Professional Level Options Module, Paper P6 (IRL) 1 Briefing notes for meeting with Neil Crosby and Kate Harris

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1 Answers

2 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) June 2017 Answers 1 Briefing notes for meeting with Neil Crosby and Kate Harris Prepared for: Tax manager By: Tax senior Date: 21 November 2016 Further to your of 18 November, the various issues for discussion at your forthcoming client meeting are addressed as follows: (i) (ii) (iii) (iv) Implications of Neil s residence and domicile status Neil is resident but not domiciled in Ireland in He will be subject to Irish income tax (IT) on Irish-source income and on any foreign income remitted to Ireland. He will be subject to Irish capital gains tax (CGT) on Irish gains and any foreign gains to the extent that they are remitted to Ireland. Any losses arising on the disposal of assets located outside Ireland are not relievable in Ireland. Irish tax implications of Neil s 2016 investment transactions 2 January 2016 The rental income of 16,000 from the letting of the Montreal apartment is not taxable in Ireland unless it is remitted. 2 February 2016 The loss arising on the sale of shares in Harvest plc is not allowable against capital gains subject to Irish tax. The lodgement of the 21,000 proceeds of disposal into the same bank account in Montreal created a mixed fund consisting of capital and income. Any remittances from such a bank account are deemed to come first from income and then from capital. The income is deemed to arise in the year of remittance. 1 March 2016 A total of 15,000 was withdrawn from the mixed fund. This is all deemed to be income. When an asset is purchased abroad out of foreign income earned (after an individual becomes liable to tax on the remittance basis) and that asset is brought into Ireland, the funds spent on that asset are deemed to be a remittance of income. Therefore, the 15,000 is deemed to have been remitted and will be taxable in 2016 at Neil s marginal rate of tax (i.e. 40%), resulting in additional IT payable of 6,000. Credit card payments The payments from the Montreal bank account of 22,000 (11 x 2,000) to settle Neil s Irish credit card bills constitute remittances. The remittances will be partly deemed to be an income remittance of 1,000, being the balance of the rental income not already remitted, resulting in an IT liability of 400. The remaining 21,000 will be deemed to be capital remittances, being the proceeds of the share disposal. The proceeds of the share disposal arose out of a capital loss event and will therefore not be subject to CGT. Income tax implications of Kate s severance package The statutory redundancy and pension lump sum receipts are exempt from tax. The ex-gratia lump sum and the value of the car amount to a total of 44,000. The maximum tax-free termination lump sum payable to Kate amounts to 44,960. Please refer to the calculation in the Appendix. Kate will therefore have a nil income tax liability on her severance package. Tax implications of the purchase and conversion of the shop premises of 12,000 (600,000 x 2%) will be payable. Value added tax (VAT) The fact that planning permission was obtained does not in itself constitute development. However, the restoration of a derelict building to a state capable of use does constitute development, even if the use to which the building is put is the same or similar to that prior to it becoming derelict. As the development occurred post August 2015, i.e within five years of the date of the sale to Neil and Kate (the first sale since the development), the building is deemed to be new. So VAT of 81,000 (600,000 x 13 5%) will be payable. It is intended that 75% of the building area will be used for a taxable activity (the grocery trade) and therefore 60,750 (81,000 x 75%) may be reclaimed. The remaining 25% of the area will be used for a non-taxable purpose, resulting in nonreclaimable VAT of 20,250. The capital goods scheme will apply for the VAT life of the building which is 20 years. If there is any reduction in the taxable use of the building during that time, then a proportionate clawback of the original VAT reclaimed will occur. VAT is not reclaimable on the apartment conversion costs of 70,000 (including VAT). 21

3 Total cost The total cost of the purchase and conversion of the premises will be 702,250 (600, , , ,000). (v) (vi) Options regarding funding of the balance of the cost of the shop The balance of the cost (purchase and conversion) will be 162,000 (702, ,250). (1) The sale of the apartment in Montreal at a gain of 80,000 will be subject to Irish capital gains tax to the extent that it is remitted. As already referred to in (ii) above, no loss relief would be available in relation to the loss incurred on the disposal of the Harvest plc shares. If the full proceeds are remitted, the resulting CGT liability will be 25,981 ((80,000 1,270) x 33%). Consequently, the net proceeds would be reduced to 144,019 (170,000 25,981) and there would be a requirement to borrow the remaining 17,981 (162, ,019). (2) A loan of 162,000, interest free, would constitute a gift of the free use of money. The annual value of the gift would be 2,430 (162,000 x 1 5%). This would be covered by the small gifts exemption of 3,000, so no capital acquisitions tax (CAT) would be payable. The sale of the Montreal apartment after five years would result in a capital gain of 100,000 (80, ,000). The CGT payable on the remittance of all the proceeds would be 32,581 ((100,000 1,270) x 33%). The net proceeds would be 157,419 (170, ,000 32,581). Neil should ensure that the sale proceeds are lodged into a different bank account from the account where rental income (if received) is lodged, as otherwise the remittance will be deemed to be from income first (taxable at 40%) and only then from capital. A further 4,581 (162, ,419) would be required. On the assumption that the apartment is let, this could be provided by the remittance of part of any accumulated rental income. As this would trigger IT at 40%, a gross remittance of 7,635 (4,581/(1 40%) would be required on which an IT liability of 3,054 (7,635 x 40%) would be payable. The remaining accumulated rental income of 72,365 (80,000 7,635) may be left in the Montreal bank account until it is required. If it is subsequently remitted, it will also be subject to IT at 40%. Tutorial note: USC and PRSI would also apply to the above income but are not required by the question. Recommendation Option (2) is recommended. There is no effective cost to the interest-free loan from Bob for five years. This option allows the Montreal property to appreciate in value and possibly accumulate rental income and leave a surplus of 72,365 (before tax) in the Montreal bank account. Tax implications for Kate of Neil s death Neil s assets, all of which would transfer to Kate, would be as follows: 50% share in the business premises 250,000 50% share in the apartment 100,000 50% share in the goodwill 50,000 Cash 30,000 Total 430,000 CGT CGT would not arise as this is an inheritance. would not apply as this is an inheritance. CAT The inheritance would be within the scope of Irish CAT as the assets are situated in Ireland. Marking note: Alternatively the Irish tax residence of either Neil or Kate would bring the inheritance within the scope of Irish CAT. Dwelling house relief Dwelling house relief will exempt the inheritance of the apartment from CAT, provided all the following conditions are met: Kate must have occupied the house continuously as her only or main residence for a period of three years prior to the date of the inheritance. At the date of the inheritance, Kate must not own any other dwelling house. 22

4 Kate must occupy the house as her only or main residence for a period of six years after the date of the inheritance. This period does not apply if Kate is 55 years or older at the date of the inheritance. Tutorial note: Where the beneficiary already owns an interest in a dwelling house and receives by way of gift or inheritance a further interest in the same property, the relief should still apply as s.83(3)(b) CATCA 2003 disallows the relief where a beneficiary has an interest in any other dwelling house. Computation On the assumption that dwelling house relief applies to the apartment, the value of the chargeable assets would be 330,000. Neil and Kate are not married and therefore the Class 3 threshold of 15,075 would apply. Therefore, the CAT payable by Kate would be 103,925 ((330,000 15,075) x 33%). Marking note: Business property relief (BPR) would apply if Neil does not die within two years from the date of purchase of the business assets. This would have the effect of reducing the taxable value of the premises and goodwill by 90%. Tax planning possibility If Neil and Kate were to marry, there would be no CAT payable on property inherited by Kate from Neil, as the transaction would be between spouses/civil partners. Appendix Calculation of maximum tax-free termination payment Option 1: Increased basic exemption 10, x N + 10,000 L N = number of completed years of service L = amount of any tax-free pension lump sum at termination of employment (10,160 + (765 x 18) + 10,000 7,000) 26,930 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 termination of employment Emoluments for the last three years 31 October 2014 (39,000 x 2/ ,000 x 10/12) 42, October 2015 (43,000 x 2/ ,000 x 10/12) 44, October 2016 (45,000 x 2/ ,400) 42,900 Total emoluments 129,900 Average emoluments (E) 43,300 SCSB (43,300 x 18/15) 7,000 44,960 Maximum tax-free payment (higher of options 1 and 2) 44,960 2 Vincent Group (a) (b) Disposal of shares in Chevy Ltd The 150,000 gain (250, ,000) on the disposal of the shares in Chevy Ltd (the investee company) by Vincent Ltd (the parent company) will be exempt from capital gains tax (CGT) under the holding company exemption, as the following conditions of the relief are satisfied: 1. Vincent Ltd owns at least 5% of Chevy Ltd and has done so for more than 12 months. 2. Chevy Ltd is wholly or mainly a trading company. 3. The greater part of the share value is not represented by Irish land or buildings. 4. Chevy Ltd is resident in an EU member state. Disposal of property by Dry Ltd Corporation tax on capital gains A capital gains group comprises a principal company and all its effective 75% subsidiaries. When an asset is transferred from one group company to another, no chargeable gain arises. Therefore, Levee Ltd and Dry Ltd (along with Vincent Ltd) form a capital gains group. The normal group transfer rule will have applied to the transfer of the property from Levee Ltd to Dry Ltd on 1 April 2016 and no gain would arise on Levee Ltd. 23

5 Levee Ltd would have been required to provide a CGT clearance certificate (CG50A) to Dry Ltd as the consideration exceeded 500,000. However, as Dry Ltd is a property dealing company, on its acquisition from Levee Ltd, Dry Ltd is deemed to have transferred the property from non-current assets to trading inventory. This means that Dry Ltd is deemed to have disposed of the property at its market value (MV) on 1 April 2016 and consequently, a gain arises as follows: MV at 1 April ,000,000 Cost (to Levee Ltd) (800,000 x 1 713) (1,370,400) Gain 629,600 Dry Ltd has two options: Option 1: (No election) The gain will be taxed as a chargeable gain at an effective rate of 33% in the year ended 31 December This results in a tax liability of 207,768 (629,600 x 33%) being payable as part of the corporation tax (CT) liability for On the sale of the property by Dry Ltd on 1 November 2016, a trading profit of 600,000 arises (2,600,000 2,000,000). This will be taxed at the 25% CT rate applicable to property dealing companies, so CT of 150,000 (600,000 x 25%) will be payable as part of the CT liability for The total tax payable under option 1 is 357,768 (207, ,000). Option 2: (Election) An election can be made to reduce the inventory cost of the property by the amount of the gain, i.e. to 1,370,400 (2,000, ,600). The sale of the property on 1 November 2016 then results in a trading profit of 1,229,600 (2,600,000 1,370,400). Consequently, CT of 307,400 (1,229,600 x 25%) will be payable as part of the CT liability for The total tax payable under option 2 is 307,400. Recommendation Availing of option 2 (election) will result in a tax saving of 50,368 (357, ,400). Value added tax (VAT) VAT does not apply to the transfer or sale of the building to Dry Ltd as the building is more than 20 years old and, therefore, its VAT life would have expired. The subsequent sale by Dry Ltd to an unconnected party will not be subject to VAT, for the same reason. The transfer of the building from Levee Ltd to Dry Ltd is subject to stamp duty of 40,000 (2,000,000 x 2%) as there is not the required shareholding of 90% between the relevant companies, to avail of the group stamp duty exemption. The stamp duty may, however, be avoided by applying a sub-sale and leaving the transaction on contract. (c) Acquisition and conversion of the hotel premises (i) Availability of losses forward in Dean Ltd If Vincent Ltd were to purchase the shares in Dean Ltd, it would not be possible to transfer the losses forward of Dean Ltd to other group members as these losses would be pre-acquisition losses. Nor will the Case I losses forward be of use to Dean Ltd because it proposes to lease the hotel, so its future income will be a Case V source, not a Case I source. Tutorial note: The loss-buying anti-avoidance legislation disallows the carry forward of losses if, before the sale of the company, the scale of the trade has become negligible and the trade is revived after the sale of the company. In this case the trade has ceased altogether. (ii) Purchase of shares v purchase of hotel premises only Option 1: Purchase of the shares in Dean Ltd by Vincent Ltd VAT VAT does not apply to the sale of shares. of 5,000 (500,000 x 1%) will be payable. CT (latent gains) There is a latent gain of 150,000 (600, ,000) on the hotel premises. If Dean Ltd subsequently sells the premises, a CT liability of 49,500 (150,000 x 33%) will be triggered. Other liabilities Dean Ltd s liabilities, with a book value of 60,000 will be taken over. 24

6 Furthermore, there may be liabilities which are not currently on the statement of assets and liabilities, but which could crystallise at a later date. For example, there could be unpaid payroll taxes in relation to casual employees since the company started trading, which may result in a substantial settlement in the event of a Revenue audit. Option 2: Purchase of the hotel premises by Levee Ltd VAT Transfer of a business relief (TOB) will apply to the above transaction as: the hotel constitutes an asset capable of being operated on an independent basis; and the letting of property qualifies as a business. It is a condition that both the transferor (Dean Ltd) and transferee (Levee Ltd) are VAT registered on the date of the transfer. Under TOB, the VAT treatment of the underlying property should be considered. In this case, as the property is considered new (i.e. less than five years old): a new VAT life of 20 years will commence from the time the sale closes; and VAT amounting to 81,000 (600,000 x 13 5%) will be deemed payable by Levee Ltd. This would be deemed reclaimable by Levee Ltd, provided the building is applied to a taxable use for its entire VAT life. The leasing of property is, however, an exempt activity for VAT purposes. However, following the purchase of the hotel it would be possible for Levee Ltd to singly elect to have the ongoing rents subject to VAT at the standard rate of 23%. If this election is made, then the VAT charged on the acquisition will be allowable. As the proposed lessee is VAT registered and can reclaim the VAT charged on the rents, they should have no objection to the above election. of 12,000 (600,000 x 2%) would be payable by Vincent Ltd. CT (latent gains) No latent gains will apply and the base cost of the premises in the event of a future disposal by Vincent Ltd would be 600,000 plus the incidental costs of acquisition. Other liabilities No liabilities, listed or potential will be taken over. Recommendation It would be preferable for Vincent Ltd to buy the hotel premises (Option 2) even if this results in a slightly higher purchase price (600,000) and a higher stamp duty liability (2% versus 1%) as the latent gain and responsibility for the liabilities (both listed and potential) will be avoided if this option is pursued. 3 Don and Julie (a) Transfer of newspaper publishing trade The transfer of the newspaper publishing trade from Rye Ltd to Doorstep Ltd is a share for undertaking reorganisation. The reorganisation is a three-party swap. Don and Julie will obtain shares in Doorstep Ltd in return for Rye Ltd transferring an undertaking consisting of the newspaper trade to Doorstep Ltd. Rye Ltd s shareholders, Don and Julie, will receive consideration in the form of shares in Doorstep Ltd for a deemed part disposal of their shares in Rye Ltd. The tax implications for the various parties are as follows: (i) Don and Julie Capital gains tax (CGT) A potential CGT charge may arise whereby Don and Julie would be liable to CGT on the deemed part disposal of their shares in Rye Ltd. However, the share for undertaking relief provides that where shareholders (Don and Julie) receive shares in the acquiring company (Doorstep Ltd) in exchange for a deemed part disposal of shares in the transferor company (Rye Ltd), the original shares and the new holding are treated as the same asset acquired at the same cost and date of acquisition. Therefore any gain or loss on the original shares is treated as accruing only when the new holding or part of it is disposed of. To avail of the relief, the reorganisation must be primarily for bona fide commercial reasons and not for the avoidance of taxation. (ii) Rye Ltd and Doorstep Ltd Corporation tax (CT) on chargeable gains A potential chargeable gain may arise on the disposal by Rye Ltd of its trade and associated chargeable assets. 25

7 However, the share for undertaking relief provides that if the newspaper publishing trade is taken over in return for shares in the acquiring company (Doorstep Ltd) and no other consideration is payable other than taking over the liabilities, no chargeable gain will accrue on Rye Ltd. Doorstep Ltd is treated as owning the business assets for the same period, and as having acquired them at the same cost as Rye Ltd. CT on trading profits and losses No balancing allowances/charges arise on the transfer of assets which qualified for capital allowances and the new company, Doorstep Ltd, is deemed to have taken over the assets at their tax written down values. Relief from stamp duty on the assets passing to the new company is also granted where at least 90% of the shares are issued to the seller or seller s shareholders (Don and Julie in this case), provided the reconstruction is for bona fide commercial purposes and not for the avoidance of tax. Value added tax (VAT) The transfer of the business will qualify for transfer of a business (TOB) relief, therefore, no VAT will arise provided both parties (Rye Ltd and Doorstep Ltd) are VAT registered. (b) (c) Surrender of research and development (R&D) credits to an employee (i) Conditions for R&D credit relief The main conditions for the relief are as follows: (1) The employee must be a key employee of the company which means: The employee must not be a director of the company or a connected company or connected to any such director. The employee must not have more than a 5% shareholding in the company or a connected company. 50% of the employee s duties must be in the conception or creation of new knowledge, products, processes, methods and systems and 50% of the emoluments of the employee must qualify for the R&D tax credit. (2) After the surrender of the R&D credit, the employee must have a minimum effective rate of tax of 23%. (3) The surrendered amount cannot exceed the employer company s corporation tax for the accounting period. (4) No reduction in income tax will be given unless all the tax deducted from the emoluments paid by the employer to the employee for the tax year to which the claim relates have been remitted by the employer to the Collector General. (5) The reduction in the employee s income tax is made in the tax year following the tax year during which the company made a claim for the R&D tax credit. (6) Any unutilised R&D credit which the employee has been allocated can be carried forward by the employee indefinitely until it is used or until the employee leaves the company. (7) The employee must file an income tax return for all years in which they avail of the R&D credit and not just the first year of claim. This is relevant where an employee carries forward an unused credit from one tax year to the next. Tutorial note: There is no relief from PRSI or USC. (ii) Tax refunds due to Holly for the years 2016 and Salary 80, ,000 Tax payable before R&D credits 21,940 37,940 R&D credit claim (2016 restricted) (3,540) (6,460) Final tax liability (minimum 23% applies in 2016 see note) 23% 18,400 26% 31,480 Less: Amount paid (21,940) (37,940) Balance payable (refundable) (3,540) (6,460) Unused credit carried forward 6,460 Nil Note: A minimum effective rate of 23% income tax is payable by employees claiming the R&D credit. The portion of the credit unused in 2016 is therefore carried forward to Advantages of investing in a pension scheme compared to an enterprise and investment incentive scheme (EIIS) Tax relief on pension contributions is available at 40% (or higher in the case of an occupational scheme), whereas EIIS relief is given at 30% in the year of investment and the balance of 10% is deferred until the fourth anniversary of the 26

8 investment and is subject to the company increasing its staff numbers by a minimum of one member of staff and increasing its total wages by a minimum of the wages of one member of staff or increased expenditure in research and development. The high earner s restriction does not apply to either pension scheme investments or EIIS schemes. When choosing a pension product, it is possible to choose a risk profile which suits the individual s circumstances. For example, a cash fund may be chosen for low growth and low risk. The same options do not exist in the case of EIIS investments and there is a real risk of the investor losing their money. Capital gains tax (CGT) at 33% will apply if the shares in the EIIS company are redeemed at a gain to the investor. However, in most cases the gains on redemption of such investments are minimal. No CGT is payable by an individual in respect of pension scheme investments 4 Albert Power (a) Gift of the farm from Albert to Padraic Capital gains tax (CGT) Albert is liable to CGT on the gift of the farm to Padraic. However, he will qualify for retirement relief as the following conditions have been met: Albert is over 55 years of age. The farmlands are a chargeable business asset. Albert has held the farmlands for more than ten years The amount of relief available depends on whether the beneficiary is a child of the disponer. For this purpose, the definition of a child includes a nephew or niece where they have worked substantially on a full-time basis in the business for the period of five years ending with the disposal. While Padraic has worked with Albert for the requisite five years, the fact that he was not working with him up to the date of the gift disqualifies him from this definition. Therefore, Albert will only be able to claim retirement relief for CGT purposes on the basis of a disposal to a person other than a child; this is subject to a limit of 500,000 as he is aged over 66. The cattle and sheep are not chargeable assets, so the only exposure to CGT arises on the farmlands. Marginal relief will apply as it results in a lower CGT liability of 55,000 as follows: Retirement relief/marginal relief calculation Market value of chargeable assets gifted (farmlands) 610,000 Retirement relief limit for disposal to a non-child (500,000) Excess 110,000 Tax at 50% 55,000 CGT computation without retirement relief Market value at date of gift 610,000 Less: Cost 200,000 Indexation factor 1986/ (327,400) 282,600 Less: Annual exemption (1,270) Chargeable gain 281,330 Tax at 33% 92,839 Value added tax (VAT) There is no VAT due on the sale of the farmlands as the farmlands have not been brought into VAT on the basis that Albert would not be considered an accountable person in respect of his farming activities. In any event, the farmlands have not been developed in the last 20 years. of 12,200 (610,000 x 2%) will be payable by Padraic on the market value of the farmlands transferred. Capital acquisitions tax (CAT) Padraic will be liable to CAT on the gift of the farm from Albert. Agricultural relief provides that where the beneficiary qualifies as a farmer (i.e. 80% of his total assets following receipt of the gift are comprised of agricultural assets), then 90% of the value of the benefit will be ignored in calculating the CAT liability. Padraic passes the 80% test as a farmer, as 81% of his total assets (755,000/(755,000 + (250,000 70,000)) are agricultural assets. 27

9 However, in addition to the 80% test, the beneficiary must: either farm the land or lease the land for a period of six years commencing on the valuation date; and either have an approved agricultural qualification or farm the agricultural property for not less than 50% of his or her normal working time. It is Padraic s intention to farm the land as his main occupation for the foreseeable future, so even though he does not have an approved agricultural qualification, he qualifies for agricultural relief. Padraic does not qualify for favourite nephew relief and the Class 1 threshold, as he did not work with Albert for the five years ending on the date of the benefit. Consequently, the CAT arising will be 13,573 calculated as follows: Market value at valuation date 755,000 Less: on farmland (12,200) 742,800 Less: Agricultural relief 90% (668,520) 74,280 Less: Small gifts exemption (3,000) 71,280 Class 2 tax free threshold (30,150) Taxable value 41,130 Tax at 33% 13,573 However, a credit is available against this CAT of the CGT paid by Albert on the same event, restricted to the proportion of CAT attributable to the farmlands of 10,966 (13,573 x 610/755), leaving a net amount payable of 2,607. (b) (i) The gift of funds to Conor There are no tax implications for Albert in relation to the gift of cash as this is not a chargeable asset for CGT purposes and is not subject to stamp duty. Where a gift is taken by a donee, subject to a condition that the gift be invested in agricultural property and such a condition is complied with within two years after the date of the gift, the gift is deemed to have consisted of agricultural property at the date of the gift. On the assumption that Conor invests the 290,000 in agricultural property by 1 December 2018, agricultural relief will apply because Conor both: satisfies the 80% assets test because he owns no other assets; and holds an approved agricultural qualification. Therefore, the taxable value of the gift will be reduced by 90% to 29,000. The Class 3 threshold of 15,075 applies to grand-nephews. CAT of 3,605 ((29,000 3,000 15,075) x 3%) will be payable by Conor. (ii) The sale of the field by Padraic to Conor Padraic VAT VAT will not apply to the transaction as the land has not been developed within the last 20 years. CGT Padraic will potentially be liable to CGT on the disposal of the field in the normal manner. But as the field is sold to Conor at market value, and this is not expected to have changed since its acquisition, the sale price and base cost are likely to be the same. CAT There will be a clawback of the agricultural relief (90%) and the CGT/CAT offset claimed on the gift from Albert in respect of the field as follows: Agricultural relief clawback (20,000 x 90% x 33%) 5,940 CGT/CAT offset clawback (10,966 x 20/610) 360 Total clawback 6,300 Conor As he is under 35 and holds an approved farming qualification, Conor qualifies for young trained farmer relief and so will be exempt from stamp duty on the purchase. 28

10 5 Loretta (a) (b) Capital gains tax (CGT) liability Share disposal in June 2016 Proceeds 100,000 Less: Cost (12,000 x 500/1,000) (6,000) Gain 94,000 Less: Annual exemption (1,270) Taxable gain 92,730 CGT at 33% 30,601 Tutorial note: The disposal of the 500 shares is deemed to come from the first holding which was acquired in March 2005 (as increased by the bonus issue): Original holding 600 Bonus 400 Subtotal 1,000 Disposal (500) Balance 500 Proposed sale of land Proceeds 200,000 Less: Cost CUV: (100,000 x 200/( )) (44,444) Hope value: (400,000 x 200/( )) (177,778) Less: Enhancement expenditure (80,000 x 200/( ) (35,556) Loss (57,778) Loretta will have a CGT liability of 30,601 in relation to her disposal of the shares in Gayle plc in The expected capital loss on the sale of the land in 2017 cannot be carried back to shelter this 2016 gain. Recommendation The sale of the land should be brought forward to December The loss can then be utilised to eliminate the CGT liability on the sale of the shares. Tutorial note: It is possible to offset development land losses against non-development gains (but not vice versa). Value added tax (VAT) on the sale of the land The carrying out of any engineering works or other operation in, on, over or under the land, to adapt it for a materially altered use, constitutes development. In this case the works under the land were carried out with the intention of adapting the land for a materially altered use (i.e. building houses). Therefore, as the works were completed during the 20 years preceding the proposed sale of the land, the sale will be subject to VAT at 13 5%. Tutorial note: The two-year and five-year rules do not apply to sites. Business VAT Sales to overseas customers Belgian business customer The supply of goods to a VAT registered customer in another EU state can be zero rated provided: o the customer is registered for VAT in that EU member state; o the customer s VAT registration number is obtained and retained in the supplier s records; o the customer s VAT registration number, together with the supplier s VAT registration number, is quoted on the sales invoice; and o the goods are dispatched and transported to the other member state. Meditekk Ltd can charge the zero rate of VAT to the Belgian customer, provided all the above conditions are met. Private individual in China Where goods are exported outside the EU, VAT is always charged at the zero rate. Meditekk Ltd must retain documentary evidence that the goods were transported outside the EU in the event of a request from the Revenue. 29

11 Private individual in France An Irish supplier who makes distance sales to customers in other EU member states who are not registered for VAT is liable to charge Irish VAT on such sales until the value of such sales reaches the threshold applying in that other EU member state (the distance selling threshold). Once the value of the supplier s sales exceeds the annual threshold in the other EU member state, the supplier will be obliged to register for VAT in that EU member state and account for VAT at the rate applicable there. Meditekk Ltd should ascertain the amount of the registration threshold in France, in order to determine the correct treatment of the sale. However, as this is its first French order and is from a private individual, the amount of the sale is unlikely to exceed the registration threshold in France. If this is the case, Meditekk Ltd would not be obliged to register for French VAT on this occasion and should charge Irish VAT on the sale at the applicable rate of 23%. Moulding machine The sale is a supply of goods to a VAT registered business in another EU state. Therefore, the Italian supplier will not charge Italian VAT to Meditekk Ltd, if Meditekk Ltd provides it with a valid VAT registration number. Meditekk Ltd must account for Irish VAT on the purchase using the reverse charge method, i.e. it must account for a simultaneous sale and purchase of the goods acquired for Irish VAT purposes. In its VAT return for the period of acquisition, Meditekk Ltd must account for output VAT of 46,000 (200,000 x 23%) and can also claim an input VAT credit of 46,000 in the same VAT return. As Meditekk Ltd is entitled to reclaim an input credit, the net effect is VAT neutral. (c) Disposal of Meditekk Ltd shares Retirement relief will not be available to Loretta as she will be under 55 years old on the date of disposal (2019). However, she will satisfy the conditions for entrepreneur relief as follows: She is an individual. She will be disposing of chargeable business assets, i.e. a holding of 5% or more of the ordinary shares in a company carrying on a qualifying trade. She will have been the beneficial owner of the chargeable business assets for a continuous period of three out of the five years prior to disposal. She will have been a director or employee of the company, and spent 50% or more of her 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 disposal. Entrepreneur relief reduces the CGT rate on the disposal of chargeable business assets from 33% to 20% for qualifying gains of up to 1 million. Therefore, the CGT payable by Loretta on the disposal of the Meditekk Ltd shares would be 89,746 ((500,000 50,000 1,270) x 20%). 30

12 Professional Level Options Module Paper P6 (IRL) Advanced Taxation (Irish) June 2017 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) Neil s residence and domicile status He is resident and not domiciled 0 5 Subject to Irish income tax on Irish source income and foreign income remitted 0 5 Subject to Irish CGT on Irish gains and foreign gains remitted 0 5 Losses on assets located outside Ireland are not relievable in Ireland (ii) (iii) (iv) Investment transactions 2 January 2016: Rental income is not taxable unless remitted February 2016: Loss on disposal not allowable against Irish CGT 0 5 Bank account is now a mixed fund 0 5 Remittances come from income first, then capital 1 0 Income is deemed to arise in year of remittance March 2016: Withdrawal of 15,000 all deemed to be income 0 5 Explanation of how the purchase of the guitar is a remittance 1 0 Calculation of income tax payable 0 5 February to December 2016: Credit card payments constitute a remittance 0 5 Remittance is 1,000 income 0 5 Calculation of income tax payable 0 5 Remittance is 21,000 capital 0 5 Explanation of why no CGT is payable Severance package Identification of non-taxable elements (redundancy and pension) 1 0 Calculation of increased basic exemption 1 0 Calculation of SCSB 1 5 Conclusion nil tax liability Purchase and conversion of shop premises Calculation of stamp duty 1 0 Value added tax (VAT) Planning permission per se not development 0 5 Conversion from derelict to actual use post August 2015 does constitute development 1 0 As within five years, the building is deemed to be new 0 5 Calculation of VAT payable % reclaimable, with reason 1 0 Calculation of non-reclaimable 25% 0 5 Capital goods scheme explanation 1 0 VAT not reclaimable on the conversion costs 0 5 Calculation of total cost of purchase and conversion

13 (v) Available Maximum Funding options regarding the balance of premises cost Calculation of the funding required 0 5 Option (1): Sale of Montreal apartment Gain is subject to Irish CGT to the extent remitted 0 5 Calculation of CGT liability with no loss relief 1 0 Calculation of additional borrowing requirement 0 5 Option (2): Interest-free loan and subsequent sale of apartment Identification of gift of free use of money 1 0 Calculation of annual value of the gift 0 5 Covered by small gifts exemption 0 5 Calculation of CGT liability on sale of apartment and remittance of proceeds 1 0 Need to ensure proceeds of apartment sale are lodged to a separate bank account 1 0 Calculation of income tax liability on remitted rental income 1 0 Calculation of surplus in Montreal bank account and IT implications of future remittance 1 0 Recommendation (vi) Future death of Neil Calculation of Neil s assets 0 5 CGT would not arise on an inheritance 0 5 would not arise on an inheritance 0 5 Inheritance is within the scope of Irish CAT 0 5 Applicability of business property relief (BPR) 1 0 BPR conditions and clawback 1 0 Dwelling house relief will apply to the apartment 1 0 Conditions 2 0 Applicability of Class 3 threshold 1 0 Calculation of CAT payable 1 0 Recommendation Professional marks Format and presentation of the briefing notes 1 0 Effectiveness of written communication 1 0 Appropriate use of support schedules/appendices 1 0 Logical flow of calculations

14 Available Maximum 2 (a) Disposal of shares in Chevy Ltd Identification of holding company exemption 1 0 Application of the conditions of the exemption to this disposal (b) Disposal of property by Dry Ltd Identification of CGT group and consequently no gain arising on Levee Ltd 1 5 CG50A requirement 0 5 Identification of transfer by Dry Ltd from non-current assets to trading inventory on 1 April Calculation of gain arising on deemed disposal on 1 April Option 1 (no election) Calculation of CGT at 33% on gain 0 5 Calculation and taxation of trading profit 1 0 Calculation of total tax payable under option Option 2 (election) Reduce inventory cost by amount of gain 1 0 Calculation and taxation of trading profit 1 0 Calculation of total tax payable under option Calculation of tax saving under option 2 and recommendation 1 0 VAT does not apply to transfer as is an old building 1 0 Also no VAT on subsequent sale to unconnected party 0 5 calculation 0 5 group exemption does not apply 1 0 avoidance by sub-sale (c) (i) Availability of losses forward in Dean Ltd Pre-acquisition CT losses may not be transferred within the Group 1 0 CT losses may not be used against future profits of Dean Ltd as they will be Case V (ii) Options regarding acquisition of the hotel premises Option 1: Purchase of the shares in Dean Ltd VAT does not apply 0 5 : identification and calculation 1 0 Latent gain: identification and calculation of potential CT 1 0 Other liabilities: book liabilities 0 5 Reference to potential hidden liabilities (e.g. PAYE) 0 5 Option 2: Purchase of the hotel premises Transfer of a business relief 1 5 Effect of TOB, including VAT calculation 1 5 Not reclaimable unless applied to a taxable use 0 5 Leasing of property exempt 0 5 Single election to tax the rents will enable reclaim 1 0 Lessee should not object to this as they are VAT registered 0 5 : identification and calculation 1 0 No latent gains and identification of base cost 1 0 No other liabilities under this option 0 5 Recommendation with reasons

15 Available Maximum 3 (a) Identification and explanation of a share for undertaking reorganisation 1 5 (i) Don and Julie Potential CGT on part disposal 0 5 Application of share for undertaking relief 1 0 Any gain or loss on the original shares is treated as accruing only when the new holding or part of it is disposed of 1 0 Must be for bona fide commercial reasons 0 5 (ii) Rye Ltd and Doorstep Ltd CT (chargeable gains) Potential capital gain on Rye Ltd on disposal of trade, etc 0 5 Application of share for undertaking relief 1 0 Doorstep Ltd is treated as owning the business for the same period and the same cost as Rye Ltd 1 0 CT (trading profits and losses) No balancing allowances or charges 1 0 Relief due to 90% shareholding 1 0 Must be for bona fide commercial reasons 0 5 VAT No VAT will arise under TOB relief providing both parties are registered (b) (i) Conditions for surrender of R&D credits Definition of a key employee 1 5 Filing of returns 1 0 Remaining five conditions 0 5 each (ii) 2016 liability restricted to 23% 1 0 Refunds applicable to 2016 and 2017 (2 x 0 5 marks) (c) Advantages of a pension scheme v EIIS Pension: immediate 40% tax relief 0 5 EIIS: 30% immediate relief % deferred for four years 0 5 Subject to conditions (0 5 marks each, max 1) 1 0 Higher earners relief does not affect either relief 1 0 Non-tax issues: risk and choice of portfolio 1 0 Potential CGT on EIIS gain on redemption

16 Available Maximum 4 (a) Gift of farm from Albert to Padraic CGT Albert is subject to CGT on the gift 0 5 Identification of retirement relief 0 5 Conditions of retirement relief 1 5 Padraic not eligible for favoured nephew relief, with reason 1 0 As Padraic does not qualify as a favoured nephew, the disposal is deemed to be to a person other than a child 0 5 Limit of 500,000 applicable to individual over 66 transferring to a non-child 0 5 Cattle and sheep not chargeable assets 0 5 Marginal relief calculation 1 0 Normal CGT calculation 1 5 VAT No VAT as not an accountable person 1 0 Also not developed within 20 years 0 5 on farmland including calculation 1 0 CAT Padraic subject to CAT on gift 0 5 Agricultural relief: 80% test 0 5 Application to Padraic (81%) 1 0 Additional conditions regarding retention and working land 1 0 Padraic qualifies as a farmer 0 5 Does not qualify for favoured nephew relief 0 5 Calculation of CAT payable 2 0 Identification and calculation of CGT offset (b) (i) Gift of funds to Conor No implications for Albert 0 5 Application of agricultural relief where a gift is conditional on it being invested in agricultural property within two years 1 0 Conor s eligibility for agricultural relief 1 0 Calculation of CAT payable (ii) Proposed sale of field from Padraic to Conor Padraic No VAT as not developed within 20 years 0 5 Not subject to CGT as there was no gain 0 5 Identification of clawback of agricultural relief 0 5 Calculation of clawback of agricultural relief 0 5 Identification of clawback of CGT/CAT offset 0 5 Calculation of clawback of CGT/CAT offset 0 5 Conor Exemption from stamp duty with reasons

17 Available Maximum 5 (a) Sale of assets Calculation of CGT on share disposal 2 0 Calculation of loss on proposed sale of land 2 0 Conclusion re 2016 liability/no carry back of loss 1 0 Recommendation to bring forward the sale of land to VAT on sale of land (b) (c) Sales to overseas customers Belgian business customer Zero rated if VAT registered in another EU state 1 0 Other conditions of zero rating 1 5 Private individual in China Zero rated if exported outside EU 1 0 Retain documentary evidence 0 5 Private individual in France Distance sales to non-registered EU customers subject to Irish VAT 1 0 Once distance selling threshold for individual state is exceeded the supplier is obliged to register in the other EU state 1 0 Application to Meditekk Ltd 1 0 Moulding machine Italian supplier will not charge VAT if VAT registration number is provided 1 0 Irish VAT applies based on the reverse-charge method 1 0 Application of reverse charge to this transaction CGT on disposal of Meditekk Ltd shares Retirement relief not available 0 5 Will qualify for entrepreneur relief 0 5 Conditions of entrepreneur relief 3 0 Reduced 20% rate of tax applies 0 5 Calculation of CGT payable