Question 1d
Your manager has had a telephone conversation with Burt, the Group Finance Director of the Epon Ltd group of companies. Extracts from both a memorandum and an email from your manager are set out below.
Extract from a memorandum from your manager
On Thursday 6 June I spoke to Burt, the Group Finance Director of Epon Ltd. He is coming to the office on Monday to appoint us as tax advisers to the group, and possibly to the individual directors, and to discuss the group’s affairs.
The Epon Ltd group
Epon Ltd is owned by a large number of unrelated individuals. Epon Ltd owns 100% of the ordinary share capital of Wahzah Ltd, Yoko Ltd and NewCo Ltd. All four companies are UK resident and prepare accounts to 30 June each year. It is the policy of the group to maximise the tax saved when relieving losses and only to carry losses forward if there is no alternative relief available.
| Epon Ltd | Wahzah Ltd | Yoko Ltd | NewCo Ltd | |
|---|---|---|---|---|
| Business activity | Manufacture of exercise equipment | Ownership and management of fitness clubs | Servicing of swimming pools | None |
| Budgeted results | ||||
| Year ending 30 June 2014 | £ | £ | £ | £ |
| Tax adjusted trading profit/(loss) | 740,000 | 90,000 | (80,000) | Nil |
| Chargeable gains | 18,000 | Nil | 12,000 | Nil |
| Capital loss | Nil | (20,000) | Nil | Nil |
| Budgeted trading losses carried forward | ||||
| as at 30 June 2013 | Nil | Nil | (65,000) | Nil |
The purchase of the Aquapower business
NewCo Ltd is currently dormant. It was incorporated on 1 May 2013 in order to purchase the assets of the Aquapower business (Aquapower) from an unincorporated trader. It was intended that NewCo Ltd would purchase Aquapower on 1 July 2013. However, Burt has now decided that he would prefer the business to be purchased by Yoko Ltd, provided that this is not more expensive from a tax point of view. Under this option, Yoko Ltd would then be carrying on two separate trades.
Aquapower’s business is the distribution of bottled drinks. The budgeted trading profit of Aquapower for the year ending 30 June 2014 is £60,000. None of the assets of the Aquapower business qualifies for rollover relief.
The purchase of equipment from the country of Candara
A new supplier of equipment for the fitness clubs has been identified in Candara. Wahzah Ltd intends to purchase equipment from this supplier in July 2013. The country of Candara is not a member of the European Union.
The purchase of Kari’s shares
The planned changes to the Epon Ltd group have resulted in a dispute with Kari, the Group Sales Director. In order to resolve this, it has been proposed that Epon Ltd will carry out a purchase of its own shares on 31 July 2013 and acquire the whole of Kari’s shareholding.
Kari subscribed £10,000 for 10,000 £1 ordinary shares in Epon Ltd on 1 December 2008. It has been agreed that Epon Ltd will purchase all of these shares on 31 July 2013 for £90,000. Kari has been advised that the money she will receive will be treated as a dividend. Kari’s annual taxable employment income (before deducting her personal allowance) is £72,000. In the tax year 2013/14, she will not receive any other income or make any disposals for the purposes of capital gains tax.
Extract from an email from your manager
Please prepare a memorandum for the client file that addresses the following issues:
(d) Appointment as tax advisers
An explanation of whether or not it is acceptable for the firm to be appointed tax advisers to the companies’ directors as well as to the Epon Ltd group of companies. On the assumption that it is acceptable, outline any safeguards that the firm should consider in relation to this joint appointment.
Tax manager
Required:
Prepare the memorandum requested in the email from your manager. The following marks are available.
(d) Appointment as tax advisers. (5 marks)
Professional marks will be awarded in question 1 for adopting a logical approach to problem solving, the clarity of the calculations, effectiveness with which the information is communicated, and the overall presentation of the memorandum. (4 marks)