustin Ltd’s turnover did not exceed €40 million per annum, nor did its
average number of employees exceed 200. Since mid-2020, there has been a significant increase
in the demand for home gym equipment throughout Europe. By 31 December 2021, the company’s
average number of employees for the year will exceed 300 and the turnover for the year will exceed
€75 million.
Requirement:
Explain how the UK transfer pricing legislation applies to Denaustin Ltd for the year ended
31 December 2021. (15)
3. Kukua Enterprises Inc is a US headed group with diversified interests including a number of UK
subsidiary companies. One subsidiary is Kukua Homes SA, a non-UK resident company, which
only has a substantial portfolio of property, all of which is located in the UK.
Kukua Homes SA has funded its property purchases by bank loans. The company claims capital
allowances on plant and machinery used in the property business and its assets include goodwill.
The company recently moved into profit but has carry forward Income Tax losses at 5 April 2020.
It prepares accounts to 5 April each year.
On 6 June 2021, Kukua Homes SA sold a block of flats for £45 million to a third party. It had
purchased the block for £30 million on 6 April 2012. Since then, the block of flats has been let to
third parties and used for residential purposes. The value of the block of flats on 5 April 2015 was
£35 million, and on 5 April 2019 it was £40 million.
Requirement:
1) Explain how Kukua Homes SA is taxable in the UK for the year ended
5 April 2021. (8)
2) Calculate, with explanations, the chargeable gain arising from the disposal of the
building by Kukua Homes SA on 6 June 2021. (7)
Total (15)
, 4. Rummy Ltd is a UK incorporated and resident biscuit manufacturer, which makes up its accounts
to 31 October each year. The company is a wholly owned subsidiary of a US manufacturing group.
Factory
Rummy Ltd purchased its factory in Sheffield in February 1990 for £400,000 and in addition,
incurred legal fees of £7,000 and Stamp Duty of £4,000. In July 1990, it spent £25,000 on
improvements to the factory; this amount did not qualify for capital allowances.
On 1 February 2021, Rummy Ltd granted an option for £500,000 to a third party property developer
to purchase the Sheffield site for £5 million within the following 12 months. The developer exercised
the option on 31 October 2021 and plans to demolish the factory and build residential houses on
the site.
On 1 June 2021, Rummy Ltd bought a large building in Doncaster for £3 million, broken down as
follows in the sale and purchase agreement:
£
Freehold land 1,100,000
Building 1,400,000
Fixtures within building (original cost was £400,000) 500,000
The building was constructed in 2019 at a cost of £1.2 million. The vendor used the building for
storage and claimed structures and buildings allowances as well as pooling the fixtures within its
capital allowances computation, treating them as integral features.
Immediately upon acquiring the Doncaster site, Rummy Ltd started converting the building into a
new factory in which to manufacture its biscuits. Some manufacturing began at the new factory on
1 September 2021 and the company gradually moved all manufacturing from the old Sheffield
factory to the new Doncaster factory during the two-month period from 1 September to 31 October
2021.
Other assets
In January 2021, Rummy Ltd spent the following amounts on new equipment and vehicles for use
in its biscuit manufacturing trade:
£
Fixed plant and machinery (not qualifying as integral features) 1,050,000
Office furniture and IT equipment 158,000
Three lorries 150,000
Machinery costing £100,000 was scrapped on the move to the new factory
Capital allowance pool
Rummy Ltd’s capital allowance pool brought forward at 1 November 2020 was £58,000. The
original cost of the pool was £585,000.
Requirement:
1) Calculate, with explanations, the chargeable gain arising on the sale of the Sheffield
factory, assuming all available reliefs are claimed by Rummy Ltd. (11)
2) Calculate, with explanations, the maximum capital allowances that Rummy Ltd can
claim in the year ended 31 October 2021. (9)
Total (20)
