Sofia will need to decide how to invest the car park sale proceeds. She knows they must

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Question:

Sofia will need to decide how to invest the car park sale proceeds. She knows they must use

£36,000 to pay outstanding creditors, but can decide whether to invest the remaining £119,000 proceeds in either:

A new piece of moveable engineering machinery costing £119,000 or

A new fixed ventilation system for the factory costing £119,000

Whichever is decided, the investment will be made as quickly as possible after the car park disposal.

i. Required: Identify and calculate any capital gains reliefs potentially available on the carpark disposal, following the two alternative re-investment options.

ii. Required: Explain the capital allowance treatment of both re-investment alternatives.

EXHIBIT C – EMAIL from Sofia Randall

Tay

Thanks for meeting me last month. I am looking forward to meeting your tax senior to discuss Web & Away Ltd’s tax affairs for the financial year which has just ended. There are a couple of other points which I will probably also take an opportunity to discuss with them:

A developer company has shown interest in purchasing the carpark attached to our St Thomas factory to build houses on. The company purchased the land together with the factory on 1 August 2016 for £174,000 plus purchase legal fees of £6,194, and the estate agent estimates that the current value of the factory together with the remaining unsold land would be £490,000. The carpark has historically been used for our factory workers’ parking. If Web & Away Ltd makes this disposal we expect, after repaying a £36,000 creditor, there will be £119,000 sales proceeds left for the company to invest. This is therefore an attractive proposition as the company is in need of a new precision-engineering machine and a new powered ventilation system for the factory, although both would cost around this amount. The decision to sell the land and how to invest the proceeds will ultimately be business decisions, but the tax effect of the options will of course be relevant!

I hope, as well as the above, we’ll have time to discuss the company’s historic tax losses as we want to use the losses as quickly as possible and don’t want to miss any crucial deadlines.