Deferred Assets and Liabilities

Deferred Assets and Liabilities
Deferred Assets and Liabilities

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Deferred Assets and Liabilities

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Overview

Complete a four-part assessment in which you will compute values, prepare journal entries, and provide written explanations.

Note: An accounting cycle requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order.
Companies must present financial information to the investment community that provides a clear picture of present and potential tax obligations and tax benefits.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

Competency 1: Define financial accounting conventions to support practice as a professional in the field.

*Apply tax rates to temporary differences.

*Analyze carryback and carryforward issues.

* Competency 3: Evaluate economic resources for an enterprise.

* Apply procedures for a capital lease.* Apply procedures for a sales-type lease.

Deferred Assets and Liabilities

Context

Companies spend a considerable amount of time and effort to minimize their income tax payments—and with good reason. Income taxes are major costs of doing business for most business organizations, regardless of the form of ownership.

Leasing of an asset has been around for many years, especially in the private sector. Individuals have utilized this form of asset acquisition for the purchase of realty, personal property, and even services. It has allowed them to acquire assets for little or no money down, use the asset for a determinable period of time, and then simply return the asset and terminate the lease agreement.

Today, leasing of capital assets is the fastest growing form of capital investment for corporations. It allows businesses to acquire large high-dollar assets with little or no responsibility for their maintenance and allows them to trade those assets in for newer models at the end of the lease. Consequently, accounting procedures for handling these transactions has undergone significant change over the last 25 years.

Questions to Consider

As you prepare to complete this assessment, you may want to think about other related issues to deepen your understanding or broaden your viewpoint. You are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of your professional community. Note that these questions are for your own development and exploration and do not need to be completed or submitted as part of your assessment.

* What are the guidelines for determining the most advantageous type of lease for an asset?* What is the advantage of an operating lease versus a capital lease?* What is the difference between a financial lease and a capital lease?
Resources

Deferred Assets and Liabilities

FACTORS THAT IMPACT TAXES

  • Economic factors: Microeconomic factors (e.g., elasticity, type of entity)Macroeconomic factors (e.g., inflation, political systems)
  • Social factors:Demographics (e.g., aging population, birth rates)Standard of living (e.g., crime rates, education)Savings rates (e.g., incentives, cost of living)
  • Political factors:Government revenue (e.g., income tax, sales tax)Type of tax (e.g., progressive, regressive)Income redistribution (e.g., political system, types)
  • Legal/regulatory factors:Justification for tax system (e.g., tax avoidance, tax evasion)Types of entities (e.g., partnership, corporation)Economic (e.g., employees vs. subcontractors, insurance deduction)
  • Emerging trend factors:Economic (e.g., command vs. market economies, trade agreements)Technology (e.g., information access, compliance)Intangible taxation (e.g., changing laws, changing regulations)

CREDITS

Subject Matter Expert:Timothy Price

Interactive Design:Tara Schiller

Instructional Designer: JodiRae Foss

Project Manager:Lon Wiessenberger

  • Laux, R. C. (2013). The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357–1383. Liabilities/Equities – Chapter 13.* This chapter reviews accounting for leases.
  • Harrington, C., Smith, W., & Trippeer, D. (2012). Deferred tax assets and liabilities: Tax benefits, obligations and corporate debt policy. Journal of Finance and Accountancy, 1–18. Retrieved from http://www.aabri.com/manuscripts/121240.pdf
  • Spiceland, J. D., Sepe, J. F., Nelson, M. W., & Thomas, W. B. (2016). Intermediate Accounting (8th ed.). New York, NY: McGraw-Hill Education.Chapter 15, “Leases,” pages 852–931.This chapter focuses on issues related to liabilities arising in connection with leases, and in particular those that produce such debtor/creditor relationships, referred to as capital leases. Pay particular attention to leases that do not produce a debtor/creditor relationship, but instead are accounted for as rental agreements.
  • Chapter 16, “Accounting for Income Taxes,” pages 932–995.This chapter presents accounting issues that focus on accounting and reporting for the effects of income taxes, particularly defining and illustrating temporary differences which are the basis for recognizing deferred tax assets and deferred tax liabilities.

Deferred Assets and Liabilities

Assessment Instructions

Note: Do not proceed with this assessment until you have reviewed faculty feedback on Assessment 4.
This assessment has four parts. The Assessment 5 Data Sheet contains the necessary information for all four parts. Record your answers in the Assessment 5 Template. Submit the completed template for this assessment. Both documents are linked in the Resources under the Required Resources heading.

Imagine your boss has handed you four client files to complete by EOD (end of day.) However, several of the clients require written explanations of your reasoning.

Part 1: Temporary Differences
Use the information for Part 1 in the Assessment 5 Data Sheet to complete the following:

  • Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2015, 2016, and 2017.
  • Assuming there were no temporary differences prior to 2015, indicate how deferred taxes will be reported on the 2017 balance sheet. Sharp’s product warranty is for 12 months.
  • Explain your reasoning. Use the blank area in the template following the journal entries to make your notes.
  • Prepare the income tax expense section of the income statement for 2017, beginning with the line “Pretax financial income.”
  • Where appropriate, show all calculations leading to the final solution.

Part 2: Carryback and Carryforward
Use the information in Part 2 of the Assessment 5 Data Sheet to complete the following:

  • Prepare the journal entries for the years 2015 to 2019 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Bryan Clark Company uses the carryback provision.
  • All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.
  • Where appropriate, show all calculations leading to the final solution.

Deferred Assets and Liabilities

Part 3: Lessee Entries: Capital Lease
Use the information in Part 3 of the Assessment 5 Data Sheet to complete the following:

  • Identify and explain the type of lease. Use the blank area in the template following the journal entries to make your notes.
  • Compute the present value of the minimum lease payments.
  • Prepare all necessary journal entries for Southern for this lease through January 1, 2016.
  • Where appropriate, show all calculations leading to the final solution.

Part 4: Lessee-Lessor Entries: Sales-Type Lease
Use the information in Part 4 of the Assessment 5 Data Sheet to complete the following:

  • Discuss the nature of this lease to Capital and Hinton. Use the blank area in the template following the journal entries to make your notes.
  • Calculate the amount of the annual rental payment.Prepare all the necessary journal entries for Hinton for 2015.
  • Prepare all the necessary journal entries for Capital for 2015.
  • Where appropriate, show all calculations leading to the final solution.

Deferred Assets and Liabilities

Assessment Data Sheet

Part 1: Temporary Differences

Sharp Company has two temporary differences between its income tax expense and income taxes payable. The information is shown below.

 201520162017
Pretax financial income$420,000$455,000$472,500
Excess depreciation expense on tax return(15,000)(20,000)(5,000)
Excess warranty expense in financial income10,0005,0004,000
Taxable income$415,000$440,000$471,500

The income tax rate for all years is 40%.

Part 2: Carryback and Carryforward

The pretax financial income (or loss) figures for Bryan Clark Company are as follows.

2013$ 80,000
2014  125,000
2015    40,000
2016   (80,000)
2017 (190,000)
2018     60,000
2019     50,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2013 and 2014 and a 40% tax rate for the remaining years.

Part 3: Lessee Entries: Capital Lease

On January 1, 2015, Southern, Inc. signed a 10-year non-cancelable lease for a machine. The terms of the lease called for Southern to make annual payments of $17,336 at the beginning of each year, starting January 1, 2015. The machine has an estimated useful life of 12 years.

The machine reverts back to the lessor at the end of the lease term. Southern uses the straight-line method of depreciation for all of its plant assets. Southern’s incremental borrowing rate is 6%, and the Lessor’s implicit rate is unknown.

Part 4: Lessee-Lessor Entries: Sales-Type Lease

On January 1, 2015, Capital Corp. leased equipment to Hinton Corporation. The following information pertains to this lease.

  1. The term of the noncancelable lease is 12 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
  2. Equal rental payments are due on January 1 of each year, beginning in 2015.
  3. The fair value of the equipment on January 1, 2015, is $225,000, and its cost is $180,000.
  4. The equipment has an economic life of 16 years. Hinton depreciates all of its equipment on a straight-line basis.
  5. Capital set the annual rental to ensure an 11% rate of return. Hinton’s incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.
  6. Collectability of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

Below is a partial answer to the above homework questions by one of our writers. If you are interested in a custom non plagiarized top quality answer, click order now to place your order.

Deferred Assets and Liabilities

Part 1: Temporary Differences

DateAccount Title Debit Credit
 Section 1: Journal entries  
2015Income tax expense168,000 
 Deferred tax asset (10,000 x 40%)4,000 
 Deferred tax liability (15,000 x 40%) 6,000
 Income tax payable (415,000 x 40%) 166,000
    
2016Income tax expense182,000 
 Deferred tax asset (5,000 x 40%)2,000 
 Deferred tax liability (20,000 x 40%) 8,000
 Income tax payable (440,000 x 40%) 176,000
    
2017Income tax expense189,000 
 Deferred tax asset (4,000 x 40%)1,600 
 Deferred tax liability (5,000 x 40%) 2,000
 Income tax payable (471,500 x 40%) 188,600
    
 Section 2: Balance sheet entries  
 Current asset  
 Deferred tax asset (4000+2000+1600)7,600 
    
 Long-term liability  
 Deferred tax liability (6000+8000+2000)16,000 
    
 Section 3: Income tax expense  
 Pretax income472,500 
Less:Income tax expenses188,600 
 Net deferred tax400 
 Net income post tax283,500 
Explanation:

2015

Deferred tax asset = 10,000 x 40% = 4000
Deferred tax liability 15,000 x 40% = 6000
Income tax payable 415,000 x 40% = 166,000

2016

Income tax expense
Deferred tax asset 5,000 x 40% = 2000
Deferred tax liability 20,000 x 40% = 8000
Income tax payable 440,000 x 40% = 176,000
 

2017

Deferred tax asset = 4,000 x 40% = 1600
Deferred tax liability = 5,000 x 40% = 2000
Income tax payable = 471,500 x 40% = 188,600

Part 2: Carryback and Carryforward

 DateAccount Title Debit Credit
12015Income Tax Expense$16,000 
2 Income Tax Payable $16,000
32016Income Tax Refund Receivable$36,000 
4 Benefit Due to Loss Carryback $36,000
52017Income Tax Refund Receivable$16,000 
6 Benefit Due to Loss Carryback $16,000
7 Deferred Tax Asset$60,000 
8 Benefit Due to Loss Carryforward $60,000
92018Income Tax Expense$24,000 
10 Deferred Tax Asset $24,000
112019Income Tax Expense$20,000 
12 Deferred Tax Asset $20,000

Calculations

1. Income tax expense

40,000 x 40%

= $16,000

3. Income tax refund receivable

80,000 x 45%

= $36,000

5. Income tax refund receivable

40,000 x 40%

= $16,000

7. Deferred Tax Asset

[(190,000 – 40,000) x 40%]

= $60,000

9. Income Tax Expense

(60,000 x 40%)

= $24,000

11. Income Tax Expense

50,000*40%

= $20,000

Part 3: Lessee Entries: Capital Lease

DateAccount Title Debit Credit
Jan 2015Leased equipment$135,250 
 Lease liability $135,250
    
Jan 2015Lease liability$17,336 
 Cash $17,336
    
Jan 2015Depreciation$13,525 
 Accumulated depreciation $13,525
    
Jan 2016Lease liability$10,261 
 Interest expense$7,075 
 Cash $17,336
Explanation:

The lease can be considered a capital lease. This is because the lease life exceeds 75% of the asset’s life. According to FASB, a capital lease may meet either of the following criteria:

  1. The lease life is more than 75% of asset’s life.
  2. Ownership transfer is done at the end of the lease
  3. Present value is higher than 90% of the asset’s fair value
  4. The leasee has an option to buy the lease asset below market value once the lease has expired.

Given that the lease life exceeds 75% of asset’s life, it is considered a capital lease. The calculations are provided as below.

10/12 x 100 = 83.3%

Equipment is capitalized at the minimum of fair value and present value of the lease payments. However, there is no fair value given and thus present value of minimum lease payments is used.

Depreciation calculation:

= Capitalized amount / Life of project

= 135,250 / 10

= $13,525

Part 4: Lessee-Lessor Entries: Sales-Type Lease

DateAccount Title Debit Credit
 Lessor Accounts  
 Lease receivables225,000 
 Equipment 225,000
    
 Installment received  
 Cash31,224 
 Lease receivable 31,224
    
   
 Hilton’s Accounts  
 Leased asset equipment225,000 
 Lease liability 225,000
    
 Depreciation14,062.5 
 Accumulated depreciation 14,062.5
Explanation:    

No interest factor is considered because payment for the lease is made on 1st January. This means that interest has not accumulated.

The type of lease in this case is a capital lease. This is because the lease term is equivalent to 75% of its economic life or more. To calculate 75% of the lease term, the following calculation is done.

12/16 x 100 = 75%

Given that the lease period is 12 years while economic life is 16 years, it means that the lease period is 75%……..

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Corporation Tax Liability

Corporation Tax Liability
Corporation Tax Liability

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Corporation Tax Liability

Aim:

The aim of this task is for you to demonstrate your ability to advise a company on its corporation tax liability and on some tax planning measures it might take to reduce that liability.

Scenario:

Your supervisor, Tom Scott has sent you;

  1. a memo and predicted financial figures for Capricorn Ltd and
  2. an email about an in-house training session which he is running next week.

He has asked you to prepare a PowerPoint presentation for him to use at a meeting with Capricorn next week together with a calculation of the company’s trading profit/loss. He has also asked you to prepare a few PowerPoint slides for him to use at the firm’s in-house tax training refresher.

Task:

(The task requires you to calculate a company´s liability to corporation tax and prepare two short PowerPoint presentations on the use of losses and the application of rollover relief respectively).

Corporation Tax Liability

Instructions:

Your tasks are:

  1. To calculate Capricorn’s trading loss and chargeable gain based on the projected figures provided for the Financial Year 2017.

The calculation should follow Steps 1 and 2 of the template (see below).

However, keep the trading loss and chargeable gain figures separate as you will consider how to treat the loss in the second part of this task.

This calculation should be prepared in a separate document and accompany your presentations prepared in accordance with paragraphs 2) and 3) below.

  • To prepare a presentation to the directors of Capricorn Ltd explaining the ways    

in which the projected loss which the company may make this year could be set off against the company’s previous, current or future income and/or gains.

  1. The presentation should consist of between 6-7 PowerPoint slides;                (Topic: Presentation to Capricorn Ltd On Corporation Tax – Treatment of Trading Losses)
  • The presentation should be structured as follows:
  1. Slide 1: Title slide (with date and time)
    1. Slide 2: The options available
    1. A slide for each option explaining how the relief works
    1. A slide showing how the relief works for Capricorn Ltd using

   the figures you have calculated.

  • The slides should be accompanied by brief explanatory notes (typed into the ‘Notes’ section) which your supervisor could use when making the presentation.
  • To prepare a presentation for your supervisor to use at the training session next week to explain when and how roll-over relief on replacement of business assets may be used by a company to reduce its liability to corporation tax.
  1. The presentation should consist of between 6-7 PowerPoint slides; (Topic: Training Session; Corporation Tax: Operation and Use of Rollover Relief)
  • The presentation should be structured as follows:
  1. Slide 1: Title slide (with date and time)
    1. Slide 2: The elements of the relief
    1. A slide explaining each element
    1. Example with figures
    1. Comparison of a company’s liability with or without relief.
  • In preparing this presentation you will need to refer to s.152-156 TCGA 1992 which are attached below.

Corporation Tax Liability

Charlesʼ Lawyers

   Memorandum

From: Tom Scott

To: You

Date: 21. November 2017

Client: Capricorn Ltd., 9 Weston Development Park, Stoke ST 60 5YT                    

Capricorn Limited is a newish client. The MD, Jason Singe, consulted us last year for advice on terms and conditions for internet trading via e-bay. Basically the company was formed about five years ago and it imports wood from sustainable sources to make rustic garden furniture. Until last year this was sold only through independent local garden centres but the poor summer last year, coupled with fears about reduced consumer spending, caused the company to look for new sources of customers, hence selling through e-bay.

Unfortunately, despite this, the poor economic climate has taken its toll. Jason has sent me Capricorn’s projected sales and expenditure figures for this year and they are attached to this Memo. I have had a quick look at the figures and whilst I have not done the calculation, it looks clear that there will be a trading loss. Jason has told me that last year the profit made was £250,000 and corporation tax paid for the Financial Year 2016 was 20%, was £50,000.

In an attempt to generate cash the company sold its premises in June 2017 and moved into rented premises. The relevant figures are given on the attached sheet. Capricorn hopes to be able to buy new premises again once the financial picture improves, but the board have delayed making any decision on this for the time being.

Jason and his two fellow board members are coming in next week to seek general advice on the financial situation. They feel the company is well placed to trade through its difficulties and the initial figures for the internet sales have been promising. However they are still very concerned at the prospect of making a loss.

As part of our advice to them we clearly need to look at the company’s tax situation and I think it would be useful for us to be able to do a short presentation for the directors on how losses are treated for tax purposes.

I know you are on holiday next week and one of your fellow lawyers from our Business Support and Restructuring Department will attend the meeting with me. However before you go on holiday, I should like you to prepare:

  1. A calculation showing Capricorn’s trading profit/loss and its chargeable gain for the Financial Year 2017 on the basis of the projected figures attached; and
  • Using the figures from your calculation, a presentation of between 6 and 7 PowerPoint slides which deals with how losses can be used to obtain repayments of corporation tax or to reduce current or future corporation tax liability.

It is very important that the presentation should be relevant to Capricorn’s situation and explain any tax reductions or rebates that may apply. As you will be unable to attend the meeting please make sure that each slide is accompanied by an explanatory note which I can use when making the presentation to the client.

Corporation Tax Liability

Capricorn Limited

Projected figures for Financial Year 2017                                  £

Sales                                                                                      1,845,000

Expenses:                                                                               

       Stock                                                                                  900,000

       Salaries                                                                             600,000

       General overheads                                                         298,000       

       Insurance                                                                             18,000

       Advertising                                                                           12,090

       Rent paid (since June 2017)                                            15,000

Purchase of new machinery:                    £20,000

Value of existing pool of machinery:  £400,000

Sales of premises in June 2017

Sale proceeds                                                               360,000     

Less cost of disposal                                                     21,000

Acquisition Cost (January 2010)                               250,000

Incidental costs of acquisition                                       4,000

Indexation factor for a disposal in June 2017:

  • from January 2010:  0.215

Corporation Tax Liability

E-mail:

From: Tom Scott

Sent:  21. November 2017

To:         You

URGENT

Subject:  Tax Training

As you are preparing some slides on Corporation tax losses for the presentation to Capricorn next week I would also like you to prepare a few additional slides for our in-house Training Session next week which it is my turn to do (again!).

As part of the session, I thought I would do a five minute refresher on how roll-over relief can be used by corporate clients.

Could you please let me have 6 to 7 slides which cover this topic. As you know, I always feel it is a good idea to be able to illustrate the theory with an example from practice. Perhaps you could use the example from the work we did for Amtex Ltd recently, when we advised them on the operation of the relief when they sold their old warehouse and decided to buy new offices.

To save you getting the file out, we calculated that the chargeable gain which Amtex made when they sold the warehouse in May 2016 was £650,000 and the purchase price for their new offices was £1,100,000

Corporation Tax Liability

Appendix:

KEY FACTS for Corporation Tax for Financial Year 2017 (FY 2017) which runs from 1. April 2017 to 31. March 2018

Rate of Tax                                                                                                           19%

Capital allowances

Annual Investment Allowance for is £200,000

Writing Down Allowances:

  • 18% on ‘main pool’ of expenditure on plant and machinery
    • 8% on ‘special rate pool’ of expenditure on integral features and long-life assets

Corporation Tax Liability

TEMPLATE FOR CORPORATION TAX CALCULATIONS:

STEP 1: CALCULATE INCOME PROFITS

Add up Income from various sources:                                                                     £

Land

Investments

Trading Income:

                 Chargeable receipt

Less

Deductible expenditure Less

Capital allowances

= Trading profit (or loss)

STEP 2: CALCULATE CHARGEABLE GAINS

Stage 1:      Identify the chargeable disposal

Stage 2:      Calculate the gain or loss

Stage 3:       Apply any reliefs

Stage 4:       Aggregate remaining gains/losses

STEP 3: CALCULATE TOTAL PROFITS

               APPLY RELIEFS AVAILABLE AGAINST TOTAL PROFITS

Main examples:

Carry-across/carry-back relief for a trading loss Terminal carry back relief for a trading loss Qualifying donations to charity

STEP 4: CALCULATE THE TAX AT THE APPROPRIATE RATE

Rate of Tax                                                                                                  19%

Corporation Tax Example:

Wendle Joinery Limited (‘the company’) makes wooden doors, architrave and skirting boards for the domestic market. In the accounting period ending 31 March 2018, the company has a turnover of £8,500,000, deductible expenditure of £7,200,000 and it claims £450,000 in capital allowances.

The company had been operating from two locations but, in September 2017, the company sold the smaller of the two sites, having consolidated all its operations on its main site. The sale of the smaller site realised a chargeable gain of £300,000 (for which no reliefs are available).

The company makes a donation of £20,000 every year to the Woodland Trust (a registered charity).

Corporation Tax Liability

Using the template (see above), calculate the company´s liability to corporation tax for the accounting period ending 31. March 2018.

EXAMPLE – ANSWER:

Step 1: Calculate income profits

From the facts of the example, the company only has once source of income, being its trading income. This is calculated using the formula:

                                                                                    £

Chargeable receipts                                    8,500,000

Less

Deductible expenditure                              7,200,000

Less

Capital allowances                                      (450,000)

Trading profit                                                  850,000

STEP 2: Calculate chargeable gains

The facts state that these are £300,000.

STEP 3: Calculate total profits

               Apply reliefs available against total profits

Total profits are calculated by adding together the income profits and chargeable gains:

Income profits                                               850,000

Chargeable gains                                        300,000

Total profits                                               1,150,000

From total profits can be deducted the qualifying donation to charity to leave taxable profits:

Total profits                                               1,150,000

Less                           

Charity donation                                          (20,000)

Taxable profits                                          1,130,000

STEP 4: Calculate the tax at the appropriate rate(s)

1,130,000 x 19%             =                       214,700

Corporation Tax payable:  £214,700.

Taxation of Chargeable Gains Act 1992

Part V

Transfer of Business Assets

Corporation Tax Liability

Chapter I

          General Provisions

      Replacement of business assets

152 Roll-over relief

(1) If the consideration which a person carrying on a trade obtains for the disposal of, or of his interest in, assets (“the old assets”) used, and used only, for the purposes of the trade throughout the period of ownership is applied by him in acquiring other assets, or an interest in other assets (“the new assets”) which on the acquisition are taken into use, and used only, for the purposes of the trade, and the old assets and new assets are within the classes of assets listed in section 155, then the person carrying on the trade shall, on making a claim as respects the consideration which has been so applied, be treated for the purposes of this Act —

(a) as if the consideration for the disposal of, or of the interest in, the old assets were (if otherwise of a greater amount or value) of such amount as would secure that on the disposal neither a gain nor a loss accrues to him, and

(b) as if the amount or value of the consideration for the acquisition of, or of the interest in, the new assets were reduced by the excess of the amount or value of the actual consideration for the disposal of, or of the interest in, the old assets over the amount of the consideration which he is treated as receiving under paragraph (a) above,

but neither paragraph (a) nor paragraph (b) above shall affect the treatment for the purposes of this Act of the other party to the transaction involving the old assets, or of the other party to the transaction involving the new assets.

(2) Where subsection (1)(a) above applies to exclude a gain which, in consequence of Schedule 2, is not all chargeable gain, the amount of the reduction to be made under subsection (1)(b) above shall be the amount of the chargeable gain, and not the whole amount of the gain.

(3) Subject to subsection (4) below, this section shall only apply if the acquisition of, or of the interest in, the new assets takes place, or an unconditional contract for the acquisition is entered into, in the period beginning 12 months before and ending 3 years after the disposal of, or of the interest in, the old assets, or at such earlier or later time as the Board may by notice allow.

(4) Where an unconditional contract for the acquisition is so entered into, this section may be applied on a provisional basis without waiting to ascertain whether the new assets, or the interest in the new assets, is acquired in pursuance of the contract, and, when that fact is ascertained, all necessary adjustments shall be made by making [or amending] assessments or by repayment or discharge of tax, and shall be so made notwithstanding any limitation on the time within which assessments [or amendments] may be made.

(5) This section shall not apply unless the acquisition of, or of the interest in, the new assets was made for the purpose of their use in the trade, and not wholly or partly for the purpose of realising a gain from the disposal of, or of the interest in, the new assets.

(6) If, over the period of ownership or any substantial part of the period of ownership, part of a building or structure is, and part is not, used for the purposes of a trade, this section shall apply as if the part so used, with any land occupied for purposes ancillary to the occupation and use of that part of the building or structure, were a separate asset, and subject to any necessary apportionments of consideration for an acquisition or disposal of, or of an interest in, the building or structure and other land.

(7) If the old assets were not used for the purposes of the trade throughout the period of ownership this section shall apply as if a part of the asset representing its use for the purposes of the trade having regard to the time and extent to which it was, and was not, used for those purposes, were a separate asset which had been wholly used for the purposes of the trade, and this subsection shall apply in relation to that part subject to any necessary apportionment of consideration for an acquisition or disposal of, or of the interest in, the asset.

(8) This section shall apply in relation to a person who, either successively or at the same time, carries on 2 or more trades as if both or all of them were a single trade.

(9) In this section “period of ownership” does not include any period before 31st March 1982.

(10) The provisions of this Act fixing the amount of the consideration deemed to be given for the acquisition or disposal of assets shall be applied before this section is applied.

(11) Without prejudice to section 52(4), where consideration is given for the acquisition or disposal of assets some or part of which are assets in relation to which a claim under this section applies, and some or part of which are not, the consideration shall be apportioned in such manner as is just and reasonable.

Corporation Tax Liability

153 Assets only partly replaced

(1) Section 152(1) shall not apply if part only of the amount or value of the consideration for the disposal of, or of the interest in, the old assets is applied as described in  that subsection, but if all of the amount or value of the consideration except for a part which is less than the amount of the gain (whether all chargeable gain or not) accruing on the disposal of, or of the interest in, the old assets is so applied, then the person carrying on the trade, on making a claim as respects the consideration which has been so applied, shall be treated for the purposes of this Act—

(a) as if the amount of the gain so accruing were reduced to the amount of the said part (and, if not all chargeable gain, with a proportionate reduction in the amount of the chargeable gain), and

(b) as if the amount or value of the consideration for the acquisition of, or of the interest in, the new assets were reduced by the amount by which the gain is reduced (or as the case may be the amount by which the chargeable gain is proportionately reduced) under paragraph

(a) of this subsection, 

but neither paragraph (a) nor paragraph (b) above shall affect the treatment for the purposes of this Act of the other party to the transaction involving the old assets, or of the other party to the transaction involving the new assets.

(2) Subsections (3) to (11) of 152 shall apply as if this section formed part of that section.

Corporation Tax Liability

[153A Provisional application of sections 152 and 153]

[(1) This section applies where a person carrying on a trade who for a consideration disposes of, or of his interest in, any assets (“the old assets”) declares, in his return for the chargeable period in which the disposal takes place —

(a) that the whole or any specified part of the consideration will be applied in the acquisition of, or of an interest in, other assets (“the new assets”) which on the acquisition will be taken into use, and used only, for the purposes of the trade;

(b) that the acquisition will take place as mentioned in subsection (3) of section 152; and

(c) that the new assets will be within the classes listed in section 155.

(2) Until the declaration ceases to have effect, section 152 or, as the case may be, section 153 shall apply as if the acquisition had taken place and the person had made a claim under that section.

(3) The declaration shall cease to have effect as follows—

(a) if and to the extent that it is withdrawn before the relevant day, or is superseded before that day by a valid claim made under section 152 or 153, on the day on which it is so withdrawn or superseded; and

(b) if and to the extent that it is not so withdrawn or superseded, on the relevant day.

(4) On the declaration ceasing to have effect in whole or in part, all necessary adjustments—

(a) shall be made by making or amending assessments or by repayment or discharge of tax; and

(b) shall be so made notwithstanding any limitation on the time within which assessments or amendments may be made.

(5) In this section “the relevant day” means—

(a) in relation to capital gains tax, the third anniversary of the 31st January next following the year of assessment in which the disposal of, or of the interest in, the old assets took place;

(b) in relation to corporation tax, the fourth anniversary of the last day of the accounting period in which that disposal took place.

(6) Subsections (6), (8), (10) and (11) of section 152 shall apply for the purposes of this section as they apply for the purposes of that section.]

Corporation Tax Liability

154 [not supplied]

155 Relevant classes of assets

The classes of assets for the purposes of section 152(1) are as follows.

                   Class 1

        Assets within heads A and B below.

Head A

1. Any building or part of a building and any permanent or semi-permanent structure in the nature of a building, occupied (as well as used) only for the purposes of the trade.

2. Any land occupied (as well as used) only for the purposes of the trade. Head A has effect subject to section 156.

Head B

Fixed plant or machinery which does not form part of a building or of a permanent or semi- permanent structure in the nature of a building.

                   Class 2

Ships, aircraft and hovercraft (“hovercraft” having the same meaning as in the Hovercraft Act 1968).

                   Class 3

Satellites, space stations and spacecraft (including launch vehicles).

      Class 4

 Goodwill.

Corporation Tax Liability

      [Classes 5-8 omitted]

156 Assets of Class 1

(1) This section has effect as respects head A of Class 1 in section 155.

(2) Head A shall not apply where the trade is a trade—

(a) of dealing in or developing land, or

(b) of providing services for the occupier of land in which the person carrying on the trade has an estate or interest.

(3) Where the trade is a trade of dealing in or developing land, but a profit on the sale of any land held for the purposes of the trade would not form part of the trading profits, then, as regards that land, the trade shall be treated for the purposes of subsection (2)(a) above as if it were not a trade of dealing in or developing land.

[(4) Where [section 19 of ITTOIA 2005] [or section 42 of  CTA 2009]  applies  (tied premises: receipts and expenses treated as those of trade) the trader shall be treated, to the extent that the conditions in subsection (1) of that section are met in relation to premises, as occupying as well as using the premises for the purposes of the trade.]

Corporation Tax Liability

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