Part 2 of 4
This is the Finance Act 2014 version of this article. It is relevant for candidates sitting the Paper P6 (UK) exam in the period 1 April 2015 to 30 June 2016. Candidates sitting Paper P6 (UK) after 30 June 2016 should refer to the Finance Act 2015 version of this article (to be published in 2016).
In Part 1 Global Figurines Ltd (GFL) was formed and began trading. In this part, GFL will acquire an additional business. Once you have read about the company’s plans, stop and think about the possible tax implications before reading on.
In February 2014 Fay identified TP Ltd (TPL) as a possible acquisition. TPL manufactures figurines of painters and poets and was a member of a large group of companies. It was agreed (for commercial reasons) that the trade and assets of TPL, rather than the shares, would be acquired.
On 1 April 2014, GFL formed a wholly owned subsidiary called Writers and Artists Ltd (WAL). On the same day, WAL acquired the trade and assets of TPL. TPL had trading losses of £65,000 and capital losses of £18,000 available to carry forward as at 31 March 2014.
The results of the two companies for the year ended 31 March 2015 were as follows.
GFL | Taxable total profits | £200,000 | |
WAL | Trading profits Chargeable gains | £80,000 £20,000 |
The tax implications arising out of the expansion via acquisition are:
GFL | £ | |
£200,000 x 21% | 42,000 | |
Less: marginal relief (£750,000 – £200,000) x 1/400 | (1,375) | |
40,625 | ||
WAL | £ | |
£100,000 (£80,000 + £20,000) x 20% | 20,000 | |
Group tax liability (£40,625 + £20,000) | 60,625 |
Consideration could have been given to GFL acquiring the trade of TPL without the use of a separate subsidiary. This would have resulted in a single company with taxable total profits of £300,000 (£200,000 + £100,000) and a lower tax liability, as set out below.
GFL (owning the trade of TPL) | ||
£300,000 x 20% | £60,000 | |
Reduced tax liability (£60,625 – £60,000) | £625 |
The decision as to whether or not to use a separate subsidiary would first need to take account of commercial and legal issues; the small tax saving would then be a minor added bonus if it was decided that GFL would acquire the trade of TPL.
In the remaining parts of this article we will look at the implications of GFL expanding overseas.
The corporation tax issues relating to groups are considered in two further articles:
Written by a member of the Paper P6 examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The author and the ACCA expressly disclaims all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.