Corporation tax for Paper P6 (UK)

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.

Expansion via acquisition

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.

The tax implications arising out of the expansion via acquisition are:

• The capital losses of TPL will remain with TPL. TPL has sold its trade and assets to WAL and capital losses always remain with a company when it sells its trade. TPL can use its capital losses to relieve any chargeable gains arising on the assets sold to WAL.
  
  The trading losses of TPL will also remain with TPL and will not be transferred with the trade. Where a company sells its trade to an unconnected company, any trading losses remain with the vendor company. TPL may be able to offset the losses against any capital allowance balancing charges arising on the sale. It is possible for trading losses to be transferred to the purchaser when a company sells its trade to another company, but only when certain conditions are satisfied. Broadly, the same persons must beneficially own at least 75% of the business both before and after the sale. These conditions would have been satisfied if TPL had formed a subsidiary, Newco, sold its trade to Newco, and then sold Newco to GFL.
  
  TPL is the legal and beneficial owner of its trade prior to the sale. If the trade had been sold to Newco, TPL would no longer be the legal owner of the trade but would still be the beneficial owner as it owns Newco, which in turn owns the trade. In such circumstances the trading losses would be transferred to Newco together with the trade. This would enable Newco to use the trading losses against future trading profits arising from the same trade.
  
  However, because there would have been a change in the ownership of Newco (it would have been sold by TPL to GFL), if there is a major change in the nature or conduct of Newco’s trade within three years of the purchase by GFL, it would not be possible for the losses to be carried forward beyond the date of the change of ownership of Newco.
  
  
• There are now two companies in the GFL group. Accordingly, the limits used to determine the rate of corporation tax payable must be divided by two.
  
  
• The corporation tax liability of the group for the year ended 31 March 2015 is computed as follows:

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. 

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.

Conclusion

• When a company purchases a new business it should consider whether to own the business directly or via a new subsidiary. The structure used will have commercial and legal implications and may affect the total tax liability of the group.
• Where a company acquires the trade of another company, capital losses remain with the vendor company. Trading losses will also remain with the vendor company unless the two companies are under common ownership.

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:

• Corporation tax – Group relief for Paper P6 (UK)
• Corporation tax – Groups and chargeable gains for Paper P6 (UK)

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.