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The key corporation tax issues Anna Jarrold, Tax Partner 23 April 2015 ADOPTION OF FRS 102

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Page 2 FRS 102 Lease incentives Business combinations Computer software Financial instruments The key tax issues Which standard to apply Whether to elect early Whether to apply transitional adjustments Whether to make certain tax elections

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Page 3 FRS 102 AND KEY TAX ISSUES A quick word on transitional adjustments General rule Were taxable profits over/understated under the old (valid) basis compared to the new (valid) basis? UnderstatedOverstated Taxable receipt on first day of first period of account new basis adopted Allowable expense on first day of first period of account new basis adopted

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Page 4 LEASE INCENTIVES A choice on transition Lease term Rent review Current UK GAAP New UK GAAP Reverse premiums Rent-free periods

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Page 5 LEASE INCENTIVES Noddy Ltd leases a building to Big Ears Ltd 40 year expected lease term with rent review after 5 years 20,000 p.a. rent Rent-free period for first 4 years Example

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Page 6 LEASE INCENTIVES Example: current UK GAAP Rent review Current UK GAAP 20,000 p.a. Rent 20,000 p.a. Rent-free period (16,000) p.a. Total 4,000 p.a. 20,000 p.a.

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Page 7 LEASE INCENTIVES Example: FRS102 Rent review New UK GAAP 20,000 p.a. Rent Rent-free period (2,000) p.a. Total 18,000 p.a.

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Page 8 LEASE INCENTIVES Example YearCash flow ()UITF 28 ()FRS 102 () 104,00018,000 204,00018,000 304,00018,000 404,00018,000 520,0004,00018,000 620,000 18,000 720,000 18,000

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Page 9 BUSINESS COMBINATIONS What assets are generally recognised? SPV Business Current UK GAAP FRS 102 Tangible assets Stock Creditors etc Goodwill Tangible assets Stock Creditors etc Goodwill Other intangibles (if identifiable and value reliably measurable)

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Page 10 BUSINESS COMBINATIONS Restatement is optional Must restate all subsequent business combinations after first Why may restatement be useful for tax purposes? To recognise intangibles with shorter useful economic lives than goodwill Accelerates tax relief for amortisation including upfront transitional adjustment BUT is timing benefit only- cannot increase total amortisation relief Restating earlier acquisitions

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Page 11 BUSINESS COMBINATIONS Business purchase in 2014 cost 5m Split 3m net assets, 2m goodwill Goodwill amortised over 10 years Customer list of 500,000 identified with UEL of 5 years What would be effect of restating the BC on adoption of FRS 102 in 2015? Example (chapter 15 part 8 CTA 2009) NBV at 31/12/14 under old UK GAAP 1.8m NBV at 31/12/14 under new UK GAAP 1.75m Difference: 50,000 Tax debit brought in at 1/1/15

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Page 12 BUSINESS COMBINATIONS Business purchase in 2014 cost 5m Split 3m net assets, 2m goodwill Goodwill amortised over 10 years Customer list of 500,000 identified with UEL of 5 years What would be effect of restating the BC on adoption of FRS 102 in 2015? Example (chapter 15 part 8 CTA 2009) Goodwill 1.35m TWDV at 1/1/15 Customer list 400,000 TWDV at 1/1/15 150,000 amortisation p.a.100,000 amortisation p.a. 250,000 total (compared to 200,000)

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Page 13 COMPUTER SOFTWARE Optimising tax deductions for expenditure Integral Current UK GAAP Must treat as tangible fixed asset FRS 102 Could be intangible or tangible

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Page 14 Software costing 20,000 with useful economic life of 5 years after which it is scrapped for nil proceeds Example COMPUTER SOFTWARE Annual Investment Allowance Capital allowances Intangible amortisation Year 120,0003,6004,000 Year 22,9524,000 Year 32,4214,000 Year 41,9854,000 Year 59,0424,000 Short life asset election

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Page 15 FINANCIAL INSTRUMENTS The treatment under FRS 102 Financial instruments under FRS 102 Basic Other Amortised cost Fair value Off-balance sheet items eg interest rate swaps

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Page 16 FINANCIAL INSTRUMENTS Tax treatment of fair value movements Financial instruments Loan relationships & derivative contracts Fair value movements taxable or relieved NB corporate debt consultation Reserves /OCI P&L/income statement Most instruments Hedging instruments

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Page 17 FINANCIAL INSTRUMENTS Transitional issues Loan relationships & derivative contracts (change of accounting practice) regulations 2004 10 year spreading Excluded The rest! Permanent-as-equity loans Some embedded derivatives Interest rate contracts under disregard regulations First year of new UK GAAP Loan relationship falling to be discharged in 1st year Derivatives embedded in or hedging these

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Page 18 FINANCIAL INSTRUMENTS Estimate potential adjustment: debit or credit? Transitional issues Credit Prefer 10 year spreading? Losses/debits to soak it up? Debit Prefer take in first year? Would it create c/f losses cant use? Elect to adopt FRS 102 early?

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Page 19 THE FUTURE OF UK GAAP Existing lease arrangements where incentives previously received Recent trade acquisitions Major plans for expenditure on computer systems Complex financial instruments, especially hedging arrangements Key tax issues to watch out for