ACCA · Question 1 · Corporate Tax Planning and Succession

SECTION A: STRATEGIC CASE STUDY

This question is worth 50 marks.

You are a tax manager in a firm of Chartered Certified Accountants. You have received an email from the tax partner regarding a client, Elias, and his company, AeroVolt Ltd.

Email from Tax Partner:
"Elias is the 80% majority shareholder and managing director of AeroVolt Ltd, a UK-resident company specializing in green technology and heavy manufacturing of wind-turbine blades. The remaining 20% is owned by his wife, who is not involved in the business. AeroVolt Ltd has recently patented a revolutionary lightweight blade design.

To expand into the European market, AeroVolt Ltd is planning to set up a wholly-owned subsidiary in Germany, AeroVolt GmbH, on 1 April next year. AeroVolt Ltd will provide a £5 million loan to AeroVolt GmbH to fund the construction of a manufacturing plant. AeroVolt Ltd will also sell raw materials to AeroVolt GmbH.

Elias is 62 years old and is planning for his retirement and succession. He intends to undertake the following personal transactions on 1 May next year:

1. Gift 15% of his shares in AeroVolt Ltd to a newly created Discretionary Trust for the benefit of his grandchildren.
2. Sell 25% of his shares in AeroVolt Ltd to a Private Equity (PE) firm, retaining a 40% stake. He will step down as managing director but remain as a non-executive director.

I need you to prepare a memorandum for my review that addresses the following requirements."

REQUIREMENTS:

(a) Advise on the UK Corporation Tax implications for AeroVolt Ltd regarding the establishment and operation of the new German subsidiary, AeroVolt GmbH. Your advice must cover:

• The application of Transfer Pricing rules to the £5 million loan and the sale of raw materials.
• The potential application of the Controlled Foreign Company (CFC) rules and any available exemptions.
• A brief comparison of the initial loss relief rules if AeroVolt had chosen to set up a German branch instead of a subsidiary. (18 marks)

(b) Explain the application of the UK Patent Box regime and the Research and Development (R&D) expenditure credit (merged scheme) to AeroVolt Ltd, detailing how the company can minimize its corporation tax liability on the profits generated from the new blade design. (14 marks)

(c) Advise Elias on the Capital Gains Tax (CGT) and Inheritance Tax (IHT) implications of:

• Gifting the 15% shareholding to the Discretionary Trust.
• Selling the 25% shareholding to the PE firm.
  Your advice should include the availability of Business Asset Disposal Relief (BADR), Gift Holdover Relief, and Business Property Relief (BPR). (14 marks)

(d) Professional skills marks will be awarded for the demonstration of clear communication, logical structure, and appropriate tone for a memorandum to a tax partner. (4 marks)