Advanced Taxation Republic of Ireland

Transcription

1 Advanced Taxation Republic of Ireland nd Year Examination August 04 Exam Paper, Solutions & Examiner s Report

2 Advanced Taxation (ROI) August 04 nd Year Paper 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 04 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 04.

3 Advanced Taxation (ROI) August 04 nd Year Paper Accounting Technicians Ireland nd Year Examination: Autumn 04 Paper Paper: ADVANCED TAXATION (Republic of Ireland) Thursday 4 th August p.m. to 5.30 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, 03. The provisions of the Finance Act (No ), 03 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 in Section A, and ANY TWO of the FOUR questions in 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 begins on Page overleaf. The following insert is included with this paper. Tax Reference Material (ROI) 3 A04 Adv. Taxation (ROI)

4 Advanced Taxation (ROI) August 04 nd Year Paper SECTION A Answer QUESTION and QUESTION and QUESTION 3 (Compulsory) in this Section QUESTION (Compulsory) Brian aged 43 and John aged 38 entered into a civil partnership in 0. They are both medical professionals. Brian has his own GP practice and John works part-time for the HSE as he stays at home three days a week to look after their daughter Penny. Brian had started his own GP practice on the st May 0 and his profits have been as follows:- Year ended 30 th April 0 90,000 Year ended 30 th April 03 75,000 Brian purchased the following assets for use in his GP surgery: Date Details Cost () /5/0 Computer system 0,000 /5/0 Motor vehicle emissions 40g/km 5% private use 35,000 /5/0 Office furniture 5,000 /7/0 Medical equipment 0,000 Details of Brian s other income and outgoings for 03 are as follows:- Deposit interest received from AIB plc,640 Rental income from Spanish property 9,500 Annual maintenance payment to ex-spouse Siobhan 5,000 Retirement annuity annual premium 9,500 Permanent health insurance 950 John works two days a week for the HSE. His salary for 03 was 6,000 (PAYE deducted,000). John s only other income was a dividend from an Irish company of 600 gross. Required: Calculate Brian and John s Income tax for 03. You may assume that they have elected for separate assessment. Total 0 Marks 4 A04 Adv. Taxation (ROI)

5 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION (Compulsory) (a) Rex Limited is an Irish incorporated and resident company. The company carries on a retail clothing business from a number of outlets in Ireland. Details of its results for the year ended the 3 st July 03 are as follows:- Notes Turnover 4,350,80 Cost of sales (,980,40) Overheads (,065,390) Trading profit,304,380 Other income and gains 47,000 Net profit,7,380 Notes:. Overheads include the following:- Depreciation 40,67 Bad debts (i),000 Legal expenses (ii),000 Motor expenses (iii),600 (i) The bad debts account was as follows:- Opening general reserve 5,500 Opening specific reserve,000 Closing general reserve (7,000) Closing specific reserve (,500) Profit and loss account,000 (ii) Legal expenses are as follows:- Pursuing bad debts,000 Disposal of a retail unit 5,000 Drafting of employee contracts,500 Defending product liability claim by a customer 3,500 Purchase of a new retail unit 9,000,000 (iii) The motor expenses are comprised as follows:- Motor car XX850: - Finance lease payment 6,500 - Motor running expenses 6,800 - Emissions 65g/km The car was acquired on the st June 0 by way of a finance lease and cost 7,000. Motor car XX Finance lease payment 5,000 - Motor running expenses 4,300 - Emissions 49g/km The car was acquired on the st March 0 by way of a finance lease and cost 30,000.. Other income and gains:- Rental income from Irish properties (iv) 00,000 Rental income from UK properties 0,000 Gain on the sale of retail outlet (v) 07,000 47,000 Question continues overleaf 5 A04 Adv. Taxation (ROI)

6 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION (Cont d) (iv) (v) The company had a case V loss carried forward from the accounting period the year ended 3 st July 0 of 5,000. The gain arose from the sale of a retail unit details as follows:- Sales considerations March ,000 Purchase price (March 998) (50,000) Legal fees on acquisition (4,000) Extension (October 00) (4,000) Legal fees on sale (5,000) 07,000 3 Plant and Machinery Tax written down value at st August 0 3,500 The company s plant and machinery was purchased in May 00 for 500,000. During the current accounting period the company sold plant and machinery with an original cost of 50,000 for,000. The company also acquired new plant and machinery at a cost of 47,600 including VAT at 3%, during the current period. The company s year-end has always been the 3 st July and all figures are stated net of VAT unless stated otherwise. Required: Calculate Rex Limited s corporation tax payable for its accounting period the 3 st July Marks (b) Sliver Limited had the following information for its accounting period the year ended 3 st December 03. Case I 0,000 Case V 50,000 Gain as adjusted 0,000 Trade charge patent royalties paid in the accounting period 3 st December 03. 5,000 Required: Calculate Sliver Limited s corporation tax for the accounting period the 3 st December 03 making maximum use of its trade charge. 4 Marks Total 0 Marks 6 A04 Adv. Taxation (ROI)

7 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION 3 (Compulsory) Aine Bradley who is Irish resident and domiciled, entered in to the following capital transactions during the year ended 3 st December 03:-. In July 03 Aine gifted her friend Olivia 4,000 shares in Alpha Limited. The market value of the shares in July 03 was.50 each. Aine s dealings in Alpha Limited are as follows:- Acquisitions Number Cost () /5/995 4,000 6,00 /0/999 3,000 0,500 Disposal Number Sales Proceeds () 6/0/008,500 8,000. Aine sold her holiday villa in France in August 03 for 90,000. Aine had purchased this property in April 00 for 75,000. Aine lodged the proceeds from this sale in her French bank account. 3. Aine had inherited two paintings from her uncle Robert in 00. Details as follows:- Purchase date Cost Market Value 00 Painting A 0/8/998 50,680 Painting B 6//00 3,00 3,300 In September 03 Aine gave painting A to her nephew Owen, the market value in September 03 was,900 and she sold painting B for, In December 03 Aine sold acres of land situated in Ireland for 0,000. Aine had originally bought 0 acres from her sister Michelle in June 00 for 30,000. The market value of the 0 acres in June 00 was 35,000. Legal fees on acquisition and disposal were,000 and,500 respectively. The market value of the remaining 8 acres in December 03 was 40,000. Required: (a) Compute Aine s capital gains tax liability for the tax year 03 showing the amount of tax due, if any, for the initial and final period. 6 Marks (b) State the due date for payment of capital gains tax for the initial and final periods for 03. Marks (c) If a person is not resident/not ordinarily resident and not domiciled in Ireland, what is their liability to Irish capital gains tax? Marks Total 0 Marks 7 A04 Adv. Taxation (ROI)

8 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION 4 SECTION B Answer ANY TWO of the FOUR questions in Section B You have been appointed a tax advisor to the small business association, and you have been asked to deal with various VAT topics that have been sent in by their members: (a) Mary Kavanagh intends to set up a children s clothes shop commencing to trade on the st September 03. Mary has prepared a business plan with the following expected turnover: Sales Two months: September/October 03 8,800 November/December 03 3,800 January/February 04 6,500 March/April 04 8,400 May/June 04 9,900 July/August 04 0,00 Advise whether Mary will have an obligation to register for VAT, or, if she does not, whether it would be in her interests to do so. 6 Marks (b) A small wholesale company has just purchased a car for one of its salesmen. It will be used 70% for business use. The car was purchased new and cost 3,000 including standard rate VAT. The car has emissions of 50g/km. Advise on the amount of VAT if any that can be reclaimed. 3 Marks (c) John Moore manufactures leather made handbags. He is registered for VAT here in Ireland. He has recently started to export these handbags to private individuals in the EU. Explain to John the VAT treatment of these sales. 5 Marks (d) The VAT return is normally submitted every two months. Outline any two circumstances when a taxpayer is allowed to deviate from this normal procedure. 4 Marks (e) Emma Greene is on the invoice basis for accounting for VAT. In March 03 she made a sale of 5,000 including VAT at the standard rate to Rivers Limited. In July 03 Rivers Limited went into liquidation and will be unable to pay its debts. Outline for Emma Greene the VAT treatment, if any, for this bad debt. Marks Total 0 Marks 8 A04 Adv. Taxation (ROI)

9 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION 5 (a) Martin Ryan and his wife Sarah own 00% of an Irish property company that owns a number of residential and commercial properties. The company s total income is derived from the letting of these properties. For the year ended 3 st December 03 the company had the following results: Rental income 350,000 Expenses: Rates 55,00 Repairs and renewals 5,600 Legal fees on purchase of new unit 6,000 Interest (Note) 60,000 Directors remuneration 35,000 Insurance 8,000 (69,700) Profit 80,300 Notes:. Interest Residential properties 4,500 Commercial properties 35,500 60,000 One of the commercial properties was let for the first time during the accounting period. The property was purchased on the st March 03 and let on the st November 03. Interest on this property from date of purchase to the 3 st December 03 was 8,450. All residential properties are registered with the Private Residential Tenancies Board (PRTB). The company paid its shareholders Martin and Sarah a gross dividend of 8,000 each. Required: (i) Calculate the company s corporation tax liability for the year ended 3 st December Marks (ii) Calculate the close company surcharge on these profits. 4 Marks (b) Mars Limited has a corporation tax liability for the accounting period year ended 30 th September 03 of 60,000. Required: (i) (ii) Its corporation tax liability for the accounting period the year ended 30 th September 0 was 30,000. Calculate the preliminary tax payment payable, if any, for the accounting period the year ended 30 th September Marks State the preliminary tax payment dates for the accounting period the year ended 30 th September 03. Marks (iii) State the final payment date for the accounting period the year ended 30 th September 03. Mark (iv) State the CT filing date for the accounting period the year ended 30 th September 03. Mark Total 0 Marks 9 A04 Adv. Taxation (ROI)

10 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION 6 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. Total 0 Marks N. B. Each part carries marks. Candidates should answer this question by ticking the appropriate boxes on the special answer sheet which is contained within the answer booklet.. Rover Limited has a six month period to the 3 st December 03. The company purchased a machine for 00,000 in October 03. The company received a government grant of 5,000. What is the company s capital allowance (to the nearest euro) for this machine for the accounting period six months ended 3 st December 03? (a) 9,375 (b) 4,688 (c),344 (d) 6,50. Martina Price sold a retail shop in June 03. She had a capital gains liability of 6,000. What is the due date of payment? (a) 3 st October 03. (b) 5 th December 03. (c) 3 st December 03. (d) 5 th July Byrne Limited leased a car in June 0 for its sales manager David Ryan. Its retail value was 8,000 with emissions of 45g/km. David uses the car 5% for private use. Byrne Limited s year end is the 3 st December 03 each year. The lease rental charged for the accounting period the year ended 3 st December 03 is 5,00. The addback in Byrne Limited s Case I computation is: (a),75 (b) 850 (c),8 (d) John Collins sold an asset in July 03. When must he submit his CGT return for this disposal:- (a) 5 th December 03 (b) 3 st October 03 (c) 3 st December 03 (d) 3 st October 04 Question 6 continues overleaf 0 A04 Adv. Taxation (ROI)

11 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION 6 (Cont d) 5. Anne Kelly is separated from her husband Sam. They have one child Max. Max lives with Anne during the week and Sam at weekends. Anne now lives with her partner Tony. Anne has the following income for 03: Maintenance from Sam 4,000 Maintenance for the benefit of Max 8,000 Part-time job at Tesco 7,500 What is Anne s income tax liability after credits for 03, assuming that she and Sam have not elected to be treated as if they were married: (a),000 (b) Nil (c),50 (d), Lucy Brown is self-employed. She had the following income and outgoings in 03: Case I before capital allowances 84,000 Capital allowances 6,50 Irish rent 7,400 Irish deposit interest gross 500 Pension contribution fully qualifying as a charge in the 03 tax computation,500 You are required to calculate Lucy s PRSI and USC for 03 (all calculations to the nearest euro): (a) 8,76 (b) 8,66 (c) 8,73 (d) 8,44 7. What is the VAT registration limit for business persons, normally exempt, who acquire goods from other EU members? (a) 75,000 (b) 37,500 (c) 4,000 (d) 35, Flynn Limited s year end is the 30 th September each year. In its accounting period the 30 th September 04 it has a trading loss of 5,000. The company wishes to carry this loss back to a previous period of corresponding length to reduce its trading income liable at the standard rate under Section 396(A). What is Flynn Limited s time limit to exercise this option? (a) 30 th September 06 (b) 30 th September 05 (c) 3 rd June 05 (d) 3 rd June 04 Question 6 continues overleaf A04 Adv. Taxation (ROI)

12 Advanced Taxation (ROI) August 04 nd Year Paper QUESTION 6 (Cont d) 9. What VAT rate applies to Hotel accommodation? (a) Exempt. (b) 3% (c) 3½% (d) 9% 0. White Limited s year end is the 3 st March each year. The shareholders of White Limited are: Sheila White (Irish resident) 5% Mark White (UK resident) 5% X Limited (Irish company) 5% Z Limited (UK company) 5% On the 0 th December 0 White Limited paid a dividend of 50,000 to its shareholders. You are required to calculate White Limited s dividend withholding tax and payment date in respect of the dividend of 50,000 paid on the 0 th December 0: (a) 5,000 4 th January 03 (b),500 3 st January 03 (c),500 4 th January 03 (d) 5,000 3 st October 03 QUESTION 7 (a) (i) (ii) State two factors which are likely to influence the Revenue in selecting a case for a full Revenue Audit. 4 Marks Outline the procedure that will be followed by the Revenue during a Revenue Audit. 8 Marks (b) List any four benefits commonly provided by an employer to an employee that are exempt from income tax under the Benefit in kind legislation. 8 Marks Total 0 Marks A04 Adv. Taxation (ROI)

13 Advanced Taxation (ROI) August 04 nd Year Paper nd Year Examination: August 04 Advanced 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 (%) Nos. Attempting Statistical Analysis - Overall Pass Rate 4% Average Mark 46% Range of Marks Nos. of Students and over Total No. Sitting Exam 4 Total Absent 44 Total Approved Absent 6 Total No. Applied for Exam 86 3 A04 Adv. Taxation (ROI)

14 Advanced Taxation (ROI) August 04 nd Year Paper Examiner s Comments on Question One This was a straight forward Income tax computation of a civil partnership. The capital allowances were well presented and calculated correctly. However very few candidates calculated the taxpayer s option in commencement which affected Brian s case II income for 03. Quite a few candidate s did not transfer the married band correctly and failed to appreciate that civil partners are treated the same as married persons for taxation. Solution One Brian Income tax computation 03 Notes Schedule D Case II 58,375 Schedule D Case IV,640/67 x 00 3,940 Schedule D Case III 9,500 7,85 Charges: Maintenance (5,000) Retirement annuity ( 9,500) Statutory income 47,35 Permanent health insurance (950) 46,365 Tax payable: 3,800 at 0% = 6,560 6,00 at 0% (note 3) =,40 3,940 at 33% =,300 3,45 at 4% =,404 0,504 Less: Married credit (,650) DIRT 3,940 at 33% (,300) Tax liability 7,554 John Income Tax Computation 03 Schedule E 6,000 Schedule F 600 6,600 Tax payable: 6,600 at 0% = 5,30 Less: Married credit (,650) PAYE (,650) Tax liability,00 PAYE paid (,000) DWT 600 at 0% ( 0) Refund 00 Marks Allocated 4 A04 Adv. Taxation (ROI)

15 Advanced Taxation (ROI) August 04 nd Year Paper Solution One (Cont d) Notes:. Tax year Basis of assessment Amount 0 30 th April 0 90, C/Y 30 th April 03 75,000 Marks Allocated Section 66 Original for year 0 90,000 Actual for year 0 st January 0 to 3 st December 0 90,000 x 4/ = 30,000 75,000 x 8/ = 50,000 80,000 Excess 0,000 Final assessment for 03 Original assessment 75,000 Less: Section 66 excess (0,000) 65,000 Capital allowances 03 Basis period: 30 th April 03 Assets Computer system 0,000 at ½% =,50 Motor vehicle 4,000 at ½% = 3,000 x 75% =,50 Office furniture 5,000 at ½% = 65 Medical equipment 0,000 at ½% =,500 6,65 3 Case II Income 65,000 Less: Capital allowances 6,65 58,375. Retirement annuity Relevant earnings Schedule D Case II 58,375 Other income: Case IV 3,940 Case III 9,500 3,440 Less: Other charges 5,000 (,560) Net relevant earnings 56,85 Maximum relief: 56,85 at 5% = 4,04 Limited to amount paid 9, Brian and John are entitled to the maximum married band as they both have income and the lower earner has income of 3,800. The band is divided between them equally, giving them 3,800 each. John only used 6,600 of his band so he can transfer the balance of 6,00 to John. 5 A04 Adv. Taxation (ROI)

16 Advanced Taxation (ROI) August 04 nd Year Paper Examiner s Comments on Question Two Part (a) was a basic corporation tax computation with the calculation of a company s case I income and a gain on the sale of a retail outlet. The gain was calculated correctly. A few candidates got confused with the treatment of the legal fees on acquisition and disposal. The case I computation was disappointing with a large number of candidates not dealing with the addbacks correctly. Part (b) dealt with trade charges and was badly dealt with by the vast majority of candidates. Quite a few candidates treated the charges as income taxed at 5%. Solution Two Marks Allocated (a) Rex Limited Corporation Tax Computation Year ended 3 st July 03 Notes Case I,74,58 Case V 85,000 Case III 0,000 Income,569,58 Gain 3 00,77 Profit,669,985 Corporation tax:,74,58 at ½% = 59,8 95,000 at 5% = 73,750 00,77 at ½% =,59 45,63 (b) Silver Limited Corporation Tax Computation Year ended 3 st December 03 Case I 0,000 Less: Patent Royalties (5,000) Case V 50,000 Income 50,000 Gain 0,000 Profits 70,000 Corporation tax: 50,000 at 5% =,500 0,000 at ½% =,500 5,000 Less: Excess trade charge 5,000 at.5% = (,875) = 3,5 6 A04 Adv. Taxation (ROI)

17 Advanced Taxation (ROI) August 04 nd Year Paper Solution Two (Cont d) Marks Allocated Notes:. Case I Computation Net profit per accounts,7,380 Addbacks Depreciation 40,67 Bad debts increase in general provision,500 Legal expenses (i) 4,000 Motor expenses (ii) 4,6 60,378,78,758 Deductions: Other income 47,000 Capital allowances (iii) 90,500 (507,500) Case I,74,58. Case V Rental income from Irish properties 00,000 Less: Case V loss (5,000) 85, Capital Gain Sales proceeds 480,000 Less: Legal fee on disposal (5,000) Cost 97/98 50,000 Legal fee on acquisition 4,000 54,000 x.3 = (3,98) Enhancement expenditure: 00 4,000 x.087 = (3,98) Gain 38,54 Gain as adjusted 38,54 x 33/.5 = 00,77 (i) Legal fees The legal fees on the purchase and sale of a retail unit must be added back as it is a capital expense. (ii) Motor expenses Motor car XX850 Limit: lower of:- 7,000 x 50% = 3,500 or 4,000 x 50% =,000 6,500 x 7,000,000 = 3,6 7,000 Motor car XX3864 Limit 4,000 5,000 x 30,000 4,000 =,000 30,000 Total addback 3,6 +,000 = 4,6 7 A04 Adv. Taxation (ROI)

18 Advanced Taxation (ROI) August 04 nd Year Paper Solution Two (Cont d) Marks Allocated (iii) Capital allowances Opening cost 500,000 Add addition 47,600 x 00 = 0,000 3 Less: Disposal (50,000) 570,000 Wear and Tear 570,000 at ½% = 7,50 Balancing position Sales proceeds,000 TWDV Cost 50,000 W + T Ap 3/7/00 (6,50) Ap 3/7/0 (6,50) Ap 3/7/0 (6,50) 3,50 Balancing allowance 9,50.5 Total capital allowance 7,50 + 9,50 = 90,500 Examiner s Comments on Question Three This question dealt with Capital Gains Tax. The taxpayer made four disposals in 03. Disposal one dealt with shares. Those candidates who had prepared for this topic did well. Disposal two was the sale of a French villa and was well dealt with by most candidates. Disposal three dealt with durable chattels and was poorly dealt with by most candidates. Disposal four was a part disposal and again was poorly dealt with by most candidates. Only a handful of candidates could give the part disposal formula. Also it is important to note that a gift is liable to Capital Gains Tax and not exempt unless it is a gift to a spouse. It appeared that quite a few candidates were not prepared for a compulsory Capital Gains Tax question. Solution Three (a)(i) Alpha Limited: Date Number Cost () /5/995 4,000 6,00 /0/999 3,000 0,500 Shares remaining after the disposal of,500 shares in 008: Date Number Cost () /5/995,500 3,875 /0/999 3,000 0,500 The disposal of 4,000 shares in 03 will come from the first holding and,500 from the second holding. 8 A04 Adv. Taxation (ROI)

19 Advanced Taxation (ROI) August 04 nd Year Paper Solution Three (Cont d) Two tax computations will be required: Sales proceeds,500 x.50 = 6,50 95/96 3,875 x.77 = (4,948),30 Sales proceeds,500 x.50 = 3,750 99/00 0,500 x,500 = 5,50 x.93 = (6,63) 3,000 Loss (,53) This will be restricted to the actual loss of:- Sales proceeds 3,750 Cost (5,50) (,500) Marks Allocated (ii) The French holiday villa is liable in full as Aine is resident and domiciled in Ireland. Sales proceeds 90, ,000 x.049 (78,675),35 (iii) Painting A Sales proceeds,900 00,680 x.049 (,76),38 Tax at 33% = 376 Marginal relief ½(,900,540) = 80 Painting B Deemed sales proceeds,540 Cost (3,300) Loss (760) (iv) Sales proceeds 0,000 Legal fees on disposal (,500) Cost 00 35,000 Legal fees,000 37,000 37,000 x 0,000 = 0, ,000,333 x.087 = (3,406) Gain 5,094 9 A04 Adv. Taxation (ROI)

20 Advanced Taxation (ROI) August 04 nd Year Paper Solution Three (Cont d) Initial period //03 to 30//03 Shares in Alpha Limited: Gain,30 Loss (,500) French Villa,35 Painting B (760) 0,367 Less: Annual exemption (,70) 9,097 Tax at 33% = 3,00 Plus marginal relief on Painting A = 80 3,8 Final period //03 to 3//03 Land 5,094 Tax at 33% =,68 Marks Allocated (b) Initial period tax due 3,8 Payment date: 5 th December 03 Final period tax due,68 Payment date: 3 st January 04 (c) Persons who are neither resident nor ordinarily resident are liable to Irish capital gains tax on the sale of the five specified assets. Examiner s Comments on Question Four This was a straight forward VAT question. Many parts of this question have been asked in previous exams. It was poorly answered by the majority of candidates who attempted it. A lot of candidates did not answer part one correctly with regard to Mary and should she register for VAT. It is not enough to list the points for why a taxpayer might not register for VAT. You must deal with the taxpayer in the question and should she register for VAT in her situation. Also quite a few candidates did not appreciate that children s clothes is zero rated not exempt or standard rated. This information was presented in the tables given in the exam. Only a handful of candidates could deal with the VAT position of the car. Also quite a few students got confused with the export to a non-registered person and treated it as an EU acquisition. 0 A04 Adv. Taxation (ROI)

21 Advanced Taxation (ROI) August 04 nd Year Paper Solution Four (a) There is an obligation to register for VAT, if a trader s turnover from the sale of goods is, or is likely, in any continuous period of months, to exceed 75,000 per annum. Marks Allocated To establish if Mary is required to register for VAT it is necessary to review her VAT exclusive turnover. The projected turnover for the month period to 3 st August 04 is as follows: (b) (c) Two months ending October 03 8,800 December 03 3,800 February 04 6,500 April 04 8,400 June 04 9,900 August 04 0,00 57,600 As Mary s turnover is below 75,000 she is not obliged to register for VAT. However given that she has zero rated sales it would be in her interests to register. She would have to charge VAT on her sales but it would be the zero rate and she would be able to reclaim VAT on her purchases like fixtures, telephone, light and heat etc. From the st January 009 it is possible for a business that buys a category A, B or C car and uses that car at least 60% for business to reclaim 0% of the VAT charged. 3,000 is the VAT inclusive cost. The VAT is 5,984 (3,000/3 x 3). The taxpayer will be able to claim 0% of this,,97 as an input credit. As John is VAT registered and the customers are EU private individuals John must charge Irish VAT as the place of supply is Ireland where the transport begins. However all EU countries have a registration limit for distance sellers. If John makes a supply in excess of the threshold of the relevant country, John must register for VAT in that country and charge that country s VAT rate when making the supply. VAT is now charged where the transportation ends..5.5 Example John supplies 40,000 worth of handbags to non-registered customers in Germany in the year to the 30 th June 03. What is the VAT position? Solution The registration limit for distance sales in Germany is 00,000. As John has not exceeded this he does not have to register for VAT in Germany and he charges Irish VAT on these sales. (d) (i) (ii) A number of alternatives to the usual bi-monthly return are available: Taxpayers in a permanent repayment position may be permitted to furnish monthly returns. The Collector General may authorise taxable persons to file an annual VAT return. In the case of all traders, an application may be made to the Collector General to account for VAT payable on an annual basis. In order to avail of this treatment, the taxable person is obliged to set up a direct debit facility and make a monthly payment on account to the Collector General. Once the annual VAT return is filed, the balance of VAT payable, if any, must be paid by the 9 th day of the month immediately following the annual accounting period. Where the balancing payment is in excess of 0% of the tax payable for the year then the Revenue marks each, (Max 4 marks) A04 Adv. Taxation (ROI)

22 Advanced Taxation (ROI) August 04 nd Year Paper Solution Four (Cont d) Commissioners may charge interest on the balance outstanding. The interest will be charged from a date 6 months prior to the submission date. This measure is to ensure that a taxable person does not postpone payment of what may be a substantial VAT liability until the end of the accounting period. Marks Allocated (iii) Four monthly returns are available to traders who have a total VAT liability of between 3,000 and 4,400 per annum. The filing date is the 9 th day of the month following the quarterly period (3 rd if using ROS). (iv) Bi-annual returns are available to traders who have a total VAT liability of less that 3,000 per annum. The filing date is the 9 th day of the month following the six month period. (3 rd if using ROS). The question only requires two of the above. (e) Relief for the VAT on a bad debt is possible where a debtor defaults and fails to pay the accountable person. Emma Greene, accounts for VAT on the invoice basis so has already accounted for VAT when the sale was made. Where the Revenue is satisfied that every effort has been made to collect the outstanding debt they will allow Emma to reduce the VAT liability in the period the debt is written off. Examiner s Comments on Question Five This question was dealt with satisfactorily. The main problem was in part (b) where most candidates failed to note that it was a large company for corporation tax purposes. This meant they had the wrong preliminary tax requirements. Solution Five (a) (i) Corporation Tax Computation Year ended 3 st December 03 Notes Case V 07,85 Corporation tax 07,85 at 5% = 5,796 A04 Adv. Taxation (ROI)

23 Advanced Taxation (ROI) August 04 nd Year Paper Solution Five (Cont d) Marks Allocated Notes:. Case V Computation Rent received 350,000 Less: Expenses Rates 55,00 Repairs and renewals 5,600 Interest (working ) 39,5 Directors remuneration 35,000 Insurance 8,000 (4,85) 07,85 Workings:. Residential properties 4,500 at 75% = 8,375 Commercial properties 35,500 8,450 = 7,050 New commercial property 8,450 x /0 = 3,690 39,5. The legal fees on the purchase of the new unit are a capital expense and not allowed. (ii) Close company surcharge: Case V income 07,85 Less: Corporation tax (5,796) Distribution (6,000) Undistributed Estate Income 39,389 Surcharge at 0% = 7,878 (b) (i) st Installment 45% of expected liability: 60,000 x 45% = 7,000 or 50% of previous liability: 30,000 x 50% = 5,000 Pay = 7,000 (ii) nd Installment 60,000 x 90% = 44,000 Less: 7,000 paid = 7,000 payable Preliminary tax payment dates: st Installment: 3 rd March 03 nd Installment: 3 rd August 03 (iii) Final payment date is: 3 rd June 04 (iv) CTI filing date is: 3 rd June 04 3 A04 Adv. Taxation (ROI)

24 Advanced Taxation (ROI) August 04 nd Year Paper Examiner s Comments on Question Six The multi-choice question was answered satisfactorily. Solution Six. (b) 00,000 5,000 = 75,000 x ½% x 6/ = 4,688. (b) 3. (d) 5,00 x 8,000 4,000 = 79 8,000 Marks Allocated Each part carries marks 4. (d) 5. (c) Income tax computation Case IV 4,000 Schedule E 7,500,500,500 at 0% = 4,300 Less: Single credit (,650) PAYE credit 7,500 at 0% (,500) Tax liability,50 6. (a) Case I 84,000 6,50 77,850 Case V 7,400 Case IV ,750 PRSI at 4% = 3, (c) 8. (a) 9. (d) Case I 77,850 Case V 7,400 85,50 USC: 0,036 at % = 0 5,980 at 4% = 39 69,34 at 7% = 4,846 5,86 Total 3, ,86 = 8,76 0. (c) 50,000 x 5% =,500,500 x 0% =,500 4 A04 Adv. Taxation (ROI)

25 Advanced Taxation (ROI) August 04 nd Year Paper Examiner s Comments on Question Seven This was a two part question. Part (a) on revenue audit was answered satisfactorily. In part (b) I asked for four exempt BIK. A lot of candidates did not read the question correctly and listed four BIK that would be liable to Income Tax under Schedule E like the motor vehicle and a preferential loan. Solution Seven (a) (i) Revenue uses three methods of selection. These are: Screening tax returns The vast majority of audit cases are selected in this way. Screening involves examining the returns made by a variety of taxpayers and reviewing their tax compliance history. The figures in the returns and accounts are then analysed in the light of trends and patterns in the particular business or profession and evaluated against other available information. Officers who screen cases seek to minimise the possibility of selecting taxpayers whose tax affairs are likely to be in order. Marks Allocated Projects on business sectors: From time to time, projects are conducted to examine tax compliance levels in particular trades or professions. The returns for a large number of taxpayers in a particular sector are screened in detail and a proportion of these selected for audit. Random selection This is in addition to the first two methods. It means that all taxpayers have a possibility of being audited. Each year, a small proportion of audit cases are selected using this method. (ii) Typically, an audit involves a series of steps. The sequences of these steps are as follows:-. On arrival, the auditor identifies himself or herself to you and explains the purpose of the audit. An indication of the length of time he or she expects to spend on your premises is also given.. You are given an opportunity to disclose to the auditor all inaccuracies in your tax return. By making such a disclosure you ensure speedier conclusion of the audit with maximum reduction in penalties and you avoid having your name published in the annual list of tax defaulters. 3. To get a better understanding of your business, the auditor may ask you questions about your book-keeping and how your business operates. The auditor then commences to examine your books and records to verify that the figures have been correctly calculated and that the tax returns and/or declarations for the different taxes are correct. 4. If the auditor finds the returns to be largely correct as is often the case you will be told as soon as this becomes clear. The auditor is not concerned with pursuing immaterial adjustments. He or she will let you know in writing that no adjustments arise 5. If the auditor finds that adjustments are required, he or she will quantify the adjustments and the additional tax. The details of how the additional tax arises will be discussed with you and you will be notified in writing. You will be given time to consider the proposed adjustments, and if you wish, to take independent tax advice. 5 A04 Adv. Taxation (ROI)

26 Advanced Taxation (ROI) August 04 nd Year Paper Solution Seven (Cont d) 6. In addition to tax, interest at the rate specified by law, will normally be payable. If the additional tax is of a material amount and can be shown as arising due to fraud or neglect on your part, penalties will also be payable. The auditor will explain to you how interest and penalties are calculated. 7. At the final interview, the auditor will ask for your agreement to the total settlement figure. This figure will include tax, interest and, if they arise, penalties. If the total settlement figure exceeds 30,000 (including interest and any penalties) and you did not make a full voluntary disclosure, details of the settlement will be included in the annual list of tax defaulters published by the Revenue Commissioners. 8. Once agreed, the full amount should be paid to the auditor who will issue you with a receipt. Marks Allocated (b) Benefits received by employees that are exempt from income tax: () The provision of living accommodation for an employee (other than a director), who is required to live on the business premises, provided that the accommodation is necessary for the employee to carry out their duties, or the accommodation has been provided as part of the office of employment prior to 948. () The provision of canteen meals, which are provided for all staff generally. (3) The cost of providing a monthly/annual bus or rail pass. (4) Security services/assets are exempt where there is a risk to the personal safety of the employee/director while carrying out the duties of employment. (5) The provision of a new bicycle and related safety equipment subject to a maximum value of,000. (6) Where an employee uses a car that is considered to be in a car pool. (7) Where an employee uses a business asset mainly for business but there is some private use, but the private use is considered to be entirely incidental. (8) Qualifying removal or relocation expenses, that is those expenses incurred directly as a result of the change of residence necessary to take up employment. marks each, (Max 8 marks) The question only requires four benefits. 6 A04 Adv. Taxation (ROI)