Mr. Walmart the managing director of Sand Ltd meet your manager. Extracts from the email prepared by your manager (a) Sand Ltd group of companies Sand Ltd has two wholly owned subsidiaries, Dump Ltd and Sautso Ltd, and also owns shares in a number of other companies. All of the group companies are UK resident trading companies, which prepare accounts to 31 March each year. All supplies made by the group are subject to value added tax (VAT) at the standard rate.

Sautso Ltd has been a member of the Sand Ltdgroup for many years.

Sale of Dump Ltd

Sand Ltdpurchased the whole of the ordinary share capital of Dump Ltd for £800,000 on 1 November 2011.

The value of Dump Ltd has fallen and the company is to be sold on 1 December 2018. Two separate offers have been received: offer A and offer B.

Offer A – in respect of a sale of the company’s shares

– The purchaser will pay £730,000 for the whole of the ordinary share capital of Dump Ltd. This amount will be reduced by any tax liabilities payable by Dump Ltd arising as a result of the company being sold.

Offer B – in respect of a sale of the company’s trade and assets

– The purchaser will pay £695,000 for the trade and assets of Dump Ltd.

Dump Ltd – expected asset values on 1 December 2018
                                                               £
Oribi building                                  410,000
Atuel building                                  230,000
Items of machinery                           25,000
Net current assets (at cost)              30,000
                                                       ––––––––
                                                          695,000
                                                       ––––––––
There is further information in respect of these assets in the attached schedule from Walmart.

The value of Dump Ltd’s goodwill is negligible and should be ignored for the purposes of this work.

Please prepare a memorandum for the client file.

When calculating the post-tax proceeds in respect of the two offers, you should assume that tax relief at the rate of 19% will be obtained in respect of any allowable capital losses.
The memorandum should cover the following:
(i) Offer A – in respect of a sale of the company’s shares
– An explanation of whether or not tax relief will be available in respect of the capital loss arising on the sale of the shares.
– An explanation of the tax implications of Dump Ltd leaving the Sand Ltdgroup whilst still owning the Atuel building. This explanation should not include any calculations.
– A calculation of the expected post-tax proceeds.
Extract from the email from your manager – dated 3 September 2018 (continued) Offer B – in respect of a sale of the company’s trade and assets
– A calculation of the expected post-tax proceeds. For this purpose you should ignore any chargeable gains or allowable losses arising on the sale of the items of machinery.
– In relation to the sale of the items of machinery, an explanation as to whether or not they will result in chargeable gains or allowable capital losses and of the availability of rollover relief.
– An explanation of the companies to which Dump Ltd can transfer any capital losses arising on the assets sold.

(iii) Offer B – value added tax (VAT)
– In respect of offer B: an explanation as to whether or not Dump Ltd should charge VAT on the sale of its buildings and/or its machinery.

(b) Tax evasion and tax avoidance

Walmart and his daughter (who is a tax expert in the field of capital allowances) have drawn up a plan which they claim will enable a company to claim a tax deduction of 180% of the cost of new machinery. The plan is complicated in that it involves the creation of a new, wholly-owned subsidiary and a series of contracts involving the leasing and sub-leasing of the machinery between the two companies.

I have not looked at the plan in detail because, even if it would appear to have the intended tax effect, I am sure that it would fall within the general anti-abuse rule (GAAR).

Please prepare notes which:
– Distinguish between tax evasion and tax avoidance and state the purpose of the GAAR.
– Explain why the GAAR is likely to apply to this particular plan.
Schedule of information from Walmart – dated 3 September 2018
Dump Ltd – details of assets
Dump Ltd uses both the Oribi and Atuel buildings in its trade.
Oribi building Atuel building Machinery
Date of purchase 1 February 2012 1 April 2016 N/A
Purchase cost £320,000 (note 1) £255,000 (note 2) (note 3)
Value added tax option to tax made? No No N/A

Notes

1. On 1 December 2011, Dump Ltd sold a machine for £74,000 resulting in a chargeable gain of £17,000. This gain was rolled over against the purchase of the Oribi building.

2. Dump Ltd purchased the Atuel building from Sautso Ltd for £255,000, its market value at that time. As Colca Ltd and Sautso Ltd are both 100% subsidiaries of Grand Ltd, the transfer of the building took place at no gain, no loss. Sautso Ltd had purchased the Atuel building, new and unused, for £340,000 on 1 January 2016.

3A. All of the items of machinery are moveable. The sale of the machinery will give rise to a balancing charge of £12,100. Most of the items of machinery are worth less than their original cost. However, a small number of items are particularly specialised, such that their current market value exceeds their original cost.

3B. Calculate stamp duty and tax payable by dump Ltd for atuel building and also post tax proceeds .