Emerald Ltd is a manufacturing company which is also involved in research and development (R&D) activities. Emerald Ltd qualifies as a small enterprise for R&D purposes.
Emerald Ltd’s profit before tax figure per the accounts is £3,500,000 for the year ended 31 March 2021. This figure is before the deduction of capital allowances and any further adjustments mentioned below.
(i) Profit before tax
The following amounts have already been deducted from the profit before tax figure of £3,500,000 for the year ended 31 March 2021.
Depreciation
Lease premium
Research and development – staff costs/consumables
Donation to charity (paid 31.12.20)
£ 80,000 30,000 320,000
10,000
The lease premium was paid on 1 April 2020 for the grant of a 10-year lease on a warehouse.
(ii) Capital allowances
The tax written down value of Emerald Ltd’s main pool is £150,000 on 1 April 2020. During the year ended 31 March 2021 the following additions/disposals took place:
ADDITIONS
Laboratory equipment for R&D purposes 120,000
Car (CO2 emissions, 45 g/km) 40,000
Car (C02 emissions, 105g/km)30,000
DISPOSALS
Laboratory equipment (original cost, £25,000)
It is estimated that the cars are both used 80% for business use. Ignore VAT on additions/disposals.
(iii) Interest receivable/payable
The draft profit before tax includes the following amounts relating to interest receivable/payable in the year ended 31 March 2021:
Loan interest receivable 20,000
Loan interest payable:
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– Overdraft interest payable 3,000
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– Interest on loan to buy shares 5,000
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Pearl Ltd
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£ 20,000
3,000 5,000
Diamond acquired 100% of Pearl Ltd on 1 July 2020. Pearl Ltd made a trading loss in the year ended 31 March 2021 of £4,000,000. It will surrender as much of the loss as possible to other group members.
Sapphire Ltd
In May 2020, Sapphire Ltd sold a factory used in its trade for £400,000. The factory had been acquired in October 2000 (RPI:171.6) for £150,000. In January 2021 Topaz acquired a new office building for use it its trade for £370,000.
RPI December 2017: 278.1.
Requirements:
a) Explain which companies would be specifically included/excluded from:
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(i) Diamond Plc’s losses group
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(ii) Diamond Plc’s gains group
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b) Calculate Emerald Ltd’s total taxable profit for the year ended 31 March 2021.
(9 marks)
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c) Explain the maximum amount of trading loss Pearl Ltd can surrender to Emerald Ltd in the year ended 31 March 2021.
(4 marks)
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d) Explain how the chargeable gain arising of the sale of the factory by Sapphire Ltd may be deferred and state how the gain will become chargeable in the future.
