Cinnabar Ltd requires advice on the corporation tax treatment of expenditure on research and development, the sale of an intangible asset, and a proposed sale of shares. Cinnabar Ltd has also requested advice on the potential to claim relief for losses incurred in a new joint venture.

Cinnabar Ltd:
– Is a UK resident trading company.
– Has one wholly-owned UK subsidiary, Lapis Ltd.
– Is a small enterprise for the purposes of research and development expenditure.
– Prepares accounts to 31 March each year.
– Expects to pay corporation tax at the main rate for all relevant accounting periods.
– Intends to enter into a joint venture with another UK company, Amber Ltd. This joint venture will be undertaken by a newly incorporated company, Beryl Ltd.

Research and development expenditure – year ended 31 March 2015:
– The expenditure on research and development activities was made up as follows:

– The staff costs include a fee of £10,000 paid to an external contractor, who was provided by an unconnected company.

– The remainder of the staff costs relates to Cinnabar Ltd’s employees, who are wholly engaged in research and development activities.

– The rent is an appropriate allocation of the rent payable for Cinnabar Ltd’s premises for the year.

Sale of an intangible asset to Lapis Ltd:
– The intangible asset was acquired by Cinnabar Ltd in May 2010 for £82,000.

– The asset was sold to Lapis Ltd on 1 November 2014 for its market value on that date of £72,000, when its tax written down value was £65,600.

Sale of shares in Garnet Ltd:
– Cinnabar Ltd acquired a 12% shareholding in Garnet Ltd, a UK resident trading company, in July 2009 for £120,000.

– Cinnabar Ltd sold one third of this shareholding on 20 October 2014.

– Cinnabar Ltd intends to sell the remaining two thirds of this shareholding on 30 November 2015 for £148,000.

– It would be possible to bring forward this sale to October 2015 if it is beneficial to do so.

Beryl Ltd:
– Will be incorporated in the UK and will commence trading on 1 January 2016.

– Is anticipated to generate a trading loss of £80,000 in its first accounting period ending 31 December 2016.

– Will have no sources of income other than trading income.

Alternative capital structures for Beryl Ltd:
– Two alternative structures have been proposed for the shareholdings in Beryl Ltd:

– Structure 1: 76% of the shares in Beryl Ltd will be held by Amber Ltd, with the remaining 24% held by Cinnabar Ltd;

– Structure 2: 70% of the shares will be held by Amber Ltd, 24% by Cinnabar Ltd and the remaining 6% held personally by Mr Varis, the managing director of Amber Ltd.

Required:
(b) Calculate the after-tax proceeds which would be received on the proposed sale of the Garnet Ltd shares on 30 November 2015 and explain the potential advantage of bringing forward this sale to October 2015.

Note: The following indexation factor should be used where necessary:
July 2009 to November 2015 – 0·1903 (5 marks)