Answers
Professional Level – Options Module Paper P6 (IRL)
Advanced Taxation (Irish)
December 2013 Answers
1
ABC & Co
Chartered Certified Accountants,
Any Street,
Any Town
5 October 2012
Ken and Lucille Rogers,
Any Street
Any Town
Dear Mr and Mrs Rogers,
Re: Tax issues arising on the disposal of County Radio Ltd
Further to our recent meeting the following is the position with regard to the queries raised.
(i)
Options regarding the sale of the Limerick business premises
The building is not a new building and no significant development has taken place. There are therefore no value added tax
(VAT) implications in relation to the proposed sale.
The sale (at market value) of the above premises by the company will trigger a capital loss of €150,000.
Option (i): Sale to yourselves
If the Limerick business premises are sold by the company to persons who have control of it (i.e. yourselves), this will
constitute a loss arising on a disposal between connected persons. The loss of €150,000 will be ‘ring-fenced’ and it will not
be possible to use it to reduce the tax payable on the gains arising on the disposal of the other company assets (namely
goodwill).
This is a significant tax disadvantage which will result in additional tax on the company’s chargeable gains at a rate of 30%
amounting to €45,000, and a corresponding reduction in the amount available for distribution to yourselves, as shareholders.
In addition, stamp duty at 2% of the value (i.e. €2,000) will be payable by yourselves as transferees, if you choose to buy
the building from County Radio Ltd.
Option (ii): Sale to an unconnected third party
In the event that the building is sold by the company to an unconnected third party on the open market, the €150,000 loss
will be allowable to shelter the capital gain arising on the disposal of goodwill by the company.
Recommendation
Option (ii) is recommended for the reasons outlined above.
(ii)
Maximisation of after-tax proceeds
(1) Eligibility for relief(s):
Ken
Retirement relief can apply to the disposal of shares in a family trading company, provided certain criteria are met. In
this situation Ken meets the following criteria:
–
–
–
–
–
he has worked with the company for ten years;
he has been a full-time working director for more than five years;
the relevant shares have been held for more than ten years;
he has reached the minimum age of 55; and
the proceeds of disposal are clearly less than €750,000.
The liquidation of County Radio Ltd is a chargeable event for capital gains tax (CGT) purposes whereby the shareholders
are effectively disposing of their shares and receiving a capital distribution. However, a strict interpretation of tax law
indicates that retirement relief would not be available as the individual would not be disposing of shares in a trading
company; the company immediately prior to the liquidation would simply hold cash.
Tutorial note: The Revenue will, by concession, allow retirement relief to be claimed if the company is liquidated no
more than six months after the sale of the business. An alternative answer, allowing retirement relief on that basis is
also acceptable.
Lucille
Lucille does not qualify for retirement relief, as she has never worked for the company.
Cork premises
The sale of the personally held Cork business premises by Ken will not qualify for retirement relief because it is not being
sold in conjunction with a sale of the shares in County Radio Ltd.
21
(2) Net after-tax proceeds
If the Limerick business premises are sold to a third party and the capital loss is used to shelter the gain arising on the
disposal of goodwill, the tax payable at the company level amounts to €58,250. This is comprised of €57,000 tax
payable on the company’s chargeable gains and €1,250 tax payable on a balancing charge on the disposal of the
equipment. The detailed calculations are included in the Appendix Schedule 1.
The expected pre-tax distributions arising on the liquidation of County Radio Ltd (as calculated in the Appendix
Schedule 2) will be as follows:
Ken Rogers
Lucille Rogers
€207,450
€138,300
The net after-tax proceeds are calculated in the Appendix Schedule 3. Ken is expected to have a CGT liability of €60,824
on the distribution.
Note: An alternative solution, availing of the Revenue concession and allowing retirement relief, is also acceptable.
Lucille will be required to pay CGT of €40,423 on her distribution.
In addition, Ken will receive pre-tax proceeds of €200,000 on the disposal of the Cork business premises. The CGT
payable on this disposal will amount to €28,530, as retirement relief is not available.
Tutorial note: The annual exemption is available for use against either the disposal of shares or the disposal of the Cork
premises, provided retirement relief has not been claimed.
In summary, based on the above, the total expected after-tax proceeds from the sale of the business will be as follows:
Ken Rogers
Lucille Rogers
€318,096
€97,877
(iii) Severance package
The statutory redundancy and the pension lump sum payable to Mr Nelson are exempt from tax.
The ex-gratia lump sum and the car amount to a total of €25,000. The maximum tax free termination lump sum payable to
Mr Nelson amounts to €26,533, please refer to the Appendix Schedule 4. Mr Nelson will therefore have a nil tax liability on
his severance package.
(iv) (1) Potential tax underpayment in relation to the DJs not on the payroll
The DJs will be deemed to be employees of County Radio Ltd if the circumstances indicate that they have been engaged
under a contract of service rather than a contract for services. The following factors indicate that they are employees
rather than self-employed:
–
–
–
–
–
–
–
They
They
They
They
They
They
They
must attend work and perform their duties at fixed times.
use the equipment of County Radio Ltd in the performance of their duties.
are paid a regular amount per month.
have little discretion in the choice of music and programme content.
do not carry financial risk.
have no opportunity to profit from sound management or efficiencies.
do not have other sources of income.
It is not possible to override this situation by stating in the contract that the individuals ‘are not employees’.
In the first instance, County Radio Ltd is responsible for the payroll taxes of the two DJs, from their date of
commencement to date. These payroll taxes would include income tax, employer and employee PRSI and universal
social charge (USC).
It may be possible for County Radio Ltd to demonstrate to the satisfaction of the Revenue that the two individuals have
correctly returned and paid their taxes as self-employed individuals.
However, at a minimum the company will be held liable for the employer’s PRSI which was avoided by the
‘self-employment’ arrangement.
(2) Minimisation of interest and penalties
The underpayment of payroll taxes in relation to the two DJs should be corrected immediately.
With regard to 2012, the underpaid taxes can be corrected by making the relevant payment before the due date for filing
the annual P35 return of 15 February 2013.
The Revenue audit code of practice 2010 includes a ‘self-correction’ procedure which, in this case, allows for a
correction of the 2011 PAYE/PRSI underpayment within 12 months of the due date for filing the 2011 return (i.e. before
15 February 2013). This option allows the taxpayer to correct errors without incurring a tax penalty and therefore only
paying tax and statutory interest. The taxpayer must include a cheque in payment of the foregoing and declare in writing
the errors which underpin the underpayment and the reasons why they arose. In this case, it will be necessary to provide
evidence that, following the payment of the employer’s PRSI by County Radio Ltd, there was no loss of revenue.
22
However, if the self-correction option is not availed of within the above time limits, and the company has not been
notified of a revenue audit, they may make an unprompted voluntary disclosure to the Revenue. In that scenario, it is
likely that the reduced penalty rate of 10%, applicable to deliberate behaviour, would apply.
It is therefore strongly recommended that action is taken with regard to this issue as soon as possible.
Please do not hesitate to contact us if you have any further queries.
Yours faithfully
T Consultant
Tax Senior
ABC & Co
Appendix
Schedule 1: Tax payable at the company level
(i)
Tax on company capital gains
€
Limerick business premises (assume disposal to a third party)
Proceeds
Cost
Capital loss
Goodwill (disposal to Southern Media plc)
Proceeds attributable to goodwill (note 1)
Cost
Gain/(Loss)
€
100,000
(250,000)
––––––––
(150,000)
340,000
0
––––––––
Taxable gain
340,000
––––––––
190,000
––––––––
57,000
Total taxable gains less allowable losses
Corporation tax on gains at an effective rate of 30%
Note 1
Proceeds attributable to goodwill
€
400,000
Total proceeds receivable for Southern Media plc
Less: Proceeds attributable to specific assets
Equipment
(60,000)
––––––––
340,000
––––––––
––––––––
Proceeds attributable to goodwill
(ii)
Corporation tax payable on balancing charge
€
Equipment
Sales proceeds
Less: Tax written down value
60,000
(50,000)
––––––––
10,000
––––––––
1,250
––––––––
58,250
––––––––
Balancing charge
Corporation tax on balancing charge at 12·5%
Total corporation tax payable (€57,000 + €1,250)
23
Schedule 2: Calculation of liquidator’s distributions
€
Proceeds from disposal to Southern Media plc
Proceeds from disposal of Limerick business premises
Proceeds from the collection of trade receivables
Cash balance
Less: Liabilities
Tax on disposal of the business
Repayment of bank loan
Repayment of trade payables
58,250
150,000
15,000
––––––––
€
400,000
100,000
23,000
46,000
––––––––
569,000
(223,250)
––––––––
Liquidator’s distribution
Distribution to Ken Rogers
Distribution to Lucille Rogers
€
345,750
60%
40%
207,450
138,300
Schedule 3: Calculation of net after-tax proceeds
Tax payable at shareholder level on the liquidation of the company
€
Ken Rogers
Proceeds from deemed disposal of shares
Cost
Indexation factor (2000/01)
€
207,450
3,000
1·144
––––––
Gain
Annual exemption
Taxable
CGT payable by shareholder
Lucille Rogers
Proceeds from deemed disposal of shares
Cost
Indexation factor (2000/01)
(3,432)
––––––––
204,018
(1,270)
––––––––
202,748
––––––––
30%
60,824
138,300
2,000
1·144
––––––
Gain
Less: Annual exemption
Taxable
CGT payable by shareholder
€
(2,288)
––––––––
136,012
(1,270)
––––––––
134,742
––––––––
30%
40,423
Tax payable on disposal of Cork business premises by Ken Rogers
€
Proceeds
Cost
Indexation factor (2002)
€
200,000
100,000
1·049
––––––––
Gain
CGT payable by shareholder
(104,900)
––––––––
95,100
––––––––
30%
28,530
Summary of net after-tax proceeds
Ken Rogers: Shares
Ken Rogers: Cork business premises
Lucille Rogers: Shares
Gross
proceeds
€
207,450
200,000
––––––––
407,450
––––––––
Tax
€
(60,824)
(28,530)
–––––––
(89,354)
–––––––
Net
after tax
€
146,626
171,470
––––––––
318,096
––––––––
138,300
––––––––
(40,423)
–––––––
97,877
––––––––
24
Schedule 4: Calculation of maximum tax-free termination payment
Option 1: Increased basic exemption
€10,160 + €765 x N + €10,000 – L
N= Number of completed years of service
L = Amount of any tax-free pension lump sum at retirement age
€
23,575
€10,160 + €765 x 11 + (€10,000 – €5,000)
Tutorial note: The basic exemption has been increased by €10,000 because the employee has not received a tax free termination
payment within the last ten years and reduced by €5,000 in respect of the pension lump sum.
Option 2: Standard capital superannuation benefit (SCSB)
(E x N/15) – L
E = Average emoluments for three-year period prior to termination
N= Number of completed years of service
L = Amount of any tax-free pension lump sum at retirement age
€
129,000
43,000
Total emoluments for the last three years
Average emoluments (E)
2
SCSB
(43,000 x 11/15) – €5,000
26,533
Maximum tax-free payment (higher of options 1 and 2)
26,533
Hank McLoughlin
(a)
Residence and domicile status 2012 to 2015
2012–2014: Hank will be resident, but not ordinarily resident and not domiciled in Ireland.
2015: Hank will be resident AND ordinarily resident in Ireland, but will remain not domiciled in Ireland.
For all years, the general rule is that Hank will be taxable on Irish sourced income and any foreign income remitted into
Ireland.
(b)
(i)
Reliefs for individuals moving to Ireland for employment
1.
Special assignee relief programme (SARP)
The SARP provides relief where a person is moving to Ireland to take up employment duties. The main conditions
of the relief are as follows:
(i)
To obtain relief, the employee in question must have a basic salary excluding benefits (‘relevant income’) of
€75,000 per annum.
(ii)
A formula is used to calculate the ‘specified amount’ of earnings which are relieved from income tax. The
specified amount is calculated as an amount of 30% of the difference between €75,000 (the ‘lower limit’)
and the lower of either:
o
o
€500,000 (‘the upper limit’) or
all the income from the employment, including benefits in kind, share based remuneration, etc (i.e. all
taxable emoluments).
Where the period for which the claim is made is less than an entire tax year, the upper and lower thresholds
and the amount of relevant income are reduced proportionately.
(iii) The employee must have already worked for the same employer or a connected company such as a parent
company for at least 12 months before moving to Ireland.
(iv) The previous employer must have been resident in a country with which Ireland has a double tax agreement
or alternatively has an agreement with Ireland in relation to exchanging taxation information.
(v)
The employee must arrive in Ireland to work in either 2012, 2013 or 2014 and must carry out the
employment duties in Ireland for a minimum of 12 months.
(vi) The employee must be resident in Ireland in the year of the claim and cannot have been resident here in any
of the five years prior to his/her secondment to Ireland.
(vii) The claim must be made in the first year of residence in Ireland.
(viii) The relief is available in the first five years of employment in Ireland.
25
2.
Split-year relief
Where an individual, who was not resident in the State for the tax year prior to arrival, arrives in the State with the
intention that they will be resident in the State in the following tax year, then they will be treated as being resident
in Ireland only from the date of arrival. In effect, this means that the individual will not be liable to Irish income
tax in respect of any foreign employment income arising prior to the date of arrival.
Split-year relief applies only to income from employment (excluding directors) and does not affect the liability of the
taxpayer in respect of his/her other sources of income
(ii)
(c)
Based on the scenario outlined, it is expected that:
–
Hank will meet the criteria set out in part (i) and so will be able to claim the SARP relief for the duration of his
secondment in Ireland (from 1 April 2012 to 31 December 2015 inclusive) and if he avails of the additional year
to 2016, it would also qualify for relief as the secondment period would be less than the maximum permitted five
years (see (viii) above).
–
Hank will also qualify for split-year relief in his year of arrival, which means that his USA salary from January to
March 2012 will not be subject to Irish tax.
–
Michael, as a new recruit, would not satisfy condition (iii) above and would be unable to claim the SARP relief.
–
Split-year relief will also not apply to Michael, as his employment commences on the first day of the tax year.
Taxable income 2012
Income tax
Working
Schedule D Case III
Interest on government securities
Schedule E
Salary
Bonus
Benefit in kind (car)
Total taxable emoluments
Less: SARP relief
€
€
10,000
275,000
20,000
9,000
––––––––
304,000
(74,325)
––––––––
1
2
Schedule F
Dividends
229,675
3,000
––––––––
232,675
––––––––
Taxable income for income tax
PRSI and USC
SARP does not relieve PRSI or USC.
(€304,000 + €10,000 + €3,000)
Taxable income for PRSI and USC
317,000
Workings:
1
Car: Benefit in kind (BIK)
€
50,000
24%
–––––––
12,000
–––––––
Original market value
Applicable % (20,000 kms)
Annualised BIK
BIK based on 9 months (9/12)
9,000
Applicable percentage calcuation
20,000 x 12/9 = 26,667
2
(24% band)
Special assignee relief programme (SARP) relief
€
(Taxable emoluments – €75,000) x 30%
(€304,000 – €75,000 x 9/12) x 30%
74,325
–––––––
Tutorial notes:
1. Government securities: Where an individual is Irish resident, interest receivable on Irish government securities is
subject to Irish income tax.
2.
Dividends from Irish companies are Irish source income, which will be subject to Irish income tax.
3.
USA investment income: As Hank does not plan to remit any of the USA investment income in 2012, it is therefore
not subject to Irish tax.
26
(d)
Health insurance premium
As Hank will be subject to Irish income tax on any foreign income which is remitted to Ireland, it is not advisable for him to
use the USA sourced income to pay his Irish health insurance premium, as this would constitute a remittance.
Tax relief at the rate of 20% is granted at source on medical insurance premia.
(e)
Gift to Kirsty
(i)
Tax payable without planning
(1) The gift of the Irish shares represents a disposal for capital gains tax (CGT) purposes. Hank would be liable to CGT
on any Irish gains. CGT will be payable at a rate of 30% on any increase in value of the share portfolio while in
his ownership. However, it would be possible to offset the CGT as a credit against any capital acquisitions tax (CAT)
payable by Kirsty on the gift, as both tax charges would arise on the same event.
(2) Irish CAT will be payable by Kirsty on the gift of the Irish shares at the rate of 30% as the property in question is
Irish. As Hank’s niece, Kirsty will be able to deduct the class 2 threshold of €33,500 from the value of the gift.
(3) Stamp duty at a rate of 1% of the value of the shares will be payable by the recipient (Kirsty).
(ii)
Tax planning advice
Note: Two possible options are outlined below.
Option 1
Hank could gift Irish government securities (instead of Irish shares) to Kirsty in November 2014.
CAT
Certain Irish government securities are exempt from CAT when taken by a non-Irish domiciled, non-ordinarily resident
individual (i.e. Kirsty). Where the disponer is either Irish domiciled or ordinarily Irish resident, the disponer must have
owned the securities for 15 years prior to the gift or inheritance. However, there is no minimum holding period where
the disponer is neither Irish domiciled nor ordinarily resident. As Hank would not be Irish domiciled or ordinarily resident
in November 2014, a gift of government securities would not be subject to Irish CAT.
Other taxes:
–
Gains on government securities are exempt from CGT.
–
The transfer of Irish government securities is exempt from stamp duty.
Option 2
Hank could gift some of his US shares to Kirsty in November 2014.
CAT
The property would not be Irish and the recipient, Kirsty, would not be resident or ordinarily resident in Ireland. With
regards to Hank, the disponer, the legislation provides that ‘Where a person is non-Irish domiciled, he/she will not be
considered Irish resident or ordinarily resident for the purposes of CAT, unless he/she has been resident in the state for
the five consecutive years of assessment preceding the date of the benefit and a resident or ordinarily resident on that
particular date.’ In November 2014, Hank would satisfy the above criteria, so such a gift by him at that date would not
be subject to CAT.
Other taxes:
–
Hank would not be liable to Irish CGT on the disposal of the US shares as he would not be Irish domiciled and no
remittance to Ireland would take place.
–
3
The transfer of the US shares to Kirsty would not be subject to Irish stamp duty provided the relevant share transfer
document is executed outside Ireland.
Folsom Ltd
(a)
(i)
Consortium relief
A loss consortium exists if at least 75% of the share capital of a company (the ‘consortium company’) is owned by five
or fewer EU resident companies, and none of the companies owns more than 75% of the share capital of the consortium
company. In this case, Folsom Ltd is a qualifying consortium company because 77% of the company is owned by three
EU resident companies.
The losses of Folsom Ltd may be surrendered to the members of the consortium in proportion to the member’s
shareholding. The non-EU resident company, Jackson Ltd, will not be entitled to claim consortium loss relief.
(ii)
Computation of tax payable in 2012
Folsom Ltd
Folsom Ltd must firstly use its Case I loss to eliminate any tax arising on its Case V income. The corporation tax (CT)
payable by Folsom Ltd is as follows:
27
€
Case I profit
0
–––––––
25,000
–––––––
6,250
(6,250)
–––––––
nil
–––––––
Case V profit
Corporation tax at 25%
Less: Loss relief on a value basis
Corporation tax payable
After the above loss relief claim, the loss available to surrender to the consortium members is €150,000 (€200,000 –
€6,250/0·125)
Blues Ltd
Blues Ltd is entitled to 50% of the available loss and the corporation tax payable is calculated as follows:
€
120,000
(75,000)
––––––––
45,000
––––––––
5,625
Case I Income
Loss from Folsom Ltd (50% x €150,000)
Net taxable profit
Corporation tax payable at 12·5%
Ring Ltd
Ring Ltd would be entitled to 15% of the available loss of Folsom Ltd, but none of this can be utilised as Ring Ltd itself
has made a loss. Therefore, Ring Ltd will have a nil CT liability and an unused loss to carry forward of €20,000.
Fire Ltd
Fire Ltd is entitled to 12% of the loss of Folsom Ltd, which is €18,000 (12% x €150,000). However, the amount
surrendered cannot exceed the actual profits of Fire Ltd of €10,000. Therefore, the corporation tax payable is calculated
as follows:
€
10,000
(10,000)
–––––––
nil
–––––––
nil
Case I profit
Loss from Folsom Ltd
Net Case I profit
Corporation tax payable at 12·5%
The allocation of the loss arising in Folsom Ltd can be summarised as below:
Loss memorandum: Folsom Ltd
€
200,000
Case I loss in Folsom Ltd
Less: Used in Folsom Ltd on a value basis
(€6,250 x 100/12·5)
50,000
––––––––
150,000
(75,000)
(10,000)
––––––––
65,000
––––––––
Available for surrender
Claimed by Blues Ltd
Claimed by Fire Ltd
Unused loss for carry forward
The unutilised loss of €65,000 will be carried forward in Folsom Ltd and may only be used to shelter future trading
profits of Folsom Ltd.
(b)
Digichoc Manufacturing Ltd
(i)
Relief for research and development (R&D) expenditure
A company qualifies for a tax credit of 25% on its incremental qualifying expenditure on R&D. For companies with
accounting periods commencing on or after 1 January 2012, the first €100,000 of qualifying expenditure (or the actual
R&D expenditure if less) will qualify for the relief. Any qualifying amount over €100,000 is compared to the company’s
expenditure in the base year (2003) and the excess is allowed as a credit.
The qualifying expenditure is the actual cost of R&D, which includes normal revenue type expenditure (such as
consumables, salaries and overheads) as well as expenditure on plant and machinery, provided proper records are
maintained. The company is entitled to claim credit for any R&D undertaken by a university in the EEA on its behalf
(subject to a maximum of 5% of the total R&D spend or €100,000, whichever is the greater). It can also claim credit
for any R&D sub-contracted to a third party (subject to a maximum of 10% of the total R&D spend or €100,000,
whichever is the greater).
In addition, expenditure on any buildings used for the purpose of R&D qualifies for a credit of 25% provided at least
35% of the building is used for R&D activities. If it is partly used for another activity, only part of the building qualifies
28
for the credit. The actual amount spent on the building qualifies (i.e. it is not incremental) and the corporation tax
reduction is given in the year in which the expenditure is incurred.
In relation to both the R&D credit and the R&D buildings credit, if the 25% credit exceeds the corporation tax, against
which it can be offset, the excess may be carried back to an accounting period of equal length or carried forward for
offset against the corporation tax payable in the following accounting period. Unused credits may be carried forward
indefinitely. There is a refund mechanism for tax already paid, if the company wishes to make a claim. The time limit
for making a claim is 12 months from the expiry of the accounting period in which the expenditure was incurred.
(ii)
Corporation tax payable 2012
Case I profit
Corporation tax at 12·5%
Less R&D credit: Revenue costs ((€1,500,000 – (€500,000 – €100,000)) x 25%
Less R&D credit: Plant and machinery (€350,000 x 25%)
Less R&D credit: Building (€800,000 x 25%)
Add: Corporation tax on Case III income (25% of €100,000)
Corporation tax payable
4
€
8,500,000
––––––––––
1,062,500
(275,000)
(87,500)
(200,000)
––––––––––
500,000
25,000
––––––––––
525,000
––––––––––
ABC Ltd
(i)
The exempt status of training for value added tax (VAT) purposes means that ABC Ltd does not charge VAT on the sales of its
training services. It does not mean that the company is exempt from incurring VAT on its inputs (in this case the rent). Also,
the company will not be entitled to reclaim the VAT incurred on the rent, because it relates to an exempt activity.
(ii)
A s.13A authorisation allows authorised persons to purchase goods and services, import goods and services and make
intra-Community acquisitions at the zero rate of VAT.
A qualifying person is an accountable person whose turnover from:
o
o
supplies of goods to either VAT registered persons in other EU member states or persons outside the EU; and/ or
certain contract work services in relation to movable goods where the goods are dispatched from Ireland to another
country after the work is carried out
amounts to 75% or more of his total turnover from the supply of goods and services.
ABC Ltd should request XYZ plc to send it a copy of its up-to-date Certificate of Authorisation (called a ‘VAT13B’). On receipt
of this documentation, the invoice can be reissued at the zero rate of VAT, and the VAT 13B authorisation should be quoted
on the invoice.
(iii) Relevant contracts tax (RCT) only applies between principal contractors and sub-contractors in the construction, forestry and
meat processing industries. ABC Ltd could not be considered to be a principal contractor, as it is not in any of the above
sectors, so there is no necessity to deduct RCT from the payment to the plumber.
The administration area of the building is presumably used by both the taxable (software sales) and exempt (training)
activities. ABC Ltd will be entitled to reclaim the VAT inputs in the proportion that the turnover from the taxable activity bears
to total turnover (i.e. 2/3rds). Therefore:
VAT element of invoice: (€600 x 13·5/113·5)
Allowable amount (2/3)
€71
€47
Based on the scenario outlined, it appears that the plumber is attempting to evade tax by receiving a cash payment. ABC Ltd
should make it clear to the plumber that they will make payment only on receipt of a valid invoice. If this plumber is not
satisfied with this arrangement, the company should seek a different plumber.
The method of payment (cash, cheque or bank transfer) is irrelevant from a tax viewpoint. However, if ABC Ltd were to make
payment in cash, without receiving adequate documentation, it would not be entitled to either claim a VAT input credit for
the work done, nor would it be entitled to claim the net repair as a deductible expense for corporation tax purposes.
Furthermore, the company could be aiding tax evasion and payments such as these could be queried in the event of a revenue
inspection with potential serious consequences for the company.
(iv) ABC Ltd is entitled to reclaim 20% of the VAT element of the car price.
It is eligible for the reclaim because:
o
o
the scheme applies to category A, B and C cars; and
the car is being used more than 60% for business use (in relation to software sales, which is a taxable activity).
Tutorial note: The non-business use is not relevant, once the 60% test has been satisfied.
29
The VAT element is calculated as follows:
(23/123) x (Cost – VRT)
(23/123) x (€30,000 – €4,000) = €4,862
ABC Ltd can reclaim a credit of 20% of this amount, i.e. €972.
(v)
The place of supply of the legal services is Ireland and ABC Ltd is the taxable person. VAT at 23% of €5,000 (€1,150)
should be accounted for on the reverse-charge basis.
The VAT of €1,150 should be included in the company’s output (sales) VAT and it is also entitled to reclaim the total amount
of input VAT, as the legal services relate exclusively to the taxable activity. This results in a neutral cash flow position for
ABC Ltd.
(vi) ABC Ltd has a turnover from its taxable activity of less than €1 million and is therefore entitled to elect to account for VAT
on a cash receipts basis. However, the company is required to apply to the Revenue for authorisation to do this.
The liability to pay VAT will then arise by reference to the VAT period in which the cash is received and not by reference to
the issuing of an invoice.
After the changeover, VAT is not accounted for in respect of cash received for goods supplied while accounting on the invoice
basis.
If turnover from the taxable activity is expected to increase above €1 million in any 12-month period, the company would be
obliged to switch back to the invoice basis.
If ABC Ltd does not elect for VAT on a cash receipts basis, the following suggestions may improve cash flow:
–
Postpone issuing invoices at the end of a two-month VAT period until the start of the following month (subject to the
legislative requirement of issuing an invoice no later than the fifteenth of the month following the supply of goods or
services).
–
Apply for annual VAT registration with monthly direct debits, to avoid large variations in VAT payments.
(vii) Professional services withholding tax (PSWT) only applies to professional services and so will not apply to the software
package supplied by ABC Ltd, which is a supply of goods.
5
Linda Harris
(a)
Valuation of shareholding in Harris Ltd
Linda holds 75% of the shares in the company and therefore no discount is applied in calculating the value of her
shareholding.
Value of the company (100%)
€48,000,000
––––––––––––
€36,000,000
––––––––––––
Value of Linda’s shareholding (75%)
(b)
Tax consequences of gift of shares to Ralph
Option 1: Lifetime gift
Capital gains tax (CGT)
CGT will be payable by Linda on the disposal of shares to Ralph and the proceeds will be deemed to be the market value of
the shares (as this is a transaction between connected parties). Retirement relief is not available to Linda, as it is a
requirement of the relief that the claimant works in the business.
The base cost will be €20 million (the value at the date Linda inherited the shares from her late husband). The resulting CGT
amounts to €4,800,000.
CGT payable by Linda
€
36,000,000
(20,000,000)
–––––––––––
16,000,000
–––––––––––
16,000,000
–––––––––––
Proceeds
Less: Cost: 2008 (no indexation)
Chargeable gain
Taxable gain
CGT at 30%
4,800,000
30
Capital acquisitions tax (CAT)
CAT applies to the gift from Linda to Ralph. However, Ralph’s liability will be reduced to nil because of:
1.
Business property relief
The above relief allows for a 90% reduction in the taxable value of the company shares.
Ralph is entitled to claim business property relief for the following reasons:
–
–
–
the underlying assets of the company are business assets;
Ralph has worked with the company for more than five years ending on the date of the gift; and
Ralph’s shareholding after the gift (75%) will be more than 10%.
It is a condition of the relief that Ralph retains the shares in the company for a minimum of six years after the gift.
2.
CGT credit
The CGT paid by Linda can be offset against the CAT liability as both liabilities arise as a result of the same event.
CAT payable by Ralph
€
36,000,000
(360,000)
–––––––––––
35,640,000
(32,076,000)
–––––––––––
3,564,000
(250,000)
–––––––––––
3,314,000
–––––––––––
Market value of shares received
Less: Stamp duty
Less: Business property relief (90%)
Less: Group 1 threshold
Taxable benefit
CAT at 30%
Less: Credit for CGT payable on same event
994,200
(994,200)
–––––––––––
nil
–––––––––––
Stamp duty
Stamp duty at the rate of 1% applies to the share transfer, i.e. €360,000 and is payable by Ralph.
Summary of taxes payable
€
4,800,000
0
360,000
––––––––––
5,160,000
––––––––––
CGT: Linda
CAT: Ralph
Stamp duty: Ralph
Option 2: Ralph inherits on the death of Linda
CGT and stamp duty
There are no CGT or stamp duty liabilities in this situation, as the transfer is on a death.
CAT
Assuming that Ralph will have worked in the company for the five years ending on the date of the inheritance, he will be
entitled to business property relief. However, Ralph will not be entitled to a credit for CGT paid.
CAT payable by Ralph
€
36,000,000
(32,400,000)
–––––––––––
3,600,000
(250,000)
–––––––––––
3,350,000
–––––––––––
Market value of shares received
Less: Business property relief (90%)
Less: Group 1 threshold
Taxable benefit
CAT at 30%
1,005,000
Summary of taxes payable
€
1,005,000
––––––––––
CAT: Ralph
31
Option 3: Discretionary trust settled during Linda’s lifetime and eventual appointment to Ralph
CGT and stamp duty on settlement
As in Option 1, CGT of €4,800,000 will be payable on the lifetime transfer of the shareholding by Linda to the trust.
Stamp duty at 1% of €360,000 will also be payable on the transfer of shares into the trust.
Discretionary trust tax and taxes on appointment
On Linda’s death, discretionary trust tax at the rate of 6% will be payable and a further 1% discretionary trust tax will be
payable annually (but not in the same year as the initial 6% tax), until the relevant assets are appointed from the trust. If the
trust assets are appointed within five years of the date of death, a refund of half the 6% discretionary trust tax will be
receivable.
Furthermore, the trustees will be liable to CGT on any appreciation in the value of the shares while they are in the trust and
Ralph will be subject to CAT on the value of any assets eventually appointed to him from the trust. There will be no stamp
duty on the appointment of the shares to Ralph.
In summary, this is an expensive option; even if the shares are appointed to Ralph fairly soon after Linda’s death, the costs
of which can be summarised as follows:
Summary of taxes payable
€
4,800,000
360,000
2,160,000
1,005,000
––––––––––
8,325,000
––––––––––
CGT: Linda
Stamp duty
CAT: 6% Discretionary trust tax
CAT payable by Ralph
CAT: 1% Discretionary trust tax
Potential refund of discretionary trust tax
€360,000
€1,080,000
Payable
Date of transfer of assets
Date of transfer of assets
Date of death: Linda
Date shares appointed to him
Annually until assets appointed
On appointment within five years
Potential CGT liabilities for the trust on appreciation in value.
Option 4: Discretionary trust settled on Linda’s death and eventual appointment to Ralph
CGT and stamp duty on settlement
There are no CGT or stamp duty liabilities in this situation as the transfer is on a death.
Discretionary trust tax and taxes on appointment
As in the case of Option 3:
–
the 6% discretionary trust tax (subject to a half refund if the assets are appointed within five years of Linda’s death) and
the 1% annual tax will apply;
–
the trustees will be liable for CGT on the appreciation in the value of the shares while they are in the trust; and
–
Ralph will be liable to CAT (but not stamp duty) on the eventual appointment of assets to him.
Summary of taxes payable
€
2,160,000
1,005,000
––––––––––
3,165,000
––––––––––
CAT: 6% Discretionary trust tax
CAT payable by Ralph
CAT: 1% Discretionary trust tax
Potential refund of discretionary trust tax
€360,000
€1,080,000
Payable
Date of death: Linda
Date shares appointed to him
Annually until assets appointed
On appointment within five years
Potential CGT liabilities for the trust, on appreciation in value.
Evaluation of options
The lifetime transfer of the shares by Linda, which is contemplated in options 1 and 3, would lead to a substantial CGT liability
which should be avoided if possible. The use of a discretionary trust to defer the payment of CAT (options 3 and 4) provides
no real benefit in this case, and results in a liability to substantial additional discretionary trust taxes, while the CAT will still
remain payable by Ralph eventually (perhaps on a higher amount).
Recommendation
Option 2 (Ralph inherits the shares from Linda) is recommended as the tax cost (€1,005,000) is substantially less than in
the case of the other options, due to the availability of business property relief.
32
Professional Level – Options Module Paper P6 (IRL)
Advanced Taxation (Irish)
December 2013 Marking Scheme
This marking scheme is given as a guide to markers in the context of the suggested answer. Scope is given to markers to award
marks for alternative approaches to a question, including relevant comment, and where well reasoned conclusions are provided. This
is particularly the case for essay based questions where there will often be more than one definitive solution.
Available
1
(i)
(ii)
Options regarding sale of the Limerick business premises
No VAT implications
Identification of capital loss in company
Option (i)
Connected persons loss restriction and tax disadvantage
Stamp duty cost of purchase
Option (ii)
Capital loss allowable
Recommendation: option (ii)
(1) Eligibility for relief(s)
Sale of shares (distribution)
Conditions for retirement relief that are met by Ken
Conclusion re not qualifying for retirement relief under the strict rules (see note)
Reason why Lucille does not qualify
Ken does not qualify for retirement relief re Cork business premises
Maximum
0·5
0·5
1·5
1·0
1·0
0·5
–––––
5·0
2·0
0·5
0·5
1·0
–––––
4·0
4·0
Note: It is equally acceptable to refer to the revenue concession and determine that Ken
is eligible for retirement relief.
(2) Calculation of net after tax proceeds
Tax at company level
Gain on goodwill including calculation of goodwill
Limerick business premises: loss
Balancing charge
Liquidator’s distribution
Assets
Liabilities
Distribution
Tax payable at shareholder level
Ken Rogers: deemed disposal of shares (alternative solution allowing
retirement relief is also acceptable)
Lucille Rogers: deemed disposal of shares
Ken Rogers: disposal of Cork business premises
Summary of net after tax proceeds
(iii) Severance package
Identification of non-taxable elements (redundancy and pension)
Calculation of increased basic exemption
Calculation of SCSB
Conclusion – nil tax liability
(iv) (1) Potential tax underpayment
Factors indicating that DJs are actually employees (0·5 each, maximum)
Not possible to exclude this by a term in the contract
Responsibility of company for payroll taxes
Demonstration of no loss of revenue
Company is at a minimum responsible for employer’s PRSI
33
1·0
0·5
1·0
1·0
1·0
0·5
1·5
1·5
1·5
1·0
–––––
10·5
1·0
1·0
1·5
0·5
–––––
2·0
0·5
1·0
1·0
1·0
–––––
5·5
9·0
4·0
5·0
Available
(2) Minimisation of interest and penalties
Correction within 2012 tax year and deadline
Self-correction of 2011
Deadline
Payment of tax and statutory interest only
Declaration and evidence of no loss of revenue
Consequences of missing deadline(s)
Professional marks
Format and presentation of the letter
Effectiveness of written communication
Appropriate use of support schedules/appendix
Logical flow of calculations
2
(a)
(b)
(d)
(e)
1·0
1·0
1·0
1·5
–––––
5·5
Status 2012–2014
Status 2015
General rule: Irish sourced income and foreign income remitted
0·5
0·5
1·0
–––––
(i)
4·0
1·5
–––––
5·5
(ii)
(c)
1·0
1
1
1
1
–––––
SARP
Split-year relief
Explanation of Hank’s eligibility for both reliefs
Explanation of Michael’s non-eligibility for SARP
Explanation of the non-applicability of split-year relief to Michael
Inclusion of government securities
Exclusion of USA income (January to March)
Benefit in kind
Inclusion of Irish dividends
SARP calculation
SARP not applicable when calculating PRSI and USC
(i)
(ii)
1·0
0·5
0·5
–––––
0·5
0·5
1·0
0·5
2·0
1·0
–––––
5·5
Advice not to use US income to pay medical insurance premium
Tax rebate position
Gift to Kirsty
Explanation of CGT exposure
Offset of CGT as a credit against CAT
Explanation of CAT exposure
Explanation of stamp duty exposure
1·5
0·5
–––––
1·0
1·0
1·5
0·5
–––––
Alternative structure (This marking scheme is based on Option 1.
A maximum of 5 marks is also available for Option 2)
Recommendation of government securities instead of Irish shares
Evaluation of CAT issues
Government securities CGT exempt
Government securities exempt from stamp duty
34
Maximum
0·5
3·0
1·0
1·0
–––––
5·5
5·0
4·0
–––––
35
–––––
2·0
5·0
2·0
5·0
2·0
4·0
5·0
–––––
25
–––––
3
(a)
(i)
(ii)
(b)
(i)
(ii)
4
(i)
(ii)
Available
2·0
1·0
–––––
Identification and conditions of consortium relief
Application to Folsom Ltd
Folsom Ltd: corporation tax (CT) computation
Folsom Ltd: explanation of computation
Blues Ltd: CT computation
Blues Ltd: explanation of computation
Ring Ltd: explanation of inability to avail of consortium relief
Ring Ltd: treatment of loss
Fire Ltd: CT computation
Fire Ltd: explanation of limitation on consortium relief
Folsom Ltd: loss memorandum/calculation of unused loss
Explanation regarding remaining unused loss in Folsom Ltd
Explanation of R&D credit
Definition of qualifying expenditure
Explanation of buildings credit
Time limit for claim
Treatment of excess credit
Maximum
3·0
1·5
1·0
1·0
0·5
1·0
0·5
1·0
1·0
1·0
1·0
–––––
9·5
9·0
1·5
2·0
1·5
0·5
1·5
–––––
7·0
5·0
Digichoc Ltd: corporation tax computation
3·0
–––––
20
–––––
Clarification that the exempt status does not apply to inputs
Confirmation that the input VAT may not be reclaimed
1·0
1·0
–––––
2·0
Explanation of s.13A authorisation
Advice to get a copy of the 13B certificate
2·0
1·0
–––––
3·0
(iii) Non-applicability of RCT as ABC is not a principal contractor
Calculation of allowable input VAT
Consequences of not receiving an invoice from the plumber
1·0
2·0
2·0
–––––
(iv) Eligibility for a VAT reclaim
Calculation of the rebate
1·0
2·0
–––––
3·0
(v)
1·0
1·0
–––––
2·0
Applicability of reverse charge
Calculation of VAT and explanation of output and input VAT
(vi) Eligibility for cash receipts basis
Requirement to seek authorisation
Benefit of cash receipts basis
After the changeover, VAT not charged on amounts previously accounted for on the
invoice basis
Requirement to change back if turnover exceeds €1 million
Alternative suggestions regarding improving cash flow
(vii) Non-applicability of PSWT
5·0
1·0
0·5
1·0
0·5
0·5
1·0
–––––
4·5
3·0
2·0
–––––
20
–––––
35
Available
5
(a)
Calculation of the value of Linda’s shares
(b)
(i)
(ii)
Option (1)
CGT Commentary
Computation
CAT Commentary
Computation
Stamp duty
1·0
1·0
2·5
1·5
1·0
Option (2)
No CGT or stamp duty on a death
CAT
1·0
1·0
(iii) Option (3)
CGT payable on lifetime transfer to trust
Stamp duty payable on lifetime transfer
6% discretionary trust tax
1% tax annually
Appointment to Ralph: eventual CAT
Appointment to Ralph: no stamp duty
Trustees liable to CGT on appreciation in value
Summary of taxes payable
1·0
0·5
1·5
1·0
1·0
0·5
1·0
1·5
(iv) Option (4)
No CGT or stamp duty on a death as for Option 2
Discretionary trust tax applies as in Option 3
CGT on trustees as for Option 3
CAT on appointment as for Option 3
0·5
1·0
0·5
0·5
Evaluation and recommendation
1·5
–––––
21·0
–––––
36
Maximum
1·0
19·0
–––––
20
–––––