Professional Level Options Module, Paper P6 (IRL) 1 Lorraine Smith. Chartered Certified Accountants. Any street Any town.

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2 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) June 2018 Answers 1 Lorraine Smith Mrs Lorraine Smith Any street Any town Re: Tax planning Dear Lorraine, Chartered Certified Accountants Any street Any town 1 October 2017 I refer to our recent meeting and am writing to give you my advice on your proposal to optimise your and Charlie s income tax position as a married couple and the implications of transferring your shareholding in Eagle Manufacturing Ltd (EML) to your niece, Mavis, when you reach age 70. (i) Optimum level of income for Charlie You currently pay income tax (IT) at 40% on all of your income in excess of 42,800. Married persons in receipt of two incomes may increase the 20% tax band by the lower of 24,800 or the amount of the second (lower earning) spouse s income. The optimum amount of income for Charlie to receive and for you to reduce your taxable income by is therefore 24,800. Tutorial note: Under joint assessment, the married person s credit of 3,300 will apply under both the current and the proposed scenario. (ii) Tax implications of the two options Option 1: Transfer of the business premises to Charlie The various taxation implications of this proposal are as follows: Value added tax (VAT) The business premises is not a new property as more than five years have elapsed since its development. Marking note: Alternatively, it is not new because this is not the first sale since the development was completed. You effectively reclaimed VAT of 56,700 ( 420,000 x 13 5%) upon the acquisition of the premises in January 2012 by making the single election to tax the rents. The simple transfer of the business premises from you to Charlie, without any further action, would therefore trigger a VAT claw back for you of 42,525 ( 56,700 x (14 + 1)/20) (Deductible VAT incurred on acquiring the property x ((number of remaining intervals + 1)/ total number of intervals)) However, this claw back of VAT would be avoided if: Charlie registers for VAT, prior to the transfer; and Charlie elects to make the letting taxable (the single election), in which case VAT would continue to be chargeable at 23% on the rents. If the above actions are taken, then no VAT will be chargeable on the transfer of the premises as the transfer will qualify for transfer of a business relief (TOB) because: the property constitutes an asset capable of being operated on an independent basis; the letting of the property qualifies as a business ; both the transferor (you) and the transferee (Charlie) will be VAT registered on the date of the transfer; and Charlie is registered on the basis that he is electing to charge VAT on the rents from the building. Please note, however, that where (as in this case) a property is not new, the transferee steps into the shoes of the transferor under the capital goods scheme, therefore: the transferee (Charlie) effectively inherits the adjustment period of the property; the transferor (you) is obliged to provide a copy of the capital goods record to the transferee (Charlie); and the transferee (Charlie) must then comply with the scheme for the remaining (i.e. 14) intervals in the normal way and account for any change of use or personal adjustments required when the property is sold. Capital acquisitions tax (CAT) No CAT will arise as it is a transfer between spouses. Stamp duty (SD) No SD will arise as it is a transfer between spouses. 23

3 Capital gains tax (CGT) No CGT is chargeable on the transfer, under the general transfer between spouses rule. Charlie will be deemed to acquire the property at your original 2012 acquisition cost of 420,000. Tutorial note: No CG50 is required because the deemed consideration is less than 500,000. There would be no claw back of the retirement relief granted to you in 2009, because the business premises is not a qualifying asset as it has not been owned for the necessary period of ten years. The deemed sales proceeds from the premises would not therefore be aggregated with the sales proceeds from the sale of shares in Banjo Ltd for the purposes of the lifetime limits in relation to disposals to third parties for retirement relief. Marking note: Alternatively, the business premises is not a qualifying asset because: it was not used for the purposes of the trade throughout the ten years; or it is not proposed to sell the premises and the shares to the same person at the same time. Income tax (IT) The first 24,800 of the rental profit receivable by Charlie would be taxed at 20%. No earned income credit would be available. This option would result in an overall tax saving to you and Charlie as a couple of 4,960 ( 24,800 x (40% 20%)). Tutorial note: The remaining 200 of rental profit receivable by Charlie would be taxed at 40%, which is the same tax rate as currently applicable to Lorraine on this income. Therefore, the taxation of the remaining 200 would make no difference to the overall tax saving. Option 2: Transfer of the Galway apartment to Charlie and his employment by EML Transfer of Galway apartment VAT No VAT would arise as it is a not a new residential property. Tutorial note: There would be no capital goods scheme (CGS) adjustment as the property is more than 20 years old. CAT on the transfer No CAT would arise as it would be a transfer between spouses. SD on the transfer No SD would arise as it would be a transfer between spouses. CGT on the transfer No CGT would be chargeable on the transfer, under the general transfer between spouses rule. Charlie will be deemed to acquire the property at your original 1990 acquisition cost of 55,000. IT The rental profit on the apartment received by Charlie of 16,500 is subject to IT. Therefore, the optimal IT position would be achieved if Charlie were to receive a gross salary of at least 8,300 ( 24,800 16,500). This would require him to work approximately eight hours per week (( 8,300/52)/ 20) for EML. Charlie would receive an earned income credit of 950 which would be fully utilised on a salary of 8,300. This credit would be in addition to the earned income credit available to you. The overall IT saving would therefore be 5,910 ( 24,800 x (40% 20%) + 950), i.e. 950 more than under option 1 due to the earned income credit. Tutorial note: The earned income credit applies to income other than earned income which qualifies for relief under s.472 Taxes Consolidation Act 1997 (Employee (PAYE) Tax Credit). The credit does not apply to passive income, such as rent or deposit interest. Charlie would not be entitled to the employee/paye credit in relation to his proposed employment income, because he is the spouse of a proprietary director. He would therefore only be entitled to the earned income credit in relation to that income. (iii) Proposed gift of shareholding in EML to Mavis Lorraine VAT VAT does not apply to a disposal of shares. CGT Entrepreneur relief You would satisfy the conditions for entrepreneur relief as you: are an individual; would be disposing of a chargeable business asset (i.e. a holding of 5% or more of the ordinary shares in a company carrying on a qualifying trade); would have been the beneficial owner of the chargeable business asset for a continuous period of three out of the five years prior to the disposal; and would have been a director or employee of the company and spent 50% or more of your working time in the service of the company in a managerial or technical capacity for a continuous period of three out of the five years prior to the disposal. 24

4 Entrepreneur relief would reduce the CGT rate on the disposal from 33% to 10% for qualifying gains of up to 1 million. Tutorial note: After the gift to Mavis, Lorraine would have utilised 234,170 of her maximum 1 million in relation to future disposals qualifying for entrepreneur relief. (See schedule 3) Retirement relief You would qualify for retirement relief on the disposal as: you are an individual and will be aged over 55 at the time of the disposal; and the disposal is of qualifying shares in a qualifying company. Your shares in EML are qualifying shares because all of the following conditions are satisfied: EML will have been a trading company for at least ten years. You will have owned the shares for at least ten years prior to the disposal. You will have been a director of the company for at least ten years. You will have been a full-time working director for at least five years. EML is a family company in relation to you, i.e. you own 25% or more of the voting rights in the company. Tutorial note: A company also qualifies as a family company if the individual owns 10% or more of the voting rights where their family (including the individual) own 75% or more of the voting rights. Where qualifying shares are disposed of to a child of the disponer and the disponer is aged over 66 (and the company only has business assets) relief will apply in full to the extent that the value of the qualifying assets does not exceed 3 million. For the purposes of this exemption, a favourite niece such as Mavis who has worked substantially on a full-time basis in the business for the five-year period prior to the date of disposal qualifies as a child. It is therefore essential that Mavis continues to work in the business for at least 24 hours per week, for the five-year period ending on the date of the gift. However, the shareholding in Kenilworth Ltd is a non-business chargeable asset. Therefore, as EML has both business assets and non-business assets, the relief will only be available for that portion of the gain on the shares which is equivalent to the portion of chargeable business assets (CBA) to total chargeable assets (CA). These amounts (as calculated in Schedule 2) are 200,000 and 225,000 respectively, so the retirement relief would be restricted accordingly. The CGT annual exemption is not available in a year when retirement relief has been claimed, so (as calculated in Schedule 3) the CGT payable on the transfer would be 2,602. The retirement relief granted on the disposal of the shares in Banjo Ltd in 2009 would not be affected by the above transaction, as the 2009 disposal was to a third party whereas this proposed disposal of EML shares will be considered to be the same as a disposal to a child, provided Mavis qualifies as a favourite niece (as described above). Mavis CGT The retirement relief would be clawed back if Mavis disposes of the shares in EML within six years of the date on which she acquired them. In that case, Mavis would be liable to pay the CGT which would have been payable by you had retirement relief not been available at the date of transfer. SD SD at the rate of 1% would be payable by Mavis on the transfer of the EML shares. Based on the current value of the shares, the duty payable would amount to 2,500 ( 250,000 x 1%). CAT Mavis would be liable to CAT on the EML shares received from you. Business property relief (BPR) Mavis would qualify for BPR in relation to the shares in EML as the following conditions for relief would have been satisfied: EML is an unquoted company. EML carries on a qualifying activity ( i.e. an activity taxable under Case I or II of Schedule D). Mavis would have more than 25% of the shares in EML after taking the gift. Tutorial note: Alternatively, Mavis would qualify on the basis that she will own more than 10% of the shares and would have worked for the company for the previous five years. The shares would have been owned by you for at least five years, prior to the gift. BPR results in a 90% reduction in the taxable value of the business assets. However, that part of the share value attributable to non-business assets, i.e. the shares in Kenilworth Ltd, would not qualify for BPR. The BPR would be clawed back if Mavis were to dispose of the shares within six years of the gift. Also, where a niece or nephew has worked substantially on a full-time basis in the business of their aunt or uncle for the five years ending on the date of the gift, the class 1 threshold applies to any business assets taken by that niece or nephew. Mavis would currently qualify for this higher threshold of 310,000, should the property pass by way of a gift, but as she has already received a gift of 280,000 from a class 1 disponer (her mother), only the remaining threshold of 30,000 will be available. On this basis, Mavis would have a CAT liability of 4,628 (as calculated in Schedule 4). However, as CGT of 2,602 would be payable by you on the same event, this CGT amount can be offset against the CAT payable by Mavis, resulting in a CAT liability of 2,026 ( 4,628 2,602). 25

5 Summary of taxes payable You would have a CGT liability of 2,602 and Mavis would have a SD liability of 2,500 and a CAT liability of 2,026. I trust that the above addresses your requirements but please feel free to contact us if you require any further assistance. Yours sincerely, ABC Chartered Certified Accountants COMPUTATIONAL APPENDIX Schedule 1: Valuation of EML Equipment (at market value) 15,000 Goodwill 185,000 Shares in Kenilworth Ltd (at market value) 25,000 Inventory 25,000 Trade receivables 20,000 Cash at bank 10,000 Trade payables (30,000) 250,000 Schedule 2: Chargeable assets (CA) and chargeable business assets ( CBA) CA CBA Equipment 15,000 15,000 Goodwill 185, ,000 Shares in Kenilworth Ltd 25, , ,000 Schedule 3: Lorraine: CGT computation on the disposal of shares in EML Deemed sales proceeds (as per Schedule 1) 250,000 Less: Cost 10,000 Indexation (15,830) Gain on disposal 234,170 CGT at 10% 23,417 Retirement relief ( 23,417 x 200,000/ 225,000) (20,815) CGT payable 2,602 Schedule 4: Mavis CAT computation Market value of shares in EML 250,000 Less: SD at 1% (2,500) Taxable value of shares in EML 247,500 Less: Business property relief (BPR) (note 1) (200,475) 47,025 Less: Small gifts exemption (3,000) Taxable value 44,025 Class 1 threshold ( 310, ,000) (30,000) 14,025 CAT at 33% 4,628 Less: Credit due for CGT paid by Lorraine (2,602) CAT payable 2,026 26

6 Note 1: BPR Market value of shares 250,000 Less: Shares in Kenilworth Ltd (25,000) Market value of shares excluding investments 225,000 SD at 1% (2,250) Taxable value of shares excluding investments 222,750 BPR at 90% 200,475 2 Joe Smith (a) Additional documents required Re item 1, a letter of confirmation from Joe s friend in relation to the gift of the 25,000. Re item 2, the documents supporting the employee mileage claims, to ensure that they actually complied with the Revenue guidelines. Re item 7, a copy of the savings account where the deposit for the purchase of the apartment of 50,000 was accumulated. These documents would be required to enable me to satisfy myself that Joe s explanations were correct and the origin of the money in the case of items 1 and 7 was not from some other source such as undeclared sales from the business, or the proceeds of crime. (b) Strategy for minimising penalties arising from the Revenue audit Prior to the commencement of the audit, the taxpayer has an opportunity to make a complete qualifying disclosure of irregular tax issues to the Revenue. In this case the disclosure would be a prompted disclosure, as the taxpayer has already been notified of a Revenue audit. It is important that the disclosure made is complete insofar as it must state the amounts of all liabilities to tax and interest in respect of the relevant tax heads and periods within the scope of the proposed audit, including all prior periods in the case of deliberate behaviour. The qualifying disclosure must be made in writing, signed by or on behalf of the taxpayer, and accompanied by a settlement of the tax and interest, but not the penalties. The taxpayer should co-operate fully with the audit process. Cooperation includes having all the books and records and linking papers ready at the start of the audit, responding promptly to all requests for information and making prompt payment of the audit settlement liability. The benefits to the taxpayer of making a qualifying disclosure and cooperating are: reduced rates of penalty; non-publication of the default; and no prosecution. (c) Tax underpayments and penalties 1 Gift from friend Value of gift 25,000 Less: Small gifts exemption (3,000) 22,000 Less: Class 3 threshold (16,250) Taxable amount 5,750 Capital acquisitions tax (CAT) at 33% 1,898 (CAT) 2 Non-allowable items Running expenses re daughter s car 2,000 Family holiday in Spain 3,000 Running costs for Joe s car ( 5,500 x 20%) 1,100 Correct add back 6,100 Less: Actual add back (2,960) Overstatement of expense 3,140 Taxes on income at the combined rate of 52% (40% + 4% + 8%) 1,633 (IT/PRSI/USC) 27

7 3 Undeclared cash sales Gross receipt 4,000 Value added tax (VAT) Underpayment of output tax ( 4,000 x 13 5/113 5) (476) 476 (VAT) Net receipt 3,524 Taxes on income at 52% 1,832 (IT/PRSI/USC) 4 Cash bonus Net bonus paid (2 x 2,000) 4,000 Marginal tax rate of 49% (40% + 4% + 5%) Grossed up bonus ( 4,000 x 100/51) 7,843 Payroll tax underpayment Employee taxes on income ( 7,843 x 49%) 3,843 Employers PRSI ( 7,843 x 10.75%) 843 4,686 (PAYROLL) The additional payroll taxes will reduce Joe s taxes at his marginal rate of 52% by ( 4,686 x 52%) (2,437) (IT/PRSI/USC) 5 Contract for AC unit installation services VAT underpayment Price per job (excluding VAT) 2,000 Underpayment per job ( 2,000 x (23% 13 5%)) 190 Total VAT underpayment ( 190 x 20) 3,800 (VAT) Note: The two-thirds rule has not been properly applied. The VAT exclusive cost of the goods ( 1,500) in the contract for the supply of the service exceeded two-thirds of the contract price ( 2,000) and, therefore, the rate of VAT applicable to the supply of goods (23%) is applicable to the entire contract. Overpayment of taxes on income ( 3,800 x 52%) (1,976 ) (IT/PRSI/USC) Note: An adjustment to taxes on income arises in relation to the VAT underpayment (in favour of the client), as less net proceeds are received as a result of the underpaid VAT now due. 6 Garden shed VAT Underpayment on self-supply ( 3,000 x 23%) 690 (VAT) Note: The use of building materials for a personal garden shed is an appropriation of goods for a private use and represents a self-supply for VAT purposes. Underpayment of taxes on income for expenses over-claimed Materials 3,000 Labour 1,500 Understatement of profit 4,500 Underpayment of taxes on income ( 4,500 x 52%) 2,340 (IT/PRSI/USC) Note: The consequence of including the materials and labour expenses in the income statement of the business is that taxable profit has been understated. 28

8 7 Rental income from UK apartment: Case III Rent ( 2,000 x 8 months) 16,000 Less: Expenses Mortgage interest ( 15,000 x 8/11 x 80%) (8,727) Service charge ( 3,000 x 8/11) (2,182) Letting agents fees (1,500) 3,591 Less: Capital allowances ( 8,000 x 12 5% x 8/12) (667) Rental profit 2,924 Taxes on income at 52% 1,520 Less: UK tax 0 Underpayment of taxes on income 1,520 (IT/PRSI/USC) Note: The rental losses incurred in relation to the Roscommon property are Case V losses, which cannot be offset against the Case III income from the UK apartment. Total tax underpaid 14,462 Summary of the tax and penalties payable Tax underpaid Reduced rate Amount of of penalty penalty 1 CAT 1,898 20% IT, PRSI, USC 1,633 10% VAT % 238 IT, PRSI, USC 1,832 50% Payroll taxes 4,686 50% 2,343 IT, PRSI, USC (overpayment) (2,437) 0 5 VAT 3,800 10% 380 IT, PRSI, USC (overpayment) (1,976) 0 6 VAT % 345 IT, PRSI, USC 2,340 50% 1,170 7 IT, PRSI, USC 1,520 20% ,462 6,239 From the above, the expected total liability for tax and penalties is 20,701 ( 14, ,239). There are three categories of default: Careless behaviour The penalty is 20% of the tax due, reduced to 10% on disclosure. For this category to apply, the tax shortfall must be less than 15% of the tax liability due in respect of the particular tax/tax head. Items 2 and 5 would appear to come within this category, as there was carelessness, and in each case the omissions constitute less than 15% of the relevant liability due for the period. Careless behaviour with significant consequences The penalty is 40% of the tax due, reduced to 20% on disclosure. This category applies where there has been a lack of due care with the result that the tax paid is substantially incorrect and exceeds the 15% test described above. Items 1 and 7 will come within this category on the basis that there was no deliberate intent to avoid tax but there was carelessness and in each case the omissions constitute more than 15% of the relevant liability due for the period. Marking note: It could be argued that item 1 is just careless behaviour which would attract a penalty of 20% reduced to 10% on disclosure, in view of the relatively low level of tax due and the client s misunderstanding of the tax implications of the transaction. Candidates who made this argument and categorised item 1 as just careless behaviour also received the available 0 5 mark. Deliberate behaviour The penalty is 100% of the tax due, reduced to 50% on disclosure. Deliberate behaviour has indicators consistent with intent and includes tax evasion and the non-operation of fiduciary taxes such as PAYE. Items 3, 4 and 6 are likely to come within this category, as Joe s behaviour in relation to these items is quite clearly deliberate, with an intent to evade tax. 29

9 3 (a) Paper Ltd (i) Corporation tax computation for the year ended 31 December 2017 Case I Trading profit 200,000 Group relief (200,000) 0 Case III UK rental income 55,000 Case V Irish rental income 105,000 Total income 160,000 Corporation tax at 25% 40,000 Group relief ((( 300,000 ( 40,000 x 25%/12 5%)) 200,000) x 12 5%) (2,500) Corporation tax payable 37,500 Tutorial note: Rock Ltd must firstly utilise 80,000 of its Case I loss, to eliminate the tax arising on its rental income of 40,000. (ii) Close company surcharge computation for the year ended 31 December 2017 Case III UK rental income 55,000 Case V Irish rental income 105, ,000 Corporation tax at 25% (40,000) 120,000 Franked investment income 37, ,000 Trading company deduction 7 5% (11,775) 145,225 Less: Dividend paid for the year ended 31 December 2017 (48,000) Amount subject to surcharge 97,225 Surcharge at 20% 19,445 (b) Sundance Ltd group (i) Acquisition of Sting Ltd s business Tax issues 1. Stamp duty (SD) The purchase of shares incurs SD at the rate of 1%, whereas SD at the rate of 2% is payable on the purchase of assets. The purchase of Sting Ltd s shares will therefore result in an immediate tax saving of 7,500 as follows: Consideration Rate SD Purchase of shares 650,000 1% 6,500 Purchase of assets ( 400, ,000) 700,000 2% 14,000 SD saving 7, Latent gains The issue of latent gains is not relevant in the case of a purchase of assets as they are bought at their market value rather than at their capital gains base cost. However, in the case of a share purchase, there will be latent gains in relation to both the goodwill and the business premises, the potential tax implications of which are as follows: 30

10 Goodwill ( 400,000 nil base cost) 400,000 Potential capital gains tax (CGT) at 33% 132,000 Business premises Proceeds (market value) 300,000 Cost 60,000 Indexation 1990/ (86,520) Latent gain 213,480 Potential CGT at 33% 70,448 Total potential CGT 202,448 Consequently, the potential CGT liability arising on a subsequent sale of the assets by the company will amount to 202, Other potential tax liabilities In the case of a purchase of assets, the purchaser need not worry about any hidden contingent tax liabilities, such as past underpayments of employee taxes in the company. Non-tax issues The non-tax issues in favour of buying assets rather than shares include: cost savings in relation to the due diligence process; the process may be more straightforward; the purchaser can choose which assets to acquire; the purchaser need not worry about any contingent non-tax liabilities of the company; and the requirement for warranties and indemnities may not arise. Recommendation Unless it has no intention or expectation of disposing of any of the company s chargeable assets in the short/medium term, Sundance Ltd should purchase the assets rather than the shares in Sting Ltd. Although the total cost (including SD) of purchasing the assets is 57,500 ( 714, ,500) more than the comparable cost of purchasing the shares, this is considerably less than the potential tax bill of 202,448 which could arise on the subsequent sale of the relevant assets by the company. In addition (as identified above), a purchase of assets is likely to be both more straightforward and incur fewer other acquisition costs, e.g. in respect of due diligence. (ii) Venture capital investment in Horse Ltd The proposed reduction of Sundance Ltd s interest in Horse Ltd from 80% to 65% on 20 December 2017 will mean that Horse Ltd will leave the capital gains tax (CGT) group with effect from that date. This will result in a claw back of the group relief given on the assets transferred to Horse Ltd in the ten-year period prior to Horse Ltd leaving the group. The time period from 8 January 2008 to 20 December 2017 is 9 years and 11 months, and as this is less than ten years, there will be a claw back of group relief in Horse Ltd, in respect of the retail premises, calculated as follows: Sales proceeds (deemed) 300,000 Less: Cost 2004 (120,000) Taxable gain 180,000 Tax payable at the effective (CGT) rate of 20% 36,000 As a result of this claw back, corporation tax on the adjusted chargeable gain amounting to 36,000 will be payable on 31 January Tutorial note: The tax will be due and payable by reference to the accounting period in which the company leaves the group, which is the period ended 31 December However, as the last payment date for preliminary tax was 23 November 2017 and the transaction is due to take place in December 2017, the company will satisfy its payment obligations if payment is made within one month of the end of the accounting period. However, if the venture capital investment is postponed until after the end of the ten-year period, then no claw back of CGT group relief will occur. It is therefore recommended that the venture capital deal is postponed until on or after 9 January

11 4 (a) Mary Wright (i) Additional taxes on projected income as a sole trader Increase in taxable profit ( 100,000 75,000) 25,000 Increase in tax at 52% 13,000 Less: Pension relief ( 15,000 x 40%) (6,000) Additional taxes payable 7,000 On the basis that Mary will be aged between 20 and 30 in 2018, her maximum allowable pension contribution will be 15,000 (being her net relevant earnings of 100,000 x 15%). The remainder of the contribution ( 5,000) may be carried forward and utilised in future tax years, subject to the same overall restriction. Income tax relief will apply at her marginal income tax rate of 40% only, because personal pension contributions do not relieve PRSI and USC. (ii) Taxes payable on projected income as a corporate business The total taxes payable on a salary of 75,000 (income tax (IT), PRSI and USC) will amount to 26,829 (as given in the question). The contribution by the company to an occupational pension scheme on behalf of Mary is not a benefit in kind. Tutorial note: There will be no employer s PRSI as Mary is a proprietary director. Corporation tax (CT) liability Net profit before director s remuneration 105,000 Less: Director s remuneration (75,000) Pension contribution (20,000) Capital allowances (5,000) Taxable profit 5,000 CT at 12 5% 625 The total tax borne on the profits is therefore 27,454 ( 26, ). Tutorial note: The close service company surcharge will not apply as bookkeeping is not a professional service. (iii) Comparison of the two options Summary of tax costs under the two alternatives Tax payable as a sole trader ( 26, ,000) 33,829 Tax payable as a company 27,454 Tax saving 6,375 The tax saving of 6,375 if incorporation and the occupational pension scheme option is chosen arises because: There is effectively no limit on the amount of contributions which a company can make to an occupational pension scheme (unless the pension fund is being overfunded) whereas (as demonstrated in (i) above) there are age-related limits and income-related limits to the amount which can be paid into a personal pension plan. PRSI and USC (amounting to 12%) are not sheltered in the case of the personal pension scheme. These differences will increase as profits and any proposed pension investments increase (and vice versa). However, in relation to the sole trader option, as Mary gets older a higher amount of her pension contribution will qualify for tax relief and this would reduce the difference between the two options. A further advantage of an occupational pension scheme is that in certain circumstances it may be possible to take the entire amount of the occupational pension fund by way of a tax-free lump sum. Disadvantages of the incorporation/occupational pension scheme option include: The compliance costs (accounting, taxation, etc) will be higher. There will be accounting, taxation and possibly legal costs associated with setting up the company and transferring the trade. (iv) Effects of providing professional accounting services If the company derives most of its income from the provision of professional accounting services, then it will be liable for the close company surcharge on service company income (in addition to corporation tax at 12 5%). This surcharge 32

12 is payable at the rate of 15% on 50% of the after-tax undistributed service income (i.e. the remaining 50% can be accumulated free of any surcharge). The surcharge may be mitigated by the adoption of one or more of the following measures: Increasing the company s contribution to the occupational pension scheme to the amount of the retained profit of the company (subject to the scheme not being overfunded). Mary taking a larger salary or receiving dividends from the company. Two separate companies being set up, one for accounting services and one for bookkeeping services, in which case the bookkeeping company would not be subject to the surcharge. (b) Teltronics Ireland plc (TI) (i) Research and development (R&D) credits available for 2017 A company may qualify for a tax credit of 25% on its qualifying expenditure on R&D provided the following conditions are met: The company must be within the charge to Irish taxation. The company must undertake the R&D within the European Economic Area (EEA). The R&D can be basic, applied or experimental but must be set to achieve scientific or technological advancement. A claim must be made within 12 months of the end of the accounting period in which the expenditure was incurred. A company may also qualify for a tax credit of 25% on its qualifying expenditure on R&D buildings on a proportional basis provided at least 35% of the building is used for the purposes of R&D over a four-year period, from the time it is first brought into use after being built or refurbished. TI s available credits for 2017 Basic and applied research expenditure Both the basic research and the applied research constitute qualifying expenditure. The tax credit is 92,500 ( 370,000 x 25%). Building expenditure The cost of the site is excluded, so the credit is 71,750 (( 410,000 x 70%) x 25%). Claw back The credit for the building may be clawed back if the building is either sold within ten years or ceases to be used for the purposes of R&D or the same trade within four years. (ii) Utilisation of the 2017 R&D credits The credit is first used to eliminate the current period s corporation tax liability of 28,000. The excess credit of 136,250 ( 92, ,750 28,000) may be carried back to the preceding accounting period. In addition, there is a repayment option for any balance which continues to be unused after carry back. The basis for the reclaim is as follows: 33% of the excess after carry back to be refunded on the filing of the return for the accounting period in which the R&D expenditure was incurred. The balance to be carried forward initially against the corporation tax of any subsequent period with 50% of any portion remaining unrelieved being available for refund after the return filing date for that accounting period. The remaining balance to be carried forward to the next accounting period with any unutilised portion being available for refund after the return filing date for that accounting period. The maximum credit which may be refunded is the greater of: (a) (b) the total corporation tax paid in all accounting periods for the ten years prior to the period in which relief is claimed; or the total PAYE/PRSI liability of the company in the period in which the R&D expenditure is incurred and the previous period. 5 George (a) Income tax Tax status George is neither resident nor ordinarily resident in Ireland. His regular visits to Ireland are not of sufficient duration to result in him being regarded as resident (using either the 183 day rule or the 280 day look-back rule). George is also not domiciled in Ireland as he was born in the UK and has not acquired a new domicile of choice in Ireland. 33

13 (i) Letting of the Dublin apartment Irish rental income derived by a non-resident is subject to income tax in Ireland. UK tax may also have to be paid, but double taxation relief may be available under the Ireland/UK double taxation treaty. Where rents are paid directly to a person whose usual place of abode is outside the State, the tenant is obliged to deduct income tax at the standard rate (20%) from the payment. The tenant gives the landlord a certificate of the tax deducted on form R185. The tenant should account to the Revenue for the tax. George can avoid the need for his tenant to deduct income tax if he uses an Irish letting agent. Where rents payable to a non-resident landlord are paid to a person whose usual place of abode is in the State (e.g. an Irish-based agent acting on behalf of a non-resident landlord), the tenant is not obliged or entitled to deduct income tax. The non-resident landlord is chargeable to tax in the name of the Irish agent. The Irish agent is not entitled to deduct tax from the rent on payment to the landlord, but would normally retain sufficient amounts to satisfy the tax payable on the rents. (ii) Irish bank interest Interest from Irish banks, even though it is income arising in Ireland, is not, in practice, charged to Irish income tax where it accrues to a person not resident in Ireland. Deposit interest retention tax (DIRT) will not be withheld from the interest if George provides the Irish bank with proof of his UK address. (b) Capital taxes The Ireland/UK double taxation treaty grants sole taxing rights to the country of residence in the case of interest income. Capital gains tax (CGT) implications of residence and domicile status Individuals who are neither resident nor ordinarily resident in Ireland, irrespective of their domicile, are assessed to CGT on the chargeable gains realised on the disposal of the following specified Irish assets: (1) land and buildings in Ireland only, including any interest in land (such as leases); (2) minerals or any rights, interests or other assets in relation to mining or minerals or the searching for minerals in Ireland; (3) assets situated in Ireland, which were used in, or acquired for use for the purposes of a trade carried on in Ireland; and (4) unquoted shares deriving the greater part (i.e. 50% or more) of their value from (1) or (2). (iii) Proposed sale of shareholding in Arrow Catering Limited (ACL) ACL s shares are not specified assets as the greater part of their value is not derived from either land and buildings or minerals, etc. Therefore, no Irish CGT will be payable by George on their disposal. (iv) Disposal of shares in Leitrim plc Quoted shares are not a specified asset. Therefore, as the Leitrim plc shares are quoted on the Dublin stock exchange their sale will not be subject to Irish CGT. (v) Tax implications of the sale of the agricultural land Value added tax (VAT) The works carried out on the land were of an agricultural nature and did not materially alter the land (since it was a farm before and is still a farm after the works were carried out). As the land was not developed, its sale will be exempt from VAT. Tutorial note: The 25% test does not apply to land. CGT The disposal of the 20 acres of land is a part disposal for CGT purposes. Proceeds 200,000 Less: Original cost ( 500,000 x 200/( )) (125,000) Less: Enhancement expenditure ( 120,000 x 200/( )) (30,000) Gain 45,000 Less: Annual exemption (1,270) 43,730 CGT at 33% 14,431 Applicability of retirement relief Retirement relief gives an exemption from CGT to certain individuals aged over 55, who are disposing of a business, provided the chargeable business assets have been held for at least ten years. Where the disposal is to a non-child, there is a lifetime limit of 750,000 in relation to the sales proceeds. Based on the facts stated in the scenario, if George waits until he is aged 55 (i.e. until 2025), he should be able to claim retirement relief on the disposal of the remaining agricultural land. (vi) Cash gift to Ruth Gifts and inheritances are only subject to Irish capital acquisitions tax (CAT) if one of the following three circumstances applies: 34

14 the property is Irish; or the disponer is either resident or ordinarily resident in Ireland; or the recipient is either resident or ordinarily resident in Ireland. A non-domiciled individual will not be considered Irish resident or ordinarily resident unless he or she has been resident for the five years immediately preceding the gift or inheritance. Therefore, the proposed gift of 25,000 will not be subject to Irish CAT because: the property is not Irish; George (the disponer) is not Irish resident (as explained in (a) above); and Ruth (the recipient) is not Irish domiciled and has resided in Ireland for only three years prior to the proposed gift. (c) Corporation tax exemption for start-up companies Start-up companies, such as Comptel Ltd, are eligible for exemption from corporation tax for three years from their date of commencement if the following conditions are met: The company is incorporated within the European Economic Area (EEA) on or after 14 October 2008 and commences trading before 31 December The company carries on a qualifying trade. Examples of non-qualifying trades are trades previously carried on by another person, excepted trades and professional service companies. The total tax relief available is the lower of 40,000 or the amount of employer s PRSI paid by the company for all its employees, subject to a maximum payment of 5,000 per employee. 35

15 Professional Level- Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2018 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 Maximum 1 (i) Identification of optimum amount of income of 24,800, with explanation (ii) Option 1 VAT Property is not new, with reason 1 0 Explanation and calculation of claw back 1 5 How to avoid claw back 1 0 Applicability of TOB relief, with reasons 2 0 Capital goods scheme issues 1 5 CAT Nil because it is between spouses 0 5 SD Nil because it is between spouses 0 5 CGT Nil because it is between spouses 0 5 Charlie deemed to acquire at Lorraine s base cost/date 0 5 No claw back of retirement relief granted in Business premises not a qualifying asset, with reason 1 0 IT Explanation and calculation of IT saving of 4, Option 2 VAT Nil because it is a non-new residential property 1 0 CAT/SD/CGT Consequences as for business premises in option IT Optimal salary 8, hours per week required 0 5 Earned income credit 0 5 Calculation of total IT saving of 5, (iii) Valuation of EML shares (Schedule 1) 1 5 Lorraine VAT Does not apply to the disposal of shares 0 5 CGT Entrepreneur relief 0 5 Application of entrepreneur relief conditions 2 0 Retirement relief 0 5 Application of retirement relief conditions 3 0 Child proceeds limit of 3 million when over age Conditions for child proceeds limit to apply to favourite niece 1 0 Non-business assets, identification and explanation 1 0 CGT calculation 1 5 No annual exemption, with reason 0 5 Previous retirement relief not affected, with reason 1 0 Mavis CGT Claw back 0 5 SD Calculation 0 5 CAT Business property relief (BPR) 0 5 Application of BPR conditions 2 0 Claw back 0 5 Class 1 threshold with reduction 1 0 Computation including BPR 3 0 Offset of CGT payable by Lorraine Professional marks Format and presentation of the letter 1 0 Effectiveness of written communication 1 0 Appropriate use of support schedules/appendix 1 0 Logical flow of calculations

16 Available Maximum 2 (a) Additional documents 1 5 Explanation (b) Opportunity to make qualifying disclosure 0 5 Explanation of nature and process of qualifying disclosure 2 5 Explanation of co-operation 1 5 Benefits of making a qualifying disclosure and co-operating (3 x 0 5) (c) Tax underpaid, including explanations Item 1 CAT underpaid 1 5 Item 2 Determination of Joe s marginal rate of 52% 0 5 IT/PRSI/USC underpaid 1 5 Item 3 VAT and IT/PRSI/USC underpaid 1 5 Item 4 Determination of employees marginal rate of 49% 0 5 Payroll taxes underpaid 1 5 IT/PRSI/USC overpaid 0 5 Item 5 VAT underpaid 1 0 Explanation 1 0 IT/PRSI/USC overpaid 0 5 Item 6 VAT underpayment 1 0 Explanation 1 0 IT/PRSI/USC underpaid 1 0 Item 7 IT/PRSI/USC underpaid 2 0 Case V loss cannot be utilised 1 0 Explanation of the three categories of default 1 5 Penalties for each scenario (7 x 0 5)

17 Available Maximum 3 (a) (i) Group relief on Case I, 200, Total income Case III and Case V, 160, Tax at 25%, 40, Group relief on a value basis, 2, (ii) Total income Case III and Case V, 160, Tax at 25%, 40, Franked investment income 37, Trading company deduction 7 5% 1 0 Dividend paid for year 48, Surcharge at 20% (b) (i) Identify difference in stamp duty rates 1 0 Calculation of potential stamp duty saving of 7, Identify issue of latent gains 1 0 Calculation of potential latent gain re goodwill 1 0 Calculation of potential latent gain re business premises 1 0 Possibility of other hidden/contingent tax liabilities 0 5 Non-tax reasons for buying assets (0 5 each, maximum) 2 0 Reasoned conclusion/recommendation (ii) Horse will leave the capital gains group 1 0 Effective date, date of disposal, i.e. 20 December Ten-year claw back period 1 0 Calculation of claw back 1 0 Date of payment of corporation tax 0 5 Recommendation to postpone the investment

18 Available Maximum 4 (a) (i) Calculation of additional taxes 1 0 Explanation of pension contribution relief (ii) Tax on director s remuneration 0 5 No employer s PRSI, with reason 0 5 Pension contribution is not a benefit in kind 0 5 Corporation tax computation (iii) Summary of tax costs and identification of saving 0 5 Explanation of savings 2 0 Identification of potential effect on pension relief as Mary gets older 0 5 Benefit of occupational scheme (tax free lump sum) 0 5 Disadvantages of incorporation (higher compliance costs, etc) (iv) Explanation of the professional service company surcharge 1 0 Measures to reduce the surcharge (0 5 mark each) (b) (i) General conditions applicable to an R&D credit claim 2 5 Additional conditions applicable to buildings 1 0 Calculation of R&D credit on research expenditure 0 5 Calculation of R&D credit on building 1 0 Claw back (ii) First set off against current year CT 0 5 Carry back to preceding period 0 5 Repayment option explanation 1 5 Limitations re CT and payroll taxes

19 Available Maximum 5 (a) Residence status 1 0 Domicile status 0 5 (i) Irish rental income is taxable 1 0 Double tax relief under the treaty for any UK tax 0 5 Standard rate deduction by tenant 1 0 Effect of using an Irish agent 1 0 (ii) Irish bank interest not charged to Irish tax for non-residents 1 0 DIRT position 0 5 Country of residence has sole taxing rights under the treaty (b) CGT implications of residence and domicile status 2 0 (iii) The greater part of the value is not derived from specified assets 1 0 Irish CGT will not apply 0 5 (iv) Quoted shares are not specified assets 0 5 Irish CGT will not apply 0 5 (v) The work did not materially alter the land 0 5 The land was not developed 0 5 Thus the sale is not subject to VAT 0 5 CGT computation on a part disposal basis 2 5 Retirement relief conditions and applicability 1 5 (vi) Three situations in which a gift is subject to CAT 1 5 Exception regarding non-domiciled individuals and application to Ruth 1 0 Gift would not be subject to CAT (c) Corporation tax exemption for start-up companies 0 5 Period of three years from date of commencement 0 5 Incorporated in the EEA 0 5 Commenced trading before 31 December Qualifying trade 0 5 Limits to relief