Taxation Republic of Ireland 1st Year Examination

Transcription

1 Taxation Republic of Ireland 1st Year Examination August 2016 Exam Paper, Solutions & Examiner s Report Page 1 of 23

2 NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 2016 Page 2 of 23

3 Accounting Technicians Ireland 1 st Year: Autumn 2016 Paper: TAXATION (Republic of Ireland) Monday 15 August a.m. to p.m. INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY For candidates answering in accordance with the law and practice of the Republic of Ireland. Candidates should answer the paper in accordance with the appropriate provisions up to and including the Finance Acts The provisions of the Finance Act 2015 should be ignored. Allowances and rates of taxation, to be used by candidates, are set out in a separate booklet supplied with the examination paper. Answer ALL THREE questions from SECTION A. Answer ANY TWO of the three questions from Section B. If more than TWO questions are answered in Section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled as appropriate e.g. s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf. The following insert is enclosed with the paper: Tax Reference Material Page 3 of 23

4 SECTION A Answer ALL THREE questions in this section QUESTION 1 Tracy is a self-employed health shop owner and commenced business on 1 March She has a small shop that sells health foods, fruit and vegetables and juices on the main street of Bray, County Wicklow. The accounts for the year ended 31 st December 2015 as prepared by Tracy are reproduced below: Notes Sales 150,450 Opening Stock. 4,005 Purchases (1) 55,402 59,407 Closing Stock (3,125) (56,282) 94,168 Add Rental income (2) 1,500 Interest Earned 150 1,650 95,818 Less Promotion/Entertainment.. (3) 1,800 Wages. (4) 32,740 Light and Heat (5) 4,500 Bank Payments.. (6) 12,400 Telephone (7) 2,703 Depreciation 5,100 Bad Debts 1,450 Rent 5,000 Rates (8) 2,000 General Bad Debt Provision.. 1,750 Insurance (9) 2,280 Legal and other fees.. (10) 2,300 Sundry. (11) 8,800 (82,823) Net Profit 12,995 ====== Page 4 of 23

5 QUESTION 1 Cont. Notes (1) Purchases The purchases figure includes 2,200 in respect stock taken by Tracy for her own use. (2) Rental Income In 2015 Tracy earned 1,500 for the rent of her holiday home in Wexford for two weeks of the year. She had decided to test would she rent this long term over the summer. (3) Promotion/Entertainment Golf lessons 600 Staff Christmas party. 900 Advertising on mouse mats ,800 (4) Wages Drawing Tracy 12,740 Staff wages.. 10,000 Paying childminder to mind daughter. 6,500 Preliminary tax payment for Tracy 3,500 32,740 (5) Light and Heat Tracy pays light and heat for her home and office, 20% of the cost relates to her home. (6) Bank Payments Business loan repayments 5,200 Mortgage loan repayments.. 7,200 12,400 A business loan was taken out to finance the cost of improvements to the store, in particular the juice bar. The interest element included in the loan repayment amounted to 1,750. A new mortgage was taken out by Tracy to buy the family a holiday home in Wexford. The interest element in the loan repayment for the mortgage was 2,670. Page 5 of 23

6 QUESTION 1 Cont. (7) Telephone 20% of the telephone costs relate to private use. (8) Rates This figure includes 120 in respect of the local property tax for Tracy s home. The balance is business rates. (9) Insurance The insurance cost is made up of the following expenses: Premises insurance Loss of profits insurance for business 1,000 Private medical insurance for Tracy ,280 (10) Legal and other fees Accountant Fee 1,200 Court case following a car accident 700 Speeding fines ,300 This court case was as a result of a car hitting Tracy when she was out walking her dog Biscuit at night. The car owner was claiming Tracy stepped out in front of him and therefore it was her fault. Tracy s solicitor told her to fight it as she has needed five sessions of physiotherapy to help heal her leg. Tracy is suing the car owner for her costs. (11) Sundry Painting.. 1,200 5 Greenstar Juicers for shop.. 5,000 Advertising 600 Lease charges 1,200 Stationery , of the painting cost related to the painting of Tracy s private house. The balance related to painting her shop. 1,200 leasing charges relate to the leasing of a car for the business. The car was a category D car and cost 26,000 in May Requirement Compute Tracy s Schedule D Case 1 tax adjusted profits for the year ended 31 st December Total 20 marks Page 6 of 23

7 QUESTION 2 You have been asked to prepare the Value Added Tax return for the year ended 31 December 2015 in respect of Mark Donovan who trades as Home Grown Feeds. The following details have been extracted from his records. Gross Total Net Total VAT 23% VAT 13.5% Purchases for resale 1,211,000 1,000, ,000 27,000 Purchases not for resale 203, ,000 26,600 6,750 The following additional information is reported: Purchases for resale: An invoice received on 15 May 2015 from a supplier of fertiliser, Sweet Supplies Ltd., with a VAT exclusive amount of 5,600 (VAT 23%) was incorrectly recorded as 6,500. Mark incorrectly read the gross amount as 6,500 and the net amount as 5,285. Purchases not for resale: Included in purchases not for resale is a computer costing 1,500 (including VAT at 23%) that was never put into use in the business and was given by Mark to his nephew Billy as a birthday gift. Mark bought a van for the business on 18 December 2015 costing 21,000 plus VAT 23% that was not included in the above purchases information as Sally the bookkeeper closed off the accounts when she went on holidays for Christmas. Sales VAT returns have been prepared on a cash receipts basis. All sales are 23% and details from the cashbook for the year ended 31 December 2015 are as follows: Opening cash balance 1,578 Total receipts 1,884,000 Bank Loan 10,200 Total 1,895,778 Total receipts of 1,884,000 includes 1,584,000 from customers and 300,000 from the sale of Mark s private house in Sligo. Page 7 of 23

8 QUESTION 2 cont. Cash wages 28,500 Cash expenses 5,200 Bank lodgements 1,852,000 Closing cash balance 10,078 Total 1,895,778 Mark found an envelope on Sally s desk containing receipts from cash customer for December 2015 amounting to 12,300 that was not included in the cash book. Requirement: (a) Compute the amount of VAT due/repayable for the year ended 31 December 2015 for Home Grown Feeds. 15 marks (b) A VAT registered trader must issue a VAT invoice when supplying goods or services to another VAT registered person. Outline five details that must be included on a VAT invoice. 5 marks Total 20 marks QUESTION 3 You manage the payroll for Troy Toys Limited and the following details refer to two employees: Barbara Smith Barbara has been employed by Troy Toys Limited for the past six years and she is paid monthly. Her gross salary is 4,200 per month. In addition to this Troy Toys pays for Barbara s gym membership at a cost of 100 per month and she is allowed to eat all her meals in the staff canteen that costs Troy Toys 50 per month per employee. In addition to this Barbara has been supplied with a company car as she regularly has to drive around the country for meetings. The annual benefit in kind on this car is 3,600. Barbara has monthly tax credits of 413 and a monthly standard rate cut off point of 3,150. Her month USC is as follows: Rate 1 1,001 at 1.5% Rate at 3.5% Rate 3 Balance at 7% Page 8 of 23

9 QUESTION 3 cont. Alan Bennet Alan started in Troy Toys on 1 st March As it was his first job he did not have a P45 from a previous employer. He did not contact the Revenue and was unable to supply you with his PPS number. Alan is paid 3,600 per month. Requirement (a) Calculate both Barbara and Alan s monthly take-home pay for December (b) Outline four situations where the emergency basis of taxation will apply and explain the normal emergency basis rules where a valid PPS number has been provided. 16 Marks 4 Marks Total 20 Marks SECTION B Answer TWO of the three questions in section B QUESTION 4 The following multiple choice question comprises of ten parts each of which is followed by four possible answers. There is only one right answer in each part. Requirement Indicate the right answer to each of the following ten parts. N.B. Each part carries 2 marks Total 20 Marks Candidates should answer this question by ticking the appropriate boxes on the special answer sheet which is contained within the answer booklet. (1) Mary s final tax liability for 2014 is 20,000. She paid preliminary tax of 18,000 based on 90% of this liability. She filed her tax return for 2014 on 1 December As the return is late a surcharge will be imposed. Her overall tax liability for 2014 including the surcharge amounts to: - (a) 21,000 (b) 22,000 (c) 2,200 (d) 18,000 Page 9 of 23

10 QUESTION 4 Cont. (2) Which of the following expenses reimbursed by an employer to an employee are not treated as income for the purpose of income tax:- (a) Round sum expenses (b) Vouched expenses (c) Flat rate expenses above civil service rates (d) Gym membership (3) Which condition below is not needed in order for Irish VAT to be charged on the supply of goods and services: - (a) There is a supply of goods or services (b) For consideration (c) Within any EU country (d) Made by a taxable person in the course of business (4) Bob leased a new Volvo (a category B car) for use in his business in January The list price of the car was 48,000 and he paid lease charges of 12,000 in The disallowed amount in his income tax computation is: - (a) 6,000 (b) 12,000 (c) 4,500 (d) 10,000 (5) Sam set up her new hairdressing business on 1 March She incurred several expenses in February 2015 and she would like your help to identify which of the four expenses below incurred pre-trading can be allowed as an expense once she commences trading: - (a) New machines (b) Childcare costs (c) Advertising (d) New car Page 10 of 23

11 QUESTION 4 Cont. (6) Barry, single, aged 42 years pays rent of 2,400 per annum. The rental relief tax credit he is entitled to in 2015 is: (a) 240 (b) 60 (c) 480 (d) 120 (7) Tax relief can be claimed for certain medical expenses and qualifying dental expenses. Which of the following expenses are not allowed:- (a) Maternity care (b) Dental fillings (c) Doctor visits (d) Hospital treatment (8) Which of the following individuals is exempt from self-employed PRSI:- (a) An individual aged 42 running their own accounting business (b) An individual in receipt of job seekers benefit (c) An individual whose gross income is 6,000 per annum (d) An individual with rental income (9) What form is used by an individual, who has become unemployed during the tax year, in order to claim a refund of tax: (a) P60 (b) P35 (c) P45 (d) P50 (10) Tom, who is self-employed, purchased a computer to use by his children. The computer cost 2,000 plus VAT of 460. The real cost to Tom is: (a) 2,000 (b) 1,540 (c) 2,460 (d) Nothing Total 20 Marks Page 11 of 23

12 QUESTION 5 You are employed as a newly qualified Accounting Technician by a firm of Accountants and have been asked to draft a letter to a client regarding the following matters: a) Explain the factors that should be considered when deciding if someone is an employee or a self-employed individual. 7 marks b) Outline the benefit in kind rules for a commercial vehicle including the circumstances under which no benefit in kind arises. 5 marks c) Outline the conditions that must be met in order for the exemption on rental income from rooms in principal private residential rental to be allowed. 5 marks d) Explain the assessment rule for a short lived business, when it applies and the due date for notifying the Revenue of the intention to apply this rule. 3 marks Total 20 Marks QUESTION 6 Sally and Michael have been jointly assessed to Income Tax for a number of years. Details of their income and outgoings for the 2015 tax year are as follows. Sally Income Salary from Durable Garden Solutions... 46,500 PAYE deducted in ,580 Accountancy membership for Sally paid by employer. 1,100 Horticulturist Society membership for Sally paid for by employer 800 Sally is qualified as an accountant but changed her career 10 years ago and retrained in the Botanic Gardens as a horticulturist. She has been working in that capacity ever since joining Durable Garden Solutions. Deposit interest amount received The amount received was net of Deposit Interest Retention Tax at 41%. Dividends received The amount received was net of Dividend Withholding Tax at 20%. Gross rental Income from holiday home in France 12,500 Expenses incurred with holiday home in France Small extension. 2,900 Repairs Advertising for tenants Page 12 of 23

13 QUESTION 6 Cont. Michael Income Self-employment Michael has been self-employed for a number of years as a painter. Accounts for the year ended 31 st October 2015 show assessable income of 55,400. Rental income from commercial property Income and outgoings for the rental property in the year ended 31 December 2015 are as follows: Gross rents... 12,600 Mortgage interest paid... 6,850 Repairs to heating system Advertising property for rent Cost of extension to premises... 5,800 Outgoings Pension Scheme In July 2015 Michael commenced contributing 800 per month to a Revenue approved pension scheme. Michael is 29 years old. Requirement: Prepare an income tax computation for 2015 in respect of Sally and Michael on the basis that joint assessment applies. Total 20 Marks N.B. For the purposes of answering this question ignore PRSI and the Universal Social Charge Page 13 of 23

14 1 st Year Examination: Taxation ROI August 2016 Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No Average Mark (%) 70% 50% 59% 51% 19% 63% Nos. Attempting General Comments: Statistical Analysis - Overall Pass Rate 72% Average Mark 56% Range of Marks Nos. of Students and over 37 Total No. Sitting Exam 163 Total Absent 59 Total Approved Absent 6 Total No. Applied for Exam 228 Overall the results were in line with previous years. Despite having been highlighted in 2015 at the examiner liaison day and in the examiner report theory questions continued to be poorly answered and this is an area that needs improvement in from students. Page 14 of 23

15 Examiner Comments on Question One This question was answered well with good candidates being very familiar with addbacks. Students scored well in this question as are as ever well prepared when this type of question is on the paper. SOLUTIONS TO AUGUST 2016 Solution 1 Adjusted profit computation for the year ended 31 December Total Marks Allocated Per Accounts 12, marks Deduct Rent 1, marks Interest earned 150 (1,650) 0.5 marks 11,345 Add General bad debt provision scheme 1,750 1 mark Depreciation 5,100 1 mark Drawings of stock 2,200 1 mark Golf lessons mark Staff Party Allowed 0.5 mark Drawings Tracy 12,740 1 mark Paying Childminder 6,500 1 mark Preliminary tax payment 3, mark Light and Heat 20% x 4, mark Mortgage 7,200 1 mark Bank loan capital 3, mark Telephone 20% x 2, mark Rates mark Medical Insurance mark Loss of profits insurance Allowed 0.5 mark Court case mark Page 15 of 23

16 Speeding Fines mark Painting mark Leasing charges 1,200 x ( 26,000-12,000)/ 26, mark Juicers 5,000 52,527 1 mark Adjusted Profit 63, mark Total 20 Marks Page 16 of 23

17 Examiner Comments on Question Two The computational VAT question suited students better than the theoretical VAT questions. Some students lost marks by overcomplicating their answers and not answering what was asked. Solution 2 (a) Gross Total Net Total VAT 23% VAT 13.5% Total Marks Allocated Purchases for resale 1,211,000 1,000, ,000 27,000 Purchases not for resale 203, ,000 26,600 6,750 VAT invoice incorrect (7,995) (6,500) (1,495) 1.5 marks VAT invoice correct 6,888 5,600 1, marks Van 25,830 21,000 4,830 2 marks VAT 215,223 33,750 Input VAT 248,973 1 mark Output VAT Receipts from customers 1,584,000 2 marks Cash extra 12,300 2 marks 1,596,300 VAT content 298,495 Self-supply (computer) marks Output VAT 298,775 Output VAT 298,775 1 mark Input VAT 248,973 1 mark VAT Due to Revenue 49,802 1 mark (b) 1) The name and address of the trader issuing the invoice 2) The trader s VAT registration number 3) The name and address of the customer 4) The date of issue of the invoice 5) The date of supply of the goods or services 6) A full description of the goods or services 7) The unit price exclusive of VAT and any discounts or deductions not contained in the unit price 8) The quality or volume of the goods supplied 9) The consideration exclusive of VAT expressed in euro 10) The rate (including zero rated) and amount of VAT calculated at each VAT rate. Page 17 of 23 Any 5, one mark each.

18 Examiner Comments on Question Three I think students demonstrated their understanding of payroll calculations well and did not miss out from not having to complete forms. In some cases PRSI rates and USC rates were not correct that students used. Solution 3 Total Marks (a) Allocated Barbara Gross Pay Salary 4, mark Gym membership mark Canteen mark Car BIK mark Total 4,600 1 mark Income Tax 3,150 x 20% = mark 1,450 x 40% = mark Total 1,210 Less: Tax Credits (413) 0.5 mark Tax mark PRSI 4,600 x 4% = mark USC 1,001 x 1.5% = mark 464 x 3.5% = mark 3,135 x 7% = mark Total USC mark Net Pay mark Alan Gross Pay Salary 3,600 1 mark Page 18 of 23

19 Income Tax 3,600 x 40% = 1,440 1 mark PRSI 3,600 x 4% = mark USC 3,600 x 8% = mark Net Pay 1, mark (b) The emergency basis will apply if the employee: - Cannot provide a Certificate of Tax Credits and Standard Rate Cut Off (CTC) for the current tax year. - Cannot provide a Certificate of Tax Credits and Standard Rate Cut Off (CTC) for the previous tax year that states it is valid for subsequent years. - Provides a P45 which shows that the emergency basis was applied previously - Provides a P45 that does not include the employee s PPS number How it applies: Month 1, gross tax at 20% (33800/12), balance 40%, tax credit (1650/12) Month 2 gross tax 20% (33800/12), balance 40%, no tax credit Every other month, gross tax 40% and no tax credit Any 4 points, 1 mark each. Examiner Comments on Question Four The multichoice was either right or wrong and good students scored well. Some students ticked several boxed for one answer which is pointless and then no marks can be given. Students who answered this did not leave boxes blank so that was good to see. Page 19 of 23

20 Solution 4 Marks Allocated (1) A 2marks (2) B 2marks (3) C 2marks (4) A 2marks (5) C 2marks (6) D 2marks (7) B 2marks (8) B 2marks (9) D 2marks (10) C 2marks Total 20 Marks Examiner Comments on Question Five Students failed in the main to provide enough detail in their theoretical answers. They would get some relevant points but not write enough detail. The benefit in kind on a commercial vehicle was very poorly answered and the assessment for short lived businesses was not answered as well as would have been expected at this level. Solution 5 A Factors for Self-Employment Marks Allocated Where the individual works under the control of another who directs how, when and where the work is carried out (employee). 1mark Where they supply labour only (employee) 1mark Where they do not supply materials or equipment (employee) 1mark Where they cannot subcontract the work (employee) 1mark Where they are paid a fixed rate and are entitled to holidays (employee) 0.5mark Where they do not have the opportunity to profit from sound management (employee) 0.5mark Where the individual must work set hours (employee) 0.5mark Are they subject to dismissal or redundancy? (employee) 0.5mark Have registered for VAT (self-employed) 0.5mark Are taking financial risk (self-employed) 0.5mark B Benefit in Kind Commercial Vehicle Page 20 of 23

21 Marks Allocated The BIK on a van is 5% of original market value 1.5marks No charge to BIK where employee is required to keep van at their Residence 1.5marks And is prohibited from using van for private purposes and 1mark And is away from their base at least 80% of the time. 1mark C Rent room in house An individual is entitled to receive up to 12,000 in rent tax free in certain circumstances. The exemption will apply if Marks Allocated Individual availing of relief lives in property as principal private residence for year 2marks Property is residential premises in State 1.5marks They receive rent in respect of one or more rooms in their house 1.5marks D Assessment rules for a short lived business If a business commences and ceases within 3 years the assessment will be on The actual profits arising. This applies where a trade or profession Has been commenced in a year of assessment and is permanently discontinued Within the second year of assessment following the year of commencement (the third year of assessment). The total profits charged to Income Tax exceed the aggregate profits arising From the date of commencement to the date of permanent cessation. Marks Allocated 1mark 1mark 1mark Page 21 of 23

22 Examiner Comments on Question Six Students failed to recognise that horticulturist membership is allowed and did not all calculate the Schedule D Case II income correctly (for example not disallowing the extension). Solution 6 Marks Allocated 2015 Sally Schedule D Case III (Note 1) 11,400 Schedule D Case IV ( 400/.59) 678 1mark Schedule E Salary 46,500 1mark Accountancy 1,100 1mark Horticulturist membership 0 1mark Schedule F ( 800/.20) 1,000 1mark 60,678 Michael Schedule D Case I 55,400 1mark Less: Retirement Annuity ( 800 x 6) (4,800) 1mark 50,600 Schedule D Case V (Note 2) 5,080 55,680 Total Income 116,358 Taxed as follows: 67,600 x 20% 13, mark 48,080 x 40% 19, mark 678 x 41% ,030 1mark Less: Non-refundable Tax Credits Personal tax credit 3, mark PAYE 1, mark DIRT 678 x 41% 278 (5,228) 1mark 27,802 Less: Refundable Tax Credits PAYE deducted 12, mark DWT 200 (12,780) 0.5mark Tax Due 15,022 1mark Note 1 Schedule D Case III Gross Rent 12, mark Less: Repairs mark Advertising mark Extension not allowed 0 (1,100) 1mark Taxable Rent 11, mark Page 22 of 23

23 Note 2 Schedule D Case V Gross Rent 12, mark Less: Mortgage 6, mark Repairs 450 Extension not allowed 1 mark Advertising 220 (7,520) 0.5mark Taxable Rent 5, mark Page 23 of 23