Taxation Republic of Ireland 1 st Year Examination

Transcription

1 Taxation Republic of Ireland 1 st Year Examination May 2016 Solutions, Examiners Comments & Marking Scheme

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, Page 2 of 20

3 Accounting Technicians Ireland 1 st Year: Summer 2016 Paper: TAXATION (Republic of Ireland) Monday 16 May 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 Act 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 inserts are enclosed with the paper: Tax Reference Material Page 3 of 20

4 SECTION A Answer ALL THREE questions in this Section. QUESTION 1 The following multiple choice question consists 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] A married individual aged 60 pays rent of 5,000 per annum. The rent relief tax credit available for the 2015 tax year amounts to: (a) 5,000 (b) 2,400 (c) 1,000 (d) 480 [2] Which of the following does not satisfy the requirement for the payment of preliminary tax for the 2015 tax year: (a) 90% of the expected liability for (b) 100% of the expected liability for (c) 100% of the expected liability for (d) 105% of the liability for [3] Sam is given a loan of 120,000 by his employer on 1 January The rate of interest on the loan is 3%. He uses the loan towards the purchase of his first house. How much is the annual benefit in kind included in Sam s Income Tax computation for 2015: (a) 4,800 (b) 3,200 (c) 1,200 (d) 8,400 [4] John leased a new Volvo (category B CO 2 emissions) 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 amount of the lease charges to be added back in the 2015 adjusted profit computation is: (a) 6,000 (b) 9,000 (c) 12,000 (d) 15,000 Page 4 of 20

5 Question 1 cont. [5] Burt stays at home to look after his two boys Sam aged 4 and Mike aged 9. Burt s only source of income is rental income of 6,000. Burt s wife Mary works for ABC Ltd and has a gross annual salary of 62,000 The home carer s tax credit Burt is entitled to is as follows: (a) 350 (b) 420 (c) 700 (d) 810 [6] Which of the following persons does not have to register for VAT in Ireland: (a) Persons whose supplies of taxable services exceed 40,000 in any 12 month period. (b) Persons whose supply of taxable goods is likely to exceed 76,000 in any 12 month period. (c) Person whose sale of a principal private residence is likely to exceed 525,000. (d) Persons whose supplies of goods and services exceed 38,000 in any 12 month period. [7] Judy is employed by ABC Ltd. and is paid 3,600 per month. Judy s SRCOP and tax credits are 2, and 275 respectively per month. The income tax liability to be deducted from Judy s salary in January 2015 is: (a) (b) (c) (d) [8] Which of the following transactions is deemed to be a supply for VAT purposes: (a) (b) (c) (d) Sale of electrical goods in the course of business. Goods provided as security for a loan or debt. The transfer of a business from one VAT registered person to another. Goods supplied free of charge as replacement for original goods under a warranty or guarantee. [9] Which form must an employer provide to an employee at the end of a tax year: (a) (b) (c) (d) P45 P60 P30 P35 [10] Pete received a dividend from a UK company in The dividend voucher showed a Gross dividend of 1,000, a UK tax credit of 200 and a Net dividend of 800. The amount Peter should include in his Income Tax return in respect of this dividend is: (a) 1,000 (b) 200 (c) 800 (d) 1,200 Total 20 marks Page 5 of 20

6 QUESTION 2 You are Mary Smith and you have recently started with Brown & Co, a firm of accountants and tax advisers. You have been asked to assist in the preparation of a study manual for junior staff who are studying for their Accounting Technician examinations. You are required to write brief notes on each of the following areas to be included in the manual: (a) Explain the three rules to be applied to the second year of assessment on the commencement of a business. 5 marks (b) Outline five advantages of electronic filing for practitioners and other customers using the Revenue Online System (ROS). 5 marks (c) Explain the export of goods to another EU country and the import of goods from an EU country in relation to VAT and outline in detail the Irish VAT position for each. 5 marks (d) Outline and explain the four conditions to be satisfied for the BIK charge on a car to be reduced by 20%. 5 marks Total 20 Marks QUESTION 3 Paul and Aileen have been married for the last ten years and are jointly assessed. It is that time of year again when they want to work out their tax liability for Their income and expenses for 2015 are detailed below. Paul is self-employed for the last 5 years. He prepares accounts to 30 April each year and his tax adjusted profits for the last two years have been as follows: Year ended 30 April ,000 Year ended 30 April ,000 He has a personal pension scheme and contributed 11,000 to his pension scheme in Paul is 45 years old. Paul entered into a qualifying deed of covenant in 2014 to pay Mark 5,000 per annum in March each year. Mark is an incapacitated child aged 10 years who is not related to Paul and is his neighbour s son. Aileen is employed by Happy Days Limited and had a gross salary of 55,000 in 2015 with PAYE deducted of 8,800. Aileen received deposit interest, net of DIRT at 41%, amounting to 1,239 in She also received a dividend net of dividend withholding tax from BCF Plc amounting to 100. Aileen maintained her widowed mother Mary in Mary s only source of income is her pension which amounted to 10,500 in Aileen carried out renovation to their house in 2014 which qualified for relief under the home renovation incentive scheme. She spent 15,000 (VAT exclusive amount) on external insulation and installing triple glaze windows. Aileen and Paul rented out a room in their house and received 11,000 in gross rent in They had expenses in relation to the letting of 1,500 (repairs to the room). Requirement Calculate Paul and Aileen s income tax liability for the 2015 tax year on the basis that joint assessment applies. 20 Marks For the purposes of answering this question you can ignore PRSI and USC. Total 20 Marks Page 6 of 20

7 QUESTION 4 SECTION B Answer TWO of the three questions in Section B. You are employed as a trainee accounting in the firm Monahan & White Accountants and have recently started to assist with payroll calculations for clients. Details regarding two employees of AB Solutions Ltd. are as follows: Kevin Byrne Kevin has been employed by AB Solutions Ltd for the last ten years and he is paid on a monthly basis. For the month of July 2015 he earned 4,250 gross. In addition to his salary Kevin has been provided with a number of benefits as follows: A bicycle for cycling to and from work each day. This costs AB Solutions Ltd 800 when they purchased it for Kevin in April Subsidised canteen meals which are provide to all employees. Kevin estimates this saves him 120 per month on food. Kevin is employed in the engineering department and AB Solutions Ltd paid his annual subscription to Engineers Ireland Ltd amounting to 1,200. Gym membership of 65 per month. The month 1 basis applies. Kevin has a monthly SRCOP of 3,150 and a monthly tax credit of 275. His USC monthly cut off point is 1,001. Sally Jones Sally is a third year student in University in Dublin studying hospitality. As part of her degree she has to undertake a six weeks work placement. Sally started with AB Solutions on 9 th March 2015 and finished on the 17 th April Each week Sally was paid 350. Sally gave AB Solutions her PPS number and understood as she had no other income for the year she would not pay tax. Required: (a) Calculate the take home pay for Kevin Byrne for the month of July You are required to briefly explain your treatment of the benefits provided by AB Solutions Ltd. 8 marks (b) Calculate the total take home pay for Sally Jones for the six weeks of her work placement. (c) Outline three employer s obligations under the PAYE system. 6 marks 3 marks (d) Outline two examples where an individual would be exempt from USC. 3 marks Total 20 Marks Page 7 of 20

8 QUESTION 5 Bob runs his own furniture design business. The total invoices issued to his customers during 2015 amounted to 180,000 excluding VAT at 23%. To date Bob has received in 147,600 including VAT from customers on foot of these invoices. He incurred the following costs in relation to his business in 2015: Purchases/ Expenses Purchase of goods for resale 35,670 Purchase of van 7,800 Hotel and meals costs to attend a trade fair 2,500 Telephone 1,450 Electricity 630 Diesel for van 2,400 Repair and servicing the van 1,400 All of the purchases costs are inclusive of VAT at 23% with the exception of electricity and repairs (13.5%) and hotel costs (9%). Bob also pays a cleaner 2,000 per month. Requirement (a) Calculate Bob s VAT liability for 2015 assuming Bob operates on the cash receipts basis. 10 Marks (b) Bob plans on taking one of his custom designed tables and chairs he made in the business for his own use. Outline the VAT treatment if any for Bob as a result of this gift. 5 Marks (c) Explain the difference between exempt and zero rated supplies, giving examples of each and outlining the VAT implications of each. 5 Marks Total 20 Marks Page 8 of 20

9 QUESTION 6 Sally Jones runs a hair salon in Tallaght in Dublin. She has been in business for the last fifteen years and has the following results for the year ended 31 December 2015: Accounts for the year ended 31 st December 2015 Notes Sales ,256 Add Dividends received (net)... 1,279 Rental income... 8,750 Gross Profit ,285 Less Employee costs... (1) 22,789 Administrative costs... (2) 4,500 Miscellaneous... (3) 2,750 Subscriptions and Donations... (4) 2,650 Insurance... (5) 2,890 Advertising and promotion... (6) 2,260 Professional Fees... (7) 1,100 Profit on disposal of non-current assets... (8) (450) Depreciation... 1,200 Light and Heat... (9) 4,500 Loan repayments... (10) 3,400 47,589 Net profit/(loss) 63,696 NOTES (1) Employee costs Staff salaries... 4,525 Drawings... 10,780 Income Tax payment for Sally... 5,200 Pension contribution for Sally... 2,284 22,789 When Sally submitted the December P30 she paid the PAYE/PRSI of 1,540 out of her personal bank account. This is not included in the figures above. (2) Administrative costs Telephone bills... 2,200 New photocopier for the office... 1,200 Magazines for the salon Stationery ,500 Sally has agreed that 25% of the calls on the telephone bill relate to the phone in the rented house. (3) Miscellaneous Page 9 of 20

10 Clamping fees Interest on late payment of tax Mortgage interest paid for rental property Stockbroker fees for share purchases ,750 (4) Subscriptions and Donations Donation to St Vincent De Paul (approved charity)... 1,260 Subscription to trade association... 1,390 2,650 (5) Insurance Public liability insurance Permanent health insurance (Sally) Medical insurance (Sally) Insurance on rented property ,890 (6) Advertising and promotion Advertising for new staff Advertising for tenant for rental property Advertising for childminder for Sally s daughter Pam Uniforms for staff in the hair salon... 1,000 2,260 (7) Professional Fees Membership of the All Ireland Hair Dressers Association Solicitor s fee for pursuing debtors Legal fee for solicitor to draw up lease for rental property Contracts for employees ,100 (8) Profit on disposal of non-current assets Profit on sale of fixtures and fittings Sally also bought new hair dryers for the salon costing 1,200 that are not included in the accounts provided. (9) Light and Heat Electricity 2,900 Heating 1,600 4, of the heating costs relate to the installation of new radiators throughout the shop. 25% of the other heating costs relate to the rental property. 35% of the electricity bill relates to the rental property. (10) Loan repayments Term loan repayments... 2,200 Credit Union loan repayments... 1,200 3,400 The amount of the term loan was 9,000 and this was used to finance the cost of a new sink system for the salon. The interest element of the loan repayments amounted to 1,586. The credit union loan amounted Page 10 of 20

11 to 4,000 and was used to refurbish the rental property which is let. The interest element included amounts to 278. Requirement Compute Sally Jones Schedule D, Case I tax adjusted profits for the year ended 31 st December Total 20 Marks Page 11 of 20

12 1 st Year Examination: May 2016 Taxation ROI 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 (%) 57% 45% 57% 57% 66% 79% Nos. Attempting General Comments: Statistical Analysis - Overall Pass Rate 76% Average Mark 59% Range of Marks Nos. of Students and over 259 Total No. Sitting Exam 887 Total Absent 228 Total Approved Absent 44 Total No. Applied for Exam 1159 GENERAL COMMENTS ON THE PAPER AS A WHOLE Overall the standard was very good this year with traditional questions like net adjusted profit very well answered. As per previous years the theory questions would benefit from more depth in their answers. Page 12 of 20

13 Examiner Comments on Question One Question one was well answered overall. In the main, students appeared to either know the answer or not and some candidates scored very highly, others poor scores. Overall the majority of candidates passed this question. Solution 1 Total Marks Allocated 1 D 2 2 C 2 3 C 2 4 A 2 5 A 2 6 C 2 7 C 2 8 A 2 9 B 2 10 C 2 Total 20 Marks Page 13 of 20

14 Examiner Comments on Question Two This question was the most poorly answered question in the paper with the majority of candidates scoring less than 50% on it. The problem seems to be as in previous years- students failed to write enough on narrative questions. Surprisingly, a lot of students answered the commencement rules poorly. Students were in the main good on ROS and VAT and poor on the rules for BIK reduction for a company car. More study is needed on theory. Solution 2 a) Commencement Total Marks Allocated Second Year of Assessment month accounting period ending in second tax year of trading If there is only one set of accounts finishing in the year, and they are for a full 12 months, then this set of accounts will form the basis period for the second year of assessment. This is the general rule for an ongoing business 2. More than one set of accounts / accounting period less than 12 months If there is more than one set of accounts, or if there is one set for less than 12 months, then the profits for the 12 months ending on the later of those dates will be assessed. 3. No accounting period ending in the second year of assessment The final rule for the second year of use is actual b) The main advantages of ROS: Avoid duplication of effort and reduce compliance costs Reduce paper handling More effective use of time More accurate processing of returns 24 hour, 365 day access to Revenue Calculation facilities to assist customers Instant knowledge of returns Speedier repayments Faster processing of returns and payments Any 5, 1 mark each. c) Cross Border Trade 1) Exports of goods to other EU countries (intra community dispatches) The Irish VAT rate depends on whether or not the customer is registered for VAT in the other EU country. The zero rate can apply to goods supplied to VAT registered persons provided that the Irish supplier obtains and quotes the VAT registration number of the foreign company on the invoice issued. The VAT rate applicable to sales to unregistered persons in other EU countries will be generally the relevant Irish VAT applicable to the item. Page 14 of 20

15 d) 2) Imports into Ireland from an EU country (intra community acquisitions) Once supplier quotes Irish VAT number of Irish business customer on invoice issued then: - Supply is charged at the zero rate by the EU supplier - The Irish company will self account for Irish VAT on the acquisition The net effect of the transaction is nil. 2.5 Marks each BIK reduction company car In order to qualify for the relief the following must apply: - the employee must spend 70% of their time working away from base (this only applies where business mileage is below the minimum threshold i.e. 24,135 km) - the annual business travel exceeds 8,047 km - The employee must work at least 20 hours per week - The employee must maintain a logbook of daily business travel Total 20 Marks Page 15 of 20

16 Examiner Comments on Question Three This question was in the main well answered. In some areas, students fell down on included pension deduction and the treatment of the covenant. Students often failed to realise that there was not enough income to be taxed at 20% for both spouses combined. The renovation scheme was often deducted in full and not split over two years. Solution 3 Income Tax Computation Total Marks Allocated Paul Schedule D Case I 36,000 1 Less: Pension (36,000-5,000)31,000 x 25% = 7,750-7,750 1 Less: Covenant -5,000 23,250 1 Aileen Sch D Case IV 2,100 1 Sch D Case V Rent a room relief 0 2 Sch E 55,000 1 Sch F ,050 (42,800+23,250) x 20% 13, ,100 x 41% ,325 x 40% 4,930 19,001 1 Less Non-refundable Tax Credits: Personal tax credit 3,300 1 PAYE 1,650 1 Dependent relative 70 1 DIRT 2,100 x 41% Renovation ( 15,000 x 13.5%)/2 1,013 6, ,107 Less: Refundable Tax Credits: PAYE deducted 8,800 1 DWT 25 8, ,282 Add: Tax deducted on covenant 1,000 1 Tax Due 4,282 Total: 20 Marks Page 16 of 20

17 Examiner Comments on Question Four This question was fairly well answered but some students failed to realise that bicycle, canteen meals and professional membership are exempt. For Sally, many students failed to recognise that there is no PRSI. Section B Solution 4 a) Kevin Byrne Take Home Month 7 Bicycle exempt once up to maximum of 1,000 and can only be claimed once every five years by employee. Bicycle must be bought by employer and used mainly to travel to and from work. Canteen meals exempt once provided to all staff Professional membership exempt once connected with job Gym membership - assessable Total Marks Allocated 1 1 Gross Pay Gym Total Income tax 3,150 x 20% 1,165 x 40% 4, , ,096 Less: Tax credit (275) Income Tax (821.00) USC 1,001 x 1.5% = x 3.5% = ,850 x 7% = Total USC (230.76) PRSI 4,315 x 4% = (172.60) Total Tax 1, Take Home Pay Month 7 ( 4,025-1,224,36) 3, Page 17 of 20

18 b) Sally Jones Weeks 1 to 4 Weeks 5 and 6 Total Pay , Tax Credit Tax due PRSI Class A0 350 x 0% USC Emergency Basis 350 x 18% Take Home Pay Pay 2, Mark Income Tax (293.08) 2 Marks PRSI 0 2 Marks USC ( Mark Net Pay 1,806,92 Mark c) Examples of points 1. Register as an employer with the Revenue Commissioners. 2. Deduct the correct tax from payments made (and benefit given) to employees. 3. Pay this tax over to the Revenue Commissioners. Any relevant points 1 Mark each d) - an individual whose total income does not exceed 12,012 in a year - Income that is not subject to income tax such as benefits that are exempt from BIK and Department of Social Protection Payments. - income subject to DIRT Any 2 relevant points, 1.2 Marks each. Page 18 of 20

19 Examiner Comments on Question Five Question 5 was well answered in the main. Some students failed to realise that VAT is not allowable on hotel meals and cleaners. Solution 5 a) Total Marks Allocated Purchase of goods 35,670/123 x 23 = 6,670 1 Purchase of van 7,800/123 x 23 = 1,459 1 Hotel and meals No input credit is allowed 0 1 Telephone bills 1,450/123 x 23 = Electricity 630/113.5 x 13.5 = 75 1 Diesel 2,400/123 x 23 = Repairs 1,400/113.5 x 13.5 = Cleaner No VAT 0 1 Total input credits 9,091 Output VAT 120,000/ % = 27,600 1 Input VAT 9,091 Net VAT Payable 18,509 1 b) This is a self-supply. 1 Mark Bob would have claimed an input credit on the materials used to make the table and chairs and he has now taken the product from the business for his own use. 2 Marks Bob must account for VAT on the cost of the materials as if he sold them. 2 Marks Page 19 of 20

20 c) Exempt supplies A person supplying exempt goods or services is not entitled to register for VAT and is therefore not entitled to any input credit for VAT suffered on business purposes. Examples financial services, insurance services. 2.5 Marks Zero rated supplies Where a business supplies zero rated goods or services it may be obliged to register for VAT. This in turn allows the business to reclaim VAT on business items purchased. 2.5 Marks Examiner Comments on Question Six This was the best answered question with students scoring very highly here. Some students failed to realise that charitable donations are no longer an allowable deduction. Other students failed to correctly calculate the term loan addback but in the main great answers. Solution 6 Total Marks Allocated Profit per accounts 64,696 Less: Dividend received 1,279 Rent received 8,750 10,029 54,667 Add: Drawings 10,780 Tax payment 5,200 Pension 2,284 P30 (1,540) 1 Photocopier 1,200 1 Telephone 2,200 x 25% = Clamping 750 Interest on late payment Charity Donation SVDP 600 1,260 Mortgage Stockbroker PHI Medical insurance Rental insurance Tenant advertising Childminder advertising Legal fees lease 100 Profit on disposal (450) 1 Radiators Depreciation 500 1,200 Heating 1,100 x 25% Term loan (2,200-1,586) Credit Union Loan , Electricity rental 1,015 1 Total 20 Marks 29,808 Taxable Profits 84,475 or 83,475 Total 20 Marks Page 20 of 20