Professional Level Options Module Paper P6 (IRL) 1 John Field. Memorandum

Transcription

1 Answers

2 Professional Level Options Module Paper P6 (IRL) Advanced Taxation (Irish) December 2014 Answers 1 John Field To: Tax manager From Tax senior Re: John Field, taxation issues Date: 3 October 2013 Memorandum (a) (b) Value added tax (VAT) implications of the disposal of premises by Forte Ltd The sale of the premises will not be subject to VAT, as the building is more than five years old and the refurbishment work carried out in March 2011 did not constitute development because it: did not materially alter the property; and its cost did not exceed 25% of the consideration proposed for the sale of the building. Projected corporation tax (CT) liabilities of both companies under the existing structure The detailed computations are included in Appendix 1. Piano Ltd would have nil liabilities in both years. It would receive a refund of the tax paid on the 40,000 of trading profits arising in 2013 as a result of the loss from 2014 being carried back. Forte Ltd would have a liability of 103,300 in 2013 and 25,000 in There would be an unrelieved trading loss amounting to 260,000 carried forward in Piano Ltd at 31 December (c) (i) Evaluation of the advice received from Mark Meadows I agree that the current structure does not allow for the transfer of losses from Piano Ltd to Forte Ltd. The chargeable gain arising on the disposal of the premises by Forte Ltd would be triggered when the contract is signed (in 2013) and NOT on the closure of the deal in The proposed 75% shareholding relationship will constitute a loss group and from the date of formation of the group, current period trading losses and excess charges can be surrendered between group members. The suggested structure whereby Forte Ltd acquires the Piano Ltd shares from John and John receives new shares in Forte Ltd should qualify for the share for share relief from capital gains tax (CGT). There will be a clawback of the CGT relief if Piano Ltd leaves the group within ten years, NOT six years. If the re-organisation takes effect by 1 January 2014, the group will be in existence for the whole of the accounting period ended 31 December The trading losses in Piano Ltd must firstly be set off against profits arising in Piano Ltd [ss.396a and 396B], so only the balance of 260,000 will be available for surrender to Forte Ltd. However, in a group, the recipient group member cannot carry back a loss to a prior year, so the loss is only available to offset against Forte Ltd s profits of 2014 and not This would still leave a loss of 60,000 in Piano Ltd (260, ,000) unless the recommendations below are implemented. Recommendations It is recommended that: the signing of the contract be postponed until January 2014 and the group formed with effect from 1 January 2014; and the shareholding relationship be increased to 90% so that the exemption from stamp duty in the case of reconstructions can be availed of. Otherwise stamp duty will be chargeable at 1% of the market value of the shares transferred. The relief will be clawed back if Piano Ltd leaves the group within two years. (ii) Risks associated with professional advice Mark Meadows is a trainee accountant and is not in a position to give formal advice to John Field. His work should be conducted for clients of his training firm who have agreed terms of engagement with that firm and should be subject to review prior to being issued to the client. It is most likely that these conditions are part of his terms of employment. The possible risks to Mark associated with giving written advice in this situation could include: dismissal from his trainee position arising from breach of his employment contract, and liability for damages arising from John Field s reliance on incorrect advice. 23

3 (d) Projected corporation tax (CT) liabilities of both companies if the advice above is implemented The detailed computations are included in Appendix 2. The new structure results in a tax saving in Forte Ltd of 32,500, which can be summarised as follows: Total CT payable: Before reorganisation 103,300 25, ,300 After reorganisation 17,500 78,300 95,800 Saving 32,500 The CT liabilities of Piano Ltd remain unchanged (at nil). (e) Taxable income for 2013 The detailed calculations are included in Appendix 3. The high earner s restriction will apply to reduce the specified reliefs (Employment and Investment Incentive Scheme (EIIS) and s.23) from 113,902 to 80,000. Taxable income is therefore calculated at 190,000. (f) (g) Comparison of pension scheme to EIIS Disadvantages of pension schemes over the EIIS One disadvantage of investing in a pension scheme over the EIIS is in relation to the timing of the return of the investment. An investor in EIIS investments must retain the shares for a minimum of three years in order to avoid any clawback of tax relief. It is therefore possible to receive a repayment of the investment any time after the specified three-year period. This compares favourably to the long-term nature of a pension investment. Advantages of pension schemes over the EIIS Tax relief on pension contributions is available at 41% (or higher in the case of an occupational scheme), whereas with the EIIS 30% relief is given in the year of investment and the balance of 11% is deferred until the third anniversary of the investment and is subject to certain conditions being satisfied in relation to increased employment or increased expenditure in research and development. High earner s restriction. As noted in point (e) above, the high earner s restriction applies to reduce the effectiveness of tax geared investments such as s.23 relief (including rental losses brought forward as a result of an earlier s.23 claim) and the EIIS. This restriction does not apply to pension scheme investments. 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. Comparison of pension scheme options Personal pension scheme This is the least attractive option in this case, because the amount of tax effective contributions are limited in relation to age and income. Note: Marks will also be awarded for relevant information on PRSAs. Occupational pension scheme There is effectively no limit on the contributions which a company can contribute to the pension scheme and it may be possible to take the entire fund by way of a tax-free lump sum in certain circumstances. Small self-administered pension scheme (SSAP) There is also no limit on the contributions which a company can contribute to the pension scheme, but there is greater flexibility in the choice of investments. The director has control over when, where and how much is invested and there is scope for borrowing by the scheme. Non-tax issues re SSAPs The management of the investment will absorb management time and there are additional compliance costs (annual accounts and three-year actuarial reports). It is not a requirement that the pension scheme has a balanced portfolio of investments and this can lead to a poor return on investment. Recommendation It is recommended that the occupational pension scheme option is chosen as it is a simpler option than a SSAP. 24

4 (h) Tax consequences of selling the s.23 property John would be liable to CGT at 33% on the difference between the sales proceeds and the cost of the property. There would also be a clawback of the s.23 relief granted as the property is being disposed of within ten years of its purchase. John would be deemed to receive additional rents in the year in which the condition is broken, equal to the total amount of s.23 relief obtained. The sale is not subject to VAT as it is an old property and it is assumed that no redevelopment work has taken place. APPENDICES Appendix 1: Projected corporation tax (CT) liabilities under the current structure Piano Ltd CT computation year ended 31 December 2013 Case I income 40,000 Less: Loss relief carried back (40,000) Amount subject to CT Nil Piano Ltd CT computation year ended 31 December 2014 Case I income Nil CT Nil Loss memorandum Case I loss incurred ,000 Carried back to 2013 (40,000) Loss carried forward 260,000 Forte Ltd CT computation year ended 31 December 2013 Case I income 140,000 Chargeable gains (note 1) 686,400 Amount subject to CT 826,400 CT at 12 5% 103,300 Forte Ltd CT computation year ended 31 December 2014 Case I income 200,000 CT at 12 5% 25,000 Note 1: Chargeable gains Freehold property Proceeds 320,000 Cost (2010) (100,000) Gain 220,000 Goodwill Proceeds 40,000 Cost 0 Gain 40,000 Total gains 260,000 Chargeable gains 260,000 x 33%/12 5% 686,400 25

5 Appendix 2: Projected CT liabilities under proposed structure if the sale is postponed to 2014 Piano Ltd has a nil CT liability for 2013 and 2014 (unchanged). Forte Ltd CT computation year ended 31 December 2013 Case I income 140,000 CT at 12 5% 17,500 Forte Ltd CT computation year ended 31 December 2014 Case I income 200,000 Chargeable gains 686,400 Amount subject to corporation tax 886,400 CT at 12 5% 110,800 Group relief on a value basis 260,000 x 12 5% (32,500) CT payable 78,300 Appendix 3: John Field income tax computation 2013 Schedule D Case V 70,000 Schedule E 200,000 Total income 270,000 Less: Specified reliefs (note 1) (80,000) Taxable income 190,000 Note 1: High earner s restriction Calculation of adjusted income: Taxable income (70,000 70, ,000 43,902 (note 2)) 156,098 Add: Specified reliefs (70, ,902) 113,902 Less: Deposit interest 0 Adjusted income 270,000 20% of adjusted income 54,000 Income threshold amount 125,000 As the adjusted income is greater than 125,000, the specified reliefs are greater than 80,000, and 20% of the adjusted income (54,000) is less than the specified reliefs, the high earner s restriction applies. The restriction is the greater of 80,000 and 54,000. Reliefs are therefore restricted to 80,000. Note 2: The EIIS investment of 60,000 is multiplied by 30/41 to reflect the initial tax relief (60,000 x 30/41 = 43,902). Tutorial note: With effect from 16 October 2013, subscriptions for EIIS shares will no longer be subject to the high earner s restriction. 2 Robert Jones (a) Proposed transfer of shares and premises to Padraig (i) Tax implications for Robert Capital gains tax (CGT) Share disposals Robert will be eligible for retirement relief on the disposal of his shares in Augusta Ltd on the basis that: He is over 55. The company has been a trading company for at least the last ten years. He has owned the shares for at least ten years prior to the date of disposal. He has been a director for at least ten years and a working director for at least five years. 26

6 (ii) The company is a family company as he owns 25% or more of the voting rights in the company. Each of the three proposed share disposals will qualify for retirement relief as the disposal is to a child (Padraig), so the 750,000 limit does not apply. Transfer of business premises The business premises will be a qualifying asset for retirement relief purposes even though it is personally owned by Robert because: it has been owned by Robert for the last ten years and throughout the last ten years of ownership it has been used for the trade of Augusta Ltd; and it is being disposed of at the same time and to the same person as the shares in Augusta Ltd. Therefore, there should be no CGT payable by Robert on the disposal of his shares in Augusta Ltd and the business premises to Padraig. Tax implications for Padraig Receipt of shares in Augusta Ltd Stamp duty Stamp duty at a rate of 1% will apply to the market value of the shares transferred and will be payable by Padraig. Based on current values, the duty will amount to 10,000 (1,000,000 x 1%). Capital acquisitions tax (CAT) No discount will apply to the value of the shares being transferred to Padraig because, following the transfer, the company is controlled by Padraig and his family. Therefore, based on the current value of the company, Padraig will take the following gifts of shares: 31 August 2014 (300/1,000) 300, August 2015 (350/1,000) 350, June 2016 (350/1,000) 350,000 Padraig will qualify for business property relief on the gifts of shares in Augusta Ltd as he will own more than 25% of the shares in the company following the first gift. So the taxable value of the gift at current values will be: Value of shares 1,000,000 Less: Stamp duty (10,000) 990,000 Less: Business property relief (90%) (891,000) 99,000 Gift of business premises Stamp duty Stamp duty will be 2% of the market value of the property, but consanguinity relief will reduce the amount payable by Padraig by 50%. Based on current values, the duty will amount to 5,000 (500,000 x 2% x 50%). CAT At the time of the proposed transfer of the premises (30 June 2016), Robert (the transferor) will only own 35% of the company (having previously transferred 65% of the company to Padraig). Even though the transfer of the premises is accompanied by the transfer of the remaining shares to the same individual (Padraig), it will not qualify for business property relief because Robert will not be a controlling shareholder at the time of the transfer. In the absence of business property relief, Padraig will receive a taxable gift of 495,000 (being 500,000 less the stamp duty of 5,000). Summary Tax payable by Padraig under the current proposal will thus be: Stamp duty (10, ,000) 15,000 CAT Taxable value after business property relief (99, ,000) 594,000 Less: Small gifts relief (3,000 x 3) (9,000) Class 1 threshold (225,000) 360,000 Tax at 33% 118,800 27

7 (b) (c) (d) Recommendation The transfer of the premises to Padraig should be brought forward to 31 August 2015, at which time Robert would still be a controlling shareholder. The premises would then qualify for business property relief and the taxable value would be reduced to 49,500 (495,000 x 10%). The outcome of the above would be that no CAT liability would arise as the aggregate taxable value of both gifts (99,000 9, ,500) would be less than the class 1 threshold. Holding period: Both the shares and the property must be retained by Padraig for six years to avoid a clawback of business property relief and retirement relief. Sale of residential house in Galway (i) Tax implications for Robert CGT As Robert and Stephen are connected persons, the consideration for the transaction will be deemed to be market value. Robert will have no CGT liability and will incur a loss of 100,000 (150, ,000) for CGT purposes. This loss will be of limited value to Robert because it will have occurred on a disposal to a connected person and can only be used to reduce any future gains arising on disposals to Stephen. (ii) Tax implications for Stephen Stamp duty Stamp duty of 1% of the deemed consideration (1,500) will be payable by Stephen. Tutorial note: Consanguinity relief does not apply to residential property. CAT Stephen is deemed to have received a gift of 30,000 from Robert, being the difference between the amount paid for the property (120,000) and its market valuation (150,000). The class 2 threshold will apply to this gift. The previous gift to Stephen from his son is also in the class 2 category and would have fully used up Stephen s tax free threshold. Therefore the gift arising on the house in Galway will be fully taxable and the CAT liability will be 8,415 ((30,000 1,500 3,000) x 33%). CGT As the property is an investment property, CGT would apply to any gain arising in the event of a future disposal. Stephen s base cost in the event of a future disposal would be 150,000. However, as the property was bought before 31 December 2013, there will be an exemption from CGT for any gains made within the first seven years of ownership. If the property is sold within seven years, any gain would be exempt. If the property is sold at a gain after seven years, relief would be given for the first seven years. Tutorial note: The above exemption has been extended to include properties bought prior to 31 December CAT on inheritances Norah There will be no inheritance tax payable by Norah (in relation to the cash or the life interest in the house) as a widow takes an inheritance from her husband free of inheritance tax. Kate In order to qualify for the relief for dwelling houses, the donee needs to have occupied the house continuously for three years prior to the inheritance as their only or main residence. Kate owns and lives in an apartment in Cork, so unless circumstances change, she is unlikely to qualify for this relief. Assuming this is the case: The value of Norah s right of residence will be an encumbrance on Kate s inheritance. The right of residence is valued using the formula: market value of property x (gross annual value of right of residence/gross annual value of property), i.e. 600,000 x 4,000/40,000 = 60,000. Therefore (based on current valuations) Kate s inheritance on the death of Robert would be valued at 540,000 (600,000 60,000) and her CAT liability would be 103,950 ((540, ,000) x 33%). Kate will have a further inheritance from Robert on the death of her mother and the cessation of her mother s right of residence. The value of this inheritance will depend on the market value of the property at that time. Tutorial note: The Revenue use 10% of the market value of the dwelling when valuing a right of residence. This approach is equally acceptable. 28

8 Tom An inheritance is regarded as taxable where: the donor is resident or ordinarily resident in the State; or the beneficiary is resident or ordinarily resident in the State; or the subject matter of the inheritance is located in the State. Therefore, as Robert was resident and ordinarily resident in Ireland, the UK investment property is liable to Irish inheritance tax. The residence status of Tom is not relevant. The total taxable value of Tom s inheritance would be 450,000 and his CAT liability would be 74,250 ((450, ,000) x 33%). Section 72 policy and the residue The proceeds of the s.72 policy, to the extent that they are applied to the payment of inheritance tax, are exempt from inheritance tax. In this case the total inheritance tax liabilities arising are calculated at 178,200 (103, ,250). So, the policy, at its current value of 200,000, exceeds these inheritance tax liabilities. The excess of the policy proceeds over the tax payable will form part of the residue of the estate and will be shared equally between the three children. Tax will be payable at the rate of 33% on this additional inheritance (to the extent that the beneficiaries have exceeded their tax-free thresholds). Tutorial note: The CAT arising on the gifts to Padraig is not a liability on Robert s death estate and would not be covered by the s.72 policy. 3 Nicole (a) (b) (c) Nicole is resident but not domiciled in Ireland in She is subject to Irish income tax on Irish-source income and on any foreign income remitted to Ireland. She is 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 the 2013 investment transactions 2 January 2013 The loss arising on the sale of shares in Antwerp Ltd is not allowable against capital gains subject to Irish tax. The lodgement of the 40,000 proceeds to the newly opened bank account in Brussels consists of capital only. 5 January 2013 The lodgement of 22,000 of rental income into the same bank account in Brussels has 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 May 2013 A total of 25,000 was withdrawn from a mixed fund. This is deemed to be 22,000 of income and 3,000 of the proceeds of the share disposal. 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. The 22,000 is deemed to have been remitted and is taxable in 2013 at Nicole s marginal rate of tax (41%), resulting in additional tax payable of 9,020. The proceeds of the share disposal arose out of a capital loss event and are therefore not subject to CGT. 31 July 2013 Nicole has realised a non-irish gain and will be subject to Irish CGT to the extent that she remits the proceeds to Ireland. The payment of her credit card from the proceeds of disposal of the foreign property constitutes a remittance. Nicole has effectively remitted 15,000 of the gain (as the gain is deemed to be remitted first) and she will have a CGT liability of 4,531 ((15,000 1,270) x 33%). Surrender of research and development (R&D) credits The relief for key employees engaged in R&D activities allows such employees to avail of the R&D tax credit to which their employer company is entitled. The main conditions and the operation of 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 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. 29

9 (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 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. Tutorial note: There is no relief from PRSI or USC. (d) Tax refunds due for the years 2013 and Salary 80, ,000 Remittance from (b) 22,000 Total income 102, ,000 Taxed as follows First 32,800 20% 6,560 6,560 Balance 41% 28,372 35,752 34,932 42,312 Less: Credits (2 x 1,650) (3,300) (3,300) 31,632 39,012 R&D credit claim (note) (8,172) (6,828) (15,000) Final tax liability 23% 23,460 27% 32,184 Less: Amount paid (22,612) (39,012) Balance payable (refundable) 848 (6,828) 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 2013 is therefore carried forward to (e) Tax implications of promotion Under an approved profit sharing scheme (APSS), an employer can give an employee shares in the employer company with a value of up to 12,700 in any tax year without there being an income tax charge on the employee. The proposed value of Nicole s shares is within this limit. The shares would firstly be allocated to Nicole and held in trust for her. The employee must retain the shares in the trust for at least three years or there will be a clawback of the income tax relief. If Nicole were to remove the shares from the trust within the three-year holding period (and immediately dispose of the shares), she would be deemed to have earned Schedule E income in the year in which the disposal takes place, on the market value of the shares when they were allocated to her or (if less) on the amount of the sales proceeds for the shares. Tutorial note: There is no exemption from USC or employee PRSI in relation to the granting of shares to Nicole. It is also important that the shares are not given in lieu of more than 7 5% of annual salary, as under the salary sacrifice legislation, any amount of remuneration foregone in excess of 7 5% could be subject to income tax. 4 (a) Technobuzz Plc (i) Tax relief in relation to specified intangible assets Capital allowances Companies carrying on relevant trades which incur costs on certain specified intangible assets are entitled to claim capital allowances on that expenditure. The specified intangible assets are intellectual property assets, examples of which are patents, registered designs, inventions, trademarks, brands, domain names and copyrights. The company has two options in relation to calculating the capital allowances: writing off in line with the depreciation or amortisation for accounting purposes; or writing off over a 15-year period, being 7% for years 1 to 14 and 2% for year 15. This option always applies where the intangible asset is considered to have an infinite life. A company will generally choose the option which offers the quickest tax relief. When the second option is chosen the company is required to make a claim in its tax return. 30

10 Where a specified intangible asset is held for more than five years and then disposed of, there will be no clawback of the capital allowances granted, unless the asset is sold to a connected company which then claims capital allowances on the asset. Tutorial note: The required holding period was ten years prior to 13 February Interest Interest on borrowings incurred in relation to the acquisition of specified intangible assets is also deductible (subject to the restriction outlined below). Restrictions (1) The allowances must be claimed against income from activities related to managing, developing or exploiting specified intangible assets (income from the relevant trade). This income must be separately identified. (2) The relief for capital allowances and certain interest costs is restricted to 80% of the gross income (i.e. income excluding such allowances and interest) from the deemed separate activity. The interest deduction must be claimed in priority to the capital allowances. Unused allowances and interest may be carried forward to future periods. (ii) Taxable income for the year ended 31 December 2013 Intangible assets capital allowances. Option 1: Accounting treatment Annual amortisation of patents (5,000,000/20) 250,000 Option 2: 7% per annum 350,000 Option 2 will be claimed because it is higher. Taxable income: Income excluding allowances and interest 600,000 Intangible asset capital allowance (note) (330,000) Interest costs incurred (150,000) Net income 120,000 Capital allowances carried forward 20,000 Note: The maximum relief available is 480,000 (80% x 600,000). The 150,000 interest is allowed in full and the capital allowances restricted to 330,000. (b) Sergeant Ltd Sergeant Ltd is a close company. Loan from George Pepper Interest on loans to a close company from a director who controls more than 5% of the share capital of that company is only tax deductible up to the lesser of 13% of the loan advanced or 13% of the issued share capital plus the share premium account. In this case, only 130 (13% of ( )) of the annual interest of 12,000 (200,000 x 6%) is deductible for corporation tax purposes. The remaining amount of interest, i.e. 11,870, is treated as a distribution. Sergeant Ltd must pay dividend withholding tax (DWT) of 2,374 (i.e. 20% x 11,870) to the Revenue by 14 January Sergeant Ltd should deduct 20% income tax on the interest element of the loan, i.e. 26 (130 x 20%), and pay this to the Revenue along with its normal corporation tax liabilities. George will be liable to income tax under Schedule F together with PRSI and USC in respect of the deemed distribution element of 11,870 at his marginal rate of 52%. He will receive a credit for the 2,374 DWT deducted by the company. George will also be liable to income tax, PRSI and USC under Schedule D Case IV in respect of the 130 allowable interest element of the payments made to him in respect of the loan to the company. A credit will be given for the 26 of income tax deducted at source. Recommendations Additional salary should be paid to George instead of interest. Although this would be subject to payroll taxes at source, at least the company would receive a corporation tax deduction for the salary paid, provided the total salary can be justified in relation to the duties which George provides to the company. The company should repay George at the earliest opportunity and borrow the required funds directly from their bank; or Increase the share capital and share premium of the company. 31

11 Golf club admission paid for John Kite As John Kite is a shareholder who is not a director or employee of Sergeant Ltd, the payment of 10,000 for his golf club levy is treated as a distribution for tax purposes. The implications of this are as follows: The payment of 10,000 is not deductible in calculating Sergeant Ltd s corporation tax, as it is treated as a distribution. Sergeant Ltd must pay 2,000 (10,000 x 20%) of DWT on this distribution to the Revenue by 14 August John will be treated as having received Schedule F income and (as for George above) will be liable to income tax, PRSI and USC on this income at his marginal rate of 52%. Sergeant Ltd should request that John Kite repay the DWT of 2,000 to the company. If John Kite does not repay the DWT, the distribution could be re-grossed and this would result in an increased DWT liability for the company and an increased income tax liability for John Kite. Both the amounts treated as distributions will reduce the company s exposure (if any) to the close company surcharge. 5 Mary Joplin (i) (ii) (iii) Capital gains tax (CGT) on the sale of the building Sales proceeds 500,000 Less: Cost (1992/93) 150,000 Deduct relief on reinvestment of insurance proceeds (30,000) Adjusted cost 120,000 Indexation factor (1992/93) (162,720) Chargeable gain 337,280 Less: Annual exemption (1,270) Taxable gain 336,010 CGT at 33% 110,883 Tutorial note: The amount of 30,000 spent on repairs to the damaged property is not capital expenditure and so the reinvestment of the proceeds would not normally have qualified as a deduction in computing a gain or loss for CGT purposes. It would be assumed that the repair costs would have been allowed as an income tax deduction. 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 value added tax (VAT) at 13 5%. Tutorial note: The two and five-year rules do not apply to the sale of land. The sale of this site is subject to VAT for a period of 20 years from when the development work is completed. Sales to overseas customers French VAT-registered customer The supply of goods to a VAT-registered customer in another EU state can be zero rated provided: the customer is registered for VAT in that EU member state; the customer s VAT registration number is obtained and retained in the supplier s records; the customer s VAT registration number, together with the supplier s VAT registration number, is quoted on the sales invoice; and the goods are dispatched and transported to the member state. The nil rate of VAT can be charged to the French customer, provided the above conditions are met. German private individual 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. The amount of the sale and the registration threshold for Germany have not been given, but on the assumption that Mary has not yet exceeded the registration threshold for Germany, she would not yet be obliged to register for German VAT and she should charge Irish VAT on the sale at the applicable rate. 32

12 Canadian sale Where goods are exported outside the EU, VAT is always charged at the zero rate. Mary must retain documentary evidence that the goods were transported outside the EU in the event of a request from the Revenue. (iv) (v) (vi) Machine A The German supplier will not charge German VAT to Mary, if she provides a valid VAT registration number. Mary must account for VAT on the reverse charge basis. This means that she must account for a simultaneous sale and purchase of the goods acquired for Irish VAT purposes. In her VAT return for the period of acquisition, output VAT of 23,000 (100,000 x 23%) must be accounted for. An input VAT credit of 23,000 can be claimed in the same VAT return. As Mary is entitled to reclaim an input credit, the net effect is VAT neutral. Machine B VAT implications Leasing the equipment The lessor will charge VAT on the lease rentals but this VAT can be reclaimed by Mary. Buying the equipment The supplier will charge VAT on the equipment but, again, this can be reclaimed by Mary in the period in which the equipment is bought. Conclusion Both options are VAT neutral for Mary as she is VAT registered. Income tax implications Leasing the equipment The five equal annual lease rentals payable (net of VAT) can be claimed in full as a tax deductible expense in the years in which they arise. As the rental consists of a capital and interest element, effectively there will be five annual tax write offs of 20% of the asset cost plus the associated interest. Buying the equipment Capital allowances at the rate of 12 5% per annum can be claimed for years 1 to 4. At the end of year 4, a total of 50% (4 x 12 5%) of the asset cost will have been written off in the form of capital allowances. As the asset has a nil value at the end of year 5, a balancing allowance may then be claimed in respect of the remaining 50% of the asset s cost. The interest on the bank loan will be a tax deductible expense as incurred for the duration of the five-year loan. Conclusion Both options write off the cost of the asset over its five-year life and give a tax deduction for the cost of finance. However, the leasing option offers a slightly quicker tax write off in years 1 to 4. This may offer a cash flow advantage in the case of a high value asset, but would be less significant for lower value assets. Purchase of a second-hand category D car VAT VAT is not reclaimable on the cost of the car as: the car was first registered before 1 January 2009, and the car is not in category A, B or C regarding emissions. VAT is not reclaimable on the petrol. Income tax Capital allowances can only be claimed on an amount of 12,000 (the category D limit of 24,000 x 50%) and these will be further restricted for Mary s private usage. Recommendation Mary should buy a new category A, B or C car. As Mary s business use of the car is greater than 60%, she will be entitled to reclaim 20% of the VAT included in the price in the case of a car in any of these categories which is registered after 1 January This VAT reclaim is not restricted by the private usage of the car. Capital allowances (restricted for Mary s private usage) will be based on an amount of 24,000 regardless of the cost of the car. If the car is a diesel car, it will also be possible to reclaim the VAT on the diesel used in relation to her business. 33

13 Professional Level Options Module Paper P6 (IRL) Advanced Taxation (Irish) December 2014 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 (a) VAT implications of the disposal of the premises Not subject to VAT 0 5 More than five years since it was built 0 5 Development did not materially alter the property 0 5 Cost of development was less than 25% of consideration (b) CT liabilities under the existing structure 2013 computation, Piano Ltd 0 5 Loss memorandum computation, Forte Ltd computation, Forte Ltd 0 5 Chargeable gains computation, premises 1 0 Chargeable gains computation, goodwill 0 5 Summary of figures in the memorandum 1 0 Unrelieved losses carried forward at 31 December (c) (i) Evaluation of advice received from Mark Meadows Current structure does not allow transfer of losses 0 5 Date contract is signed is relevant date for CGT 1 0 Proposed 75% shareholding will constitute a loss group 0 5 Suggested structure will qualify for share for share relief 0 5 Clawback of CGT relief if Piano Ltd leaves the group within 10 years 1 0 Significance of forming the group pre 1 January Trading losses must be firstly set against profits arising in Piano Ltd 0 5 Current year group loss relief only, no carry back to prior year 0 5 Recommendation re date of formation of group and signing of contract 1 0 Recommendation re 90% shareholding to avail of stamp duty relief (ii) Position of Mark as a trainee accountant 1 5 Risks arising to Mark re giving advice (d) (e) (f) Recalculation of CT liabilities Piano Ltd, no change in liability computation, Forte Ltd computation, Forte Ltd 1 5 Summary, showing difference in CT liabilities Taxable income calculation Calculation of high earner s restriction 2 5 Computation of taxable income 1 0 Summary in memorandum Comparison of pension scheme to EIIS EIIS gives a faster return of investment 1 0 EIIS 30% tax relief with a conditional 11% after three years 1 0 Pension: immediate 41% tax relief 0 5 Higher earner s restriction affects EIIS relief but not pension 1 0 Non-tax issues: risk and choice of portfolio

14 (g) Available Maximum Comparison of pension options Tax issues (3 x 1) 3 0 Non-tax issues re SSAPs 1 0 Recommendation (h) Tax implications of disposing of the s.23 property CGT 0 5 Clawback of s.23 relief (deemed additional rental income) 1 0 VAT Professional marks Format and presentation of the memorandum 1 0 Effectiveness of written communication 1 0 Appropriate use of support schedules/appendices 1 0 Logical flow of calculations

15 Available Maximum 2 (a) Tax liabilities re transfer of shares and premises (i) Robert Eligibility for retirement relief on transfer of shares 3 0 Eligibility for retirement relief on transfer of premises (ii) Padraig Gift of shares in Augusta Ltd Stamp duty 1 0 CAT No discount 1 0 Eligibility for business property relief 1 0 Calculation of taxable value 1 0 Gift of business premises Stamp duty 1 0 CAT Will not qualify for business property relief 1 0 Calculation of taxable value 0 5 Calculation of overall CAT liability (b) (c) (d) Recommendations Bring forward the date of transfer of the premises to a date when Robert is still the controlling shareholder 1 0 Reduction in taxable value of premises and nil CAT liability 0 5 Holding period of six years to avoid clawback Sale of residential house in Galway (i) Robert Connected persons, consideration deemed to be market value 0 5 Loss of 100, Limitation on the use of a connected person loss (ii) Stephen Stamp duty 0 5 Gift of 30, Aggregate class 2 gift 0 5 Calculation of CAT 1 0 CGT base cost 0 5 CGT seven year exemption Inheritances Norah No tax payable by Norah (husband to wife) 0 5 Kate Dwelling house relief: feasibility of a claim 1 0 Value of right of residence 1 0 CAT payable by Kate on inheritance from Robert 1 0 Additional inheritance and tax by Kate on the death of her mother 0 5 Tom Inheritance is subject to CAT because Robert was resident 1 5 CAT liability 0 5 Section 72 policy and residue Explanation of CAT benefit of s.72 policy 1 5 Excess is taxable and will form part of the residue

16 Available Maximum 3 (a) Implications of Nicole s residence and domicile status She 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 any foreign gains remitted 0 5 Losses on assets located outside Ireland are unrelievable in Ireland (b) (c) (d) Investments Disposal of shares in Antwerp Ltd Loss is not allowable against Irish capital gains 0 5 The bank account contains capital only 0 5 Lodgement of rental income The bank account is now a mixed fund 0 5 Income is deemed to arise in the year of remittance 0 5 Withdrawal of 25,000 Deemed to be 22,000 income and 3,000 capital 1 0 Explanation of how the purchase of the car is a remittance 1 0 Calculation of income tax payable 0 5 Payment of credit card Liable to CGT on remittances 0 5 Explanation of how the payment of the credit card constitutes a remittance 1 0 Calculation of CGT payable Relief re surrender of R&D credits to key employees Employee must be a key employee 1 0 Explanation of the term key employee 2 0 Employee must have a minimum effective tax rate of 23% 1 0 Surrendered amount cannot exceed company CT 0 5 All tax deducted from employee on emoluments must have been paid over to the Revenue 0 5 Reduction in income tax is made in the tax year following the tax year during which the company made a claim for the R&D credit 0 5 Unutilised credits may be carried forward by the employee until they are used or until the employee leaves the company Calculation of tax refund due to Nicole (e) Value of shares within the annual limit 1 0 Three-year holding period requirement 1 0 Consequences of removal within three years

17 Available Maximum 4 (a) (i) Tax relief specified intangible assets Definition of specified assets, including examples 1 5 Options for calculating the capital allowances 1 0 Rule in relation to assets with an infinite life 0 5 Need for claim re 15-year period write off 0 5 Rule in relation to clawback 1 0 Interest is allowed on borrowings re specified assets 0 5 Restrictions Claim can only be against income from managing, developing or exploiting the asset 1 0 Relief for capital allowances and interest is restricted to 80% of the gross income 1 0 Restriction applies firstly re the capital allowances, then the interest (ii) Calculation Calculation of 250, Calculation of 350, Calculation of taxable income, including the restriction (b) Rule relating to the 13% restriction deductible for CT purposes 0 5 Calculation of distribution and DWT 1 0 Date of payment of DWT 0 5 Company must deduct 20% income tax on interest element 0 5 George is liable to income tax under Schedule F together with PRSI and USC on the deemed distribution but will receive a credit for DWT deducted 1 5 George is liable to income tax, PRSI and USC under Schedule D, Case IV in respect of the interest element with a credit for the income tax deducted 1 0 Recommendation (any one of the three suggested actions) 1 0 Payment re John Kite is a distribution, with reasons 1 0 Distribution is not tax-deductible by the company 0 5 Calculation of DWT payable by company 0 5 Payment date for DWT 0 5 Taxation of Schedule F income received by John (as for George above) 0 5 John should repay DWT to the company 0 5 Consequences of John not repaying the DWT 0 5 Both deemed distributions will reduce the company s exposure to the close company surcharge

18 Available Maximum 5 (i) Deduction of compensation proceeds from base cost 1 0 CGT computation (ii) (iii) (iv) (v) Works done under the land with the intention of adapting it for a materially altered use constitutes development 1 5 Development completed within 20 years of sale 1 0 Sale is subject to VAT French sale Zero rated if all conditions met 0 5 Conditions for zero rating (4 x 0 5) 2 0 German sale Rule for distance sales to non VAT-registered EU customers 1 5 Conclusion Irish VAT chargeable at the applicable rate 1 0 Canada sale Zero rated for goods exported outside the EU Machine A No VAT payable 1 0 Account on the reverse charge basis Machine B VAT implications of lease versus buy decision 1 0 Income tax implications of lease versus buy decision 3 0 Conclusion (vi) VAT not reclaimable on the car 0 5 VAT not reclaimable on petrol 0 5 Capital allowance restrictions 1 0 Recommendation re new category A/B/C car 0 5 VAT refund 1 0 Increased capital allowances 0 5 VAT claimable on business fuel if a diesel car