business-reporting-july-2010-marks-plan

Revised corporation tax liability 69492 brief notes

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Revised corporation Tax liability 69,492 Brief notes explaining errors and adjustments Identification of errors 1. Legal fees have been correctly disallowed. However they could potentially be allowed against the disposal of the building for chargeable gains calculation. 2. The chargeable gain has been calculated incorrectly. 3. Foreign exchange losses have been incorrectly disallowed. Foreign exchange losses on settled transactions are deducted for tax purposes. 4. The calculation of corporation tax must take into account associated companies. Pepper Art now has three associated companies. 5. Goodwill – 4% WDA claimed (see below)
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TI BR – Advanced Stage – July 2010 © The Institute of Chartered Accountants in England and Wales 2010 9 Explanation of adjustments Impairment charge on goodwill Goodwill represents a ‘new intangible’ asset. Since 2002 the tax and accounting treatments of intellectual property are aligned. This means that the accounting entries for intellectual property such as goodwill are given tax relief or are taxable. Therefore it would appear to be more beneficial in this instance to follow the accounting treatment as this results in a larger tax deduction in the current financial year. The 4% per annum deduction is given only if an election (which is irrevocable is made). It is unlikely an election had been made by July 2010. Therefore the tax computation has incorrectly added back the impairment charge and allowed the 4% deduction. However this is a matter which would need to be confirmed. (see later additional information) Software Support Charges For an expense to be allowable for tax purposes it should be wholly and exclusively for the purposes of the trade. Provided there is evidence of this in terms of work performed and payment made the expense could be allowed. Clearly this is a substantial potential deduction and therefore the supplier should be requested again to produce an invoice. However, at the moment this expense has been disallowed until further evidence is supplied. Chargeable gain - Sale of Prospect House The chargeable gain has been incorrectly calculated by the client. A deduction for allowable cost, legal fees and indexation is permitted. The acquisition of Spaceway by Pepper Art means that Pepper Art now forms a capital gains tax group with Spaceway and its 100% subsidiary DeliverUK. DeliverUK plans to invest £900,000 in fixed plant and machinery which will enable Pepper Art to rollover the gain on the disposal of Prospect House against the purchase by DeliverUK of plant and machinery. As only part of the proceeds is being reinvested some of the gain will become chargeable in the current period. £’000 Disposal Proceeds 1,335 Less Cost Legal fees (500) (35) Indexation allowance 215-166.6 /166.6 = 0.291 x 500,000 (145.5) Indexed gain 654.5 Rollover relief 254.5 Proceeds not reinvested = Chargeable gain 400 Spaceway – potential group relief claim Group relief available 240,000 x (1.8.09 – 31.5.10) 10/12 200 Group relief could be claimed in respect of the period from 1 August 2009 (the date of acquisition of
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Revised corporation Tax liability 69492 Brief notes...

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