(b) Using the TARA framework, construct four possible strategies for managing the risk presented by Product 2.Your answer should describe each strategy and explain how each might be applied in the case.(10 marks)

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(b) Carrying out a systematic PESTEL analysis is a key step in developing alternative scenarios about the future. Johnson and
Scholes define scenarios as ‘detailed and plausible views of how the business environment of an organisation might develop
in the future based on groupings of key environmental influences and drivers of change about which there is a high level of
uncertainty’. In developing scenarios it is necessary to isolate the key drivers of change, which have the potential to have a
significant impact on the company and are associated with high levels of uncertainty. Development of scenarios enables
managers to share assumptions about the future and the key variables shaping that future. This provides an opportunity for
real organisational learning. They are then in a position to monitor these key variables and amend strategies accordingly. It
is important to note that different stakeholder groups will have different expectations about the future and each may provide
a key input to the process of developing scenarios. By their very nature scenarios should not attempt to allocate probabilities
to the key factors and in so doing creating ‘spurious accuracy’ about those factors. A positive scenario is shown below and

should provide a shared insight into the external factors most likely to have a significant impact on Airtite‘s future strategy.
For most companies operating in global environments the ability to respond flexibly and quickly to macro-environmental
change would seem to be a key capability.
The scenario as illustrated below, clearly could have a major impact on the success or otherwise of Airtite’s strategy for the
future. The key drivers for change would seem to be the link between technology and global emissions, fuel prices and the
stability of the global political environment. Through creating a process which considers the drivers which will have most
impact on Airtite and which are subject to the greatest uncertainty, Airtite will have a greater chance of its strategy adaptingto changing circumstances.

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(c) Fiduciary responsibility
Definition of ‘fiduciary responsibility’
A fiduciary responsibility is a duty of trust and care towards one or more constituencies. It describes direction of accountability
in that one party has a fiduciary duty to another. In terms of the case, the question refers to whose interests the directors of
the football club should act in. Traditionally, the fiduciary duty of directors in public companies is to act in the economic
interests of shareholders who invest in the company but are unable to manage the company directly. The case raises a number
of issues concerning broadening the fiduciary duties of the directors of the football club with regard to the building of the new
stadium, to other stakeholder groups.
The case for extending fiduciary responsibility
Although the primary fiduciary duty of directors in large public companies will be to shareholders, directors in businesses such
as the football club described in the case may have good reason to broaden their views on fiduciary responsibility. This would
involve taking into account, and acting in the interests of, the local wildlife centre, the residents, the school, the local
government authority and the fans. The stakeholders in the case are not in agreement on the outcome for the new stadium
and the club will need to privilege some stakeholders over others, which is a common situation whenever a proposal involving
multiple impacts is considered. The specific arguments for broadening the fiduciary duties in this case include the following:
Such an acceptance of claims made on the football club would clearly demonstrate that the club values the community of
which it considers itself a part.
It would help to maintain and manage its local reputation, which is important in progressing the stadium project.
To broaden the fiduciary responsibility in this case would be to an important part of the risk management strategy, especially
with regard to risks that could arise from the actions of local stakeholders.
It could be argued that there is a moral case for all organisations to include other stakeholders’ claims in their strategies as it
enfranchises and captures the views of those affected by an organisation’s policies and actions.

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(ii) Stakeholder claims
Four external stakeholders in the case and their claims are as follows.
The client, i.e. the government of the East Asian country. This stakeholder wants the project completed to budget and
on time. It may also be concerned to minimise negative publicity in respect of the construction of the dam and the
possible negative environmental consequences.
Stop-the-dam, the vocal and well organised pressure group. This stakeholder wants the project stopped completely,
seemingly and slightly paradoxically, for environmental and social footprint reasons.
First Nation, the indigenous people group currently resident on the land behind the dam that would be flooded after its
construction. This stakeholder also wants the project stopped so they can continue to live on and farm the land.
The banks (identified as a single group). These seem happy to lend to the project and will want it to proceed so they
make a return on their loans commensurate with the risk of the loan. They do not want to be publicly identified as being
associated with the Giant Dam Project.
Shareholders. The shareholders have the right to have their investment in the company managed in such a way as to
maximise the value of their shareholding. The shareholders seek projects providing positive NPVs within the normal
constraints of sound risk management.
Tutorial note: only four stakeholders need to be identified. Marks will be given for up to four relevant stakeholders
only.

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(c) The following are six separate and distinct assessment criteria (including those suggested by the managing director), that
would enable the management of Envico Ltd to assess the ‘value for money’ of each seminar. The assessment criteria are
presented as questions that would comprise the contents of a questionnaire but other presentations would have been equally
acceptable.
(1) Did the course meet your objectives?
‘Value for money’ may, in part, be assessed by reference to the ‘effectiveness’ of the service provision. Effectiveness may
be viewed in this context as meeting the objectives of attendees. All attendees have similar but varying objectives and
hence it is vital that Envico Ltd meets the objectives of all attendees if seminars are to constitute ‘value for money’.
(2) How would you rate the quality of the speakers?
A primary resource of Envico Ltd is its speakers and thus it is important to gauge how they were perceived to perform
by the attendees.
(3) How would you rate comfort, cleanliness and facilities of the seminar rooms?
Again, a principal resource, which is consumed when providing the service, is the seminar room and the facilities
contained within it. Attendees will find a clean and ergonomically designed room more conducive for education and
training activities.
(4) How would you assess the quality of the course materials?
Since Envico Ltd undertakes the provision of educational and training seminars then the quality of course materials
provided assumes critical significance as they represent the ‘raison d’être’ of Envico Ltd. If they are perceived to be of
high quality they may act as a good advertisement for the company. Conversely, poor quality course materials will cause
Envico Ltd to be perceived poorly.
(5) How strongly would you recommend Envico courses to friends and colleagues?
This is a very important consideration since ‘word of mouth’ may represent the best means of advertising the services
provided by Envico Ltd and is indicative of whether attendees consider that they have received ‘value for money’ from
Envico Ltd.
(6) Do you consider that you could have achieved your objectives in attending the course in a more expedient manner? If
so, please detail below.
This question acknowledges that the time of attendees is a scarce resource and hence there may well be an opportunity
cost in attending seminars in addition to the explicit costs such as course fees, travel and subsistence costs etc. It is
essential that Envico Ltd is flexible in its approach to meeting the needs of clients where attendance at seminars is either
impracticable or undesirable. Perhaps a series of interactive CDs and/or video tuition may be more appropriate in certain
instances.

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(ii) The forecast situation of Diverse Holdings Plc is not without its problems. KAL and OPL require the immediate attention
of management. The position of KAL is precarious to say the least. There is a choice of strategies for it:
(i) Outsource the manufacture of appliances
(ii) Set up a manufacturing operation overseas
(ii) Withdraw from the market.
Each alternative must be assessed. Whatever decision is taken it is unlikely to affect the other four subsidiaries.
PSL is also independent of the other subsidiaries. A strategic decision to widen its range of products and outlets must
surely help. Hence management should endeavour to find new markets for its products, which are separate and distinct
from those markets served by its appointed distributors.
21
In order to improve the prospects of OPL management need to adopt appropriate strategies since at the present time the
company appears to be in a high growth market but is unable to capture a reasonable market share. Perhaps the answer
lies in increased or more effective advertising of the endorsement of the product range by health and safety experts.
Management should endeavour to develop a strategy to integrate further its subsidiaries so that they can benefit from
each other and also derive as much synergy as possible from the acquisition of HTL.
It is of paramount importance that management ensure that sufficient funds are channelled into growing OFL and HTL,
which are both showing a rising trend in profitability. The group has depleted cash reserves which must to some extent
be attributable to the purchase of HTL. It is possible that the divestment of KAL would provide some much needed
funding.

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(b) The major characteristics of services which distinguish services from manufacturing are as follows:
– Intangibility.
When a dentist provides a service to a client there are many intangible factors involved such as for example the
appearance of the surgery, the personality of the dentist, the manner and efficiency of the dental assistant. The output
of the service is ‘performance’ by the dentist as opposed to tangible goods.
– Simultaneity.
The service provided by the dentist to the patient is created by the dentist at the same time as the patient consumed it
thus preventing any advance verification of quality.
– Heterogeneity.
Many service organisations face the problem of achieving consistency in the quality of its output. Whilst each of the
dentists within the Dental Health Partnership will have similar professional qualifications there will be differences in the
manner they provide services to clients.
– Perishability.
Many services are perishable. The services of a dentist are purchased only for the duration of an appointment.

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(ii) Market Penetration
With regard to existing products it would appear that a strategy of market penetration is being followed, whereby attempts
are made to sell existing products into existing markets. This is a low risk strategy which is most unlikely to lead to high
rates of growth, reflected in the forecast increase of 2% per annum in the years ending 30 November 2008 and 2009.
Management seeks here to increase its market share with the current product range. In pursuing a penetration strategy
the management of Vision plc may to some extent be able to exploit opportunities including the following:
– Encouraging existing customers to buy more of their brand
– Encouraging customers who are buying a competitor’s brand to switch to their brand
– Encouraging non-users within the segment to buy their brand
‘Strengths’ within the current portfolio will need to be consolidated and any areas of weakness addressed with remedial
action.
Market Development
The purchase of the retail outlets will enable management to sell existing products via new channels of distribution. The
products of both the Astronomy and Outdoor Pursuits divisions could be sold via the retail outlets. Very often new
markets can be established in geographical terms. Management could, for example, look to promote the sale of
microscopes and associated equipment to overseas hospitals.
Product Development
The launch of the Birdcam-V is an example of a product development strategy whereby new products are targeted at
existing markets. Very often, existing products can be improved, or if an organisation possesses adequate resources,
completely new products can be developed to meet existing market needs. Some of the main risks here lie in the ‘time
to market’ and product development costs which frequently go well beyond initial estimates.
Diversification
The purchase of Racquets Ltd is an example of diversification on the part of Vision plc since the products and markets
of Racquets Ltd bear no relationship to the existing products and markets of the company. In this regard the
diversification is said to be unrelated.
The establishment of the Oceanic division could be regarded as a related diversification since existing technology will be
used to develop new products for new markets. The success of this strategy will very much depend on the strength of
the Vision brand.

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(b) Growth may be measured in a number of ways which are as follows:
Cash flow
This is a very important measure of growth as it ultimately determines the amount of funds available for re-investment by any
business.
Sales revenue
Growth in sales revenues generated is only of real value to investors if it precipitates growth in profits.
Profitability
There are many measures relating to profit which include sales margin, earnings before interest, taxation, depreciation and
amortisation (EBITDA) and earnings per share. More sophisticated measures such as return on capital employed and residual
income consider the size of the investment relative to the level of profits earned. In general terms, measures of profitability
are only meaningful if they are used as a basis for comparisons over time or in conjunction with other measures of
performance. Growth rate in profitability are useful when compared with other companies and also with other industries.
Return on investment
A growing return upon invested capital suggests that capital is being used more and more productively. Indicators of a growing
return would be measured by reference to dividend payment and capital growth.
Market share
Growth in market share is generally seen as positive as it can generate economies of scale.
Number of products/service offerings
Growth is only regarded as useful if products and services are profitable.
Number of employees
Measures of productivity such as value added per employee and profit per employee are often used by shareholders in
assessing growth. Very often an increased headcount is a measure of success in circumstances where more people are
needed in order to deliver a service to a required standard. However it is incumbent on management to ensure that all
employees are utilised in an effective manner.
It is a widely held belief that growth requires profits and that growth produces profits. Profits are essential in order to prevent
a company which has achieved growth from becoming a target for a take-over or in a worse case scenario goes into
liquidation. Hence it is fundamental that a business is profitable throughout its existence. Growth accompanied by growth in
profits is also likely to aid the long-term survival of an organisation. CSG operates in Swingland which experiences fluctuations
in its economic climate and in this respect the exploitation of profitable growth opportunities will help CSG to survive at the
expense of its competitors who do not exploit such opportunities.
Note: Alternative relevant discussion and examples would be accepted.

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(b) A cost driver is the factor that determines the level of resource required for an activity. This may be illustrated by considering
costs for each of the four levels in Order Number 377.
Unit based costs:
Direct material costs are driven by the quantity, range, quality and price of materials required per product unit according to
the specification for the order.
Direct labour costs are driven by the number of hours required per product unit and the rate per hour that has been agreed
for each labour grade.
Batch related costs:
The number of machine set-ups per batch is the cost driver for machines used.
The number of design hours per batch is the cost driver for design work.
Product sustaining costs:
The number of marketing visits to a client per order is the cost driver for marketing cost chargeable to the order.
The number of hours of production line maintenance per order is the cost driver for production line cost.
Business sustaining costs:
These costs are absorbed at a rate of 30% of total cost excluding business sustaining costs. This is an arbitrary rate which
indicates the difficulty in identifying a suitable cost driver/drivers for the range of residual costs in this category. Wherever
possible efforts should be made to identify aspects of this residual cost that can be added to the unit, batch or product related
analysis.
The cost drivers are useful in that they provide a basis for an accurate allocation of the cost of resources consumed by an
order. In addition, investigation of the cause(s) of a cost driver occurring at its present level allows action to be considered
that will lead to a reduction in the cost per unit of cost driver.
Examples of causes that might be identified are:
Material price may be higher than necessary due to inefficient sourcing of materials. This may be overcome through efforts
to review sourcing policy and possibly provide additional training to staff responsible for the sourcing of materials.
The number of machine set-ups per batch may be due to lack of planning of batch sizes. It may be possible for batch sizes
in this order to be increased to 1,250 units which would reduce the number of batches required to fulfil the order from five
to four. This should reduce overall costs.
The amount of production line maintenance (and hence cost) required per order may be reduced by examining causes such
as level of skill of maintenance carried out – by GMB’s own staff or out-sourced provision. Action would involve re-training of
own staff or recruitment of new staff or changing of out-source providers.
(alternative relevant examples and discussion would be acceptable for all aspects of part (b))

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(b) The analysis of each of the market entry strategies has begun the process of identifying how the marketing mix of product,
price, place and promotion will vary significantly between the three outlets.
Product – here the nature of the product in terms of recipes and product range can be varied reasonably easily to meet the
demands of the outlet.
Price – again this will vary in significance between the three outlets with the greatest pressure coming from the supermarkets
and catering wholesalers. Margins may come under pressure with the supermarkets looking for a contribution to sales
promotions.
Promotion – here the issue of brand development is a crucial factor. Using her own brand, Helen can develop the product
range and extend the outlets she sells through.

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(a) Typical roles of a risk management committee
The typical roles of a risk management committee are as follows:
To agree and approve the risk management strategy and policies. The design of risk policy will take into account the
environment, the strategic posture towards risk, the product type and a range of other relevant factors.
Receiving and reviewing risk reports from affected departments. Some departments will file regular reports on key risks (such
as liquidity assessments from the accounting department, legal risks from the company secretariat or product risks from the
sales manager).
Monitoring overall exposure and specific risks. If the risk policy places limits on the total risk exposure for a given risk then
this role ensures that limits are adhered to. In the case of certain strategic risks, monitoring could occur on a very frequent
basis whereas for more operational risks, monitoring will more typically occur to coincide with risk management committee
meetings.
Assessing the effectiveness of risk management systems. This involves getting feedback from departments and the internal
audit function on the workings of current management and risk mitigation systems.
Providing general and explicit guidance to the main board on emerging risks and to report on existing risks. This will involve
preparing reports on apparent risks and assessing their probability of being realised and their potential impact if they do.
To work with the audit committee on designing and monitoring internal controls for the management and mitigation of risks.
If the risk committee is part of the executive structure, it will likely have an advisory role in respect of its input into the audit
committee. If it is non-executive, its input may be more directly influential.
[Tutorial note: other roles may be suggested that, if relevant, will be rewarded]

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(b) Framework for assessing risk
Risk is assessed by considering each identified risk in terms of two variables:
– its hazard (or consequences or impact) and,
– its probability of happening (or being realised or ‘crystallising’).
The most material risks are those identified as having high impact/hazard and the highest probability of happening. Risks
with low hazard and low probability will have low priority whilst between these two extremes are situations where judgement
is required on how to manage the risk.
In practice, it is difficult to measure both variables with any degree of certainty and so if is often sufficient to consider each
in terms of relative crude metrics such as ‘high/medium/low’ or even ‘high/low’. The framework can be represented as a ‘map’
of two intersecting continuums with each variable being plotted along a continuum.

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(c) One of the main qualitative benefits that may arise from an investment in a new IT system by Moffat Ltd is the improved level
of service to its customers in the form. of reduced waiting times which may arise as a consequence of better scheduling of
appointments, inventory management etc. This could be assessed via the introduction of a questionnaire requiring customers
to rate the service that they have received from their recent visit to a location within Moffat Ltd according to specific criteria
such as adherence to appointment times, time taken to service the vehicle, cleanliness of the vehicle, attitude of staff etc.
Alternatively a follow-up telephone call from a centralised customer services department may be made by Moffat Ltd
personnel in order to gather such information.
Another qualitative benefit of the proposed investment may arise in the form. of competitive advantage. Improvements in
customer specific information and service levels may give Moffat Ltd a competitive advantage. Likewise, improved inventory
management may enable costs to be reduced thereby enabling a ‘win-win’ relationship to be enjoyed with its customers.

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(b) The use of residual income as a basis for the management incentive plan operated by NCL plc would have the following
advantages:
Divisional management would be more willing to accept a project with a positive residual income and this would contribute
to the improved performance of NCL plc. Also, the disincentive to accept a project with a positive residual income but a return
on investment regarded by divisional management as not being in their best interests would be removed, because divisional
management would be rewarded.
The use of annuity depreciation may improve performance appraisal by removing the effect of straight-line depreciation which
tends to distort project returns especially in the early years of a project’s life when invested capital remains relatively high due
to the constant depreciation charge. The residual income approach using annuity depreciation will only match the NPV if the
annual cashflows of a project are constant. Hence the method when applied to the North or South projects would produce
an NPV which does not exactly match that previously calculated. By way of contrast it is forecast that the East project will
have constant cashflows and in this instance the NPV and residual income based approach when discounted, will produce
the same result.

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(c) Target costing should be viewed as an integral part of a strategic profit management system. The initial consideration in target
costing is the determination of an estimate of the selling price for a new product which will enable a firm to capture its required
share of the market. In this particular example, Superstores plc, which on the face of it looks a powerful commercial
organisation, wishes to apply a 35% mark-up on the purchase price of each cake from GWCC. Since Superstores plc has
already decided on a launch price of ￡20·25 then it follows that the maximum selling price that can be charged by GWCC
is (100/135) x ￡20·25 which is ￡15·00.
This is clearly a situation which lends itself to the application of target costing/pricing techniques as in essence GWCC can
see the extent to which they fall short of the required level of return with regard to a contract with Superstores plc which ends
after twelve months. Thus it is necessary to reduce the total costs by ￡556,029 to this figure in order to achieve the desired
level of profit, having regard to the rate of return required on new capital investment. The deduction of required profit from
the proposed selling price will produce a target price that must be met in order to ensure that the desired rate of return is
obtained. Thus the main theme that underpins target costing can be seen to be ‘what should a product cost in order to achieve
the desired level of return’.
Target costing will necessitate comparison of current estimated cost levels against the target level which must be achieved if
the desired levels of profitability, and hence return on investment, are to be achieved. Thus where a gap exists between the
current estimated cost levels and the target cost, it is essential that this gap be closed.
The Directors of GWCC plc should be aware of the fact that it is far easier to ‘design out’ cost during the pre-production phase
than to ‘control out’ cost during the production phase. Thus cost reduction at this stage of a product’s life cycle is of critical
significance to business success.
A number of techniques may be employed in order to help in the achievement and maintenance of the desired level of target
cost. Attention should be focussed upon the identification of value added and non-value added activities with the aim of the
elimination of the latter. The product should be developed in an atmosphere of ‘continuous improvement’. In this regard, total
quality techniques such as the use of Quality circles may be used in attempting to find ways of achieving reductions in product
cost.
Value engineering techniques can be used to evaluate necessary product features such as the quality of materials used. It is
essential that a collaborative approach is taken by the management of GWCC and that all interested parties such as suppliers
and customers are closely involved in order to engineer product enhancements at reduced cost.
The degree of success that will be achieved by GWCC via the application of target costing principles will be very much
dependent on the extent of ‘flexibility’ in variable costs. Also the accuracy of information gathered by GWCC will assume
critical importance because the use of inaccurate information will produce calculated ‘cost gaps’ which are meaningless and
render the application of target costing principles of little value.

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(c) The government of Happyland will be concerned by the negative impact on the environment. The growth in the number of
children born in Happyland will have raised the demand for disposable nappies as is evidenced from the market size data
contained in the question. In some countries disposable nappies make up around 4% of all household waste and can take
up to five hundred years to decompose! The government will be concerned by the fact that trees are being destroyed in order
to keep babies and infant children in nappies. The disposal costs incurred by the government in terms of landfill etc will be
very high, hence its green paper on the effect of non-biodegradable products in Happyland. The costs of such operations as
the landfill for such products will need to be funded out of increased taxation.
It might be beneficial for the directors of TMC to develop more eco-friendly products such as washable nappies which, by
definition, are recyclable many times over during the life of the ‘product’. Many parents are now changing to ‘real nappies’
because they work out cheaper and better for the environment than disposables.

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(b) There are several matters that Irroy will need to be aware of in relation to value added tax and corporation tax. These are set
out below.
Residence of subsidiary
Irroy will want to ensure that the subsidiary is treated as being resident in the Republic of Ireland. It will then pay corporation
tax on its profits at lower rates than in the UK. The country of incorporation usually claims taxing rights, but this is not by
itself sufficient. Irroy needs to be aware that a company can be treated as UK resident by virtue of the location of its central
management and control. This is usually defined as being where the board of directors meets to make strategic decisions. As
a result, Irroy needs to ensure that board meetings are conducted outside the UK.
If Green Limited is treated as being UK resident, it will be taxed in the UK on its worldwide income, including that arising in
the Republic of Ireland. However, as it will be conducting trading activities in the Republic of Ireland, Green Limited will also
be treated as being Irish resident as its activities in that country are likely to constitute a permanent establishment. Thus it
may also suffer tax in the Republic of Ireland as a consequence, although double tax relief will be available (see later).
A permanent establishment is broadly defined as a fixed place of business through which a business is wholly or partly carried
on. Examples of a permanent establishment include an office, factory or workshop, although certain activities (such as storage
or ancillary activities) can be excluded from the definition.
If Green Limited is treated as being an Irish resident company, any dividends paid to Aqua Limited will be taxed under
Schedule D Case V in the UK. Despite being non resident, Green Limited will still count as an associate of the existing UK
companies, and may affect the rates of tax paid by Aqua Limited and Aria Limited in the UK. However, as a non UK resident
company, Green Limited will not be able to claim losses from the UK companies by way of group relief.
Double tax relief
If Green Limited is treated as UK resident, corporation tax at UK rates will be payable on all profits earned. However, income
arising in the Republic of Ireland is likely to have been taxed in that country also by virtue of having a permanent
establishment located there. As the same profits have been taxed twice, double tax relief is available, either by reference to
the tax treaty between the UK and the Republic of Ireland, or on a unilateral basis, where the UK will give relief for the foreign
tax suffered.
If Green Limited is treated as an Irish resident company, it will pay tax in the Republic of Ireland, based on its worldwide
taxable profits. However, any repatriation of profits to the UK by dividend will be taxed on a receipts basis in the UK. Again,
double tax relief will be available as set out above.
Double tax relief is available against two types of tax. For payments made by Green Limited to Aqua Limited on which
withholding tax has been levied, credit will be given for the tax withheld. In addition, relief is available for the underlying tax
where a dividend is received from a foreign company in which Aqua Limited owns at least 10% of the voting power. The
underlying tax is the tax attributable to the relevant profits from which the dividend was paid.
Double tax relief is given at the lower rate of the UK tax and the foreign tax (withholding and underlying taxes) suffered.
Transfer pricing
Where groups have subsidiaries in other countries, they may be tempted to divert profits to subsidiaries which pay tax at lower
rates. This can be achieved by artificially changing the prices charged (known as the transfer price) between the group
companies. While they can do this commercially through common control, anti avoidance legislation seeks to correct this by
ensuring that for taxation purposes, profits on such intra-group transactions are calculated as if the transactions were carried
out on an arms length basis. Since 1 April 2004, this legislation can also be applied to transactions between UK group
companies.
If Green Limited is treated as a UK resident company, the group’s status as a small or medium sized enterprise means that
transfer pricing issues will not apply to transactions between Green Limited and the other UK group companies.
If Green Limited is an Irish resident company, transfer pricing issues will not apply to transactions between Green Ltd and the
UK resident companies because of the group’s status as a small or medium-sized enterprise and the existence of a double
tax treaty, based on the OECD model, between the UK and the Republic of Ireland.
Controlled foreign companies
Tax legislation exists to stop a UK company accumulating profits in a foreign subsidiary which is subject to a low tax rate.
Such a subsidiary is referred to as a controlled foreign company (CFC), and exists where:
(1) the company is resident outside the UK, and
(2) is controlled by a UK resident entity or persons, and
(3) pays a ‘lower level of tax’ in its country of residence.
A lower level of tax is taken to be less than 75% of the tax that would have been payable had the company been UK resident.
If Green Limited is an Irish resident company, it will be paying corporation tax at 12·5% so would appear to be caught by
the above rules and is therefore likely to be treated as a CFC.
Where a company is treated as a CFC, its profits are apportioned to UK resident companies entitled to at least 25% of its
profits. For Aqua Limited, which would own 100% of the shares in Green Limited, any profits made by Green Limited would
be apportioned to Aqua Limited as a deemed distribution. Aqua Limited would be required to self-assess this apportionment
on its tax return and pay UK tax on the deemed distribution (with credit being given for the Irish tax suffered).
There are some exemptions which if applicable the CFC legislation does not apply and no apportionments of profits will be
made. These include where chargeable profits of the CFC do not exceed ￡50,000 in an accounting period, or where the CFC
follows an acceptable distribution policy (distributing at least 90% of its chargeable profits within 18 months of the relevant
period).
Value added tax (VAT)
Green Limited will be making taxable supplies in the Republic of Ireland and thus (subject to exceeding the Irish registration
limit) liable to register for VAT there. If Green Limited is registered for VAT in the Republic of Ireland, then supplies of goods
made from the UK will be zero rated. VAT on the goods will be levied in the Republic of Ireland at a rate of 21%. Aqua Limited
will need to have proof of supply in order to apply the zero rate, and will have to issue an invoice showing Green Limited’s
Irish VAT registration number as well as its own. In the absence of such evidence/registration, Aqua Limited will have to treat
its transactions with Green Limited as domestic sales and levy VAT at the UK standard rate of 17·5%.
In addition to making its normal VAT returns, Aqua Limited will also be required to complete an EU Sales List (ESL) statement
each quarter. This provides details of the sales made to customers in the return period – in this case, Green Limited. Penalties
can be applied for inaccuracies or non-compliance.