Advanced Taxation. Republic of Ireland (ROI) Suggested Solutions to Practice Questions. Professional, Practical, Proven

Transcription

1 Advanced Taxation Republic of Ireland (ROI) Suggested Solutions to Practice Questions Professional, Practical, Proven

2 Table of Contents Part A:... 2 Part B:... 7 Part C: Part D: Part E: Part F:... 56

3 Part A 2135 Solution (a) Tax residence (b) (i) (ii) (iii) (a) An individual is resident in Ireland for a tax year if he is present in Ireland for 183 days or more in a tax year; or 280 days or more in two consecutive tax years (known as the 280 day rule). A person is regarded as being present in Ireland if he is present at any time during a day. In connection with the 280 day rule, a person will not be regarded as resident for a tax year in which he has spent less than 30 days in total in the State. Ordinarily resident A person is ordinarily resident in Ireland for a tax year if he has been resident for all of the three previous tax years. A person will cease to be ordinarily resident only after he is non-resident for three consecutive tax years. Domicile Domicile is a legal concept and is not defined in tax legislation. A person cannot be without domicile. A domicile of origin is where the person was born. A child will acquire the domicile of his father, or if the child s parents are not married, the child s domicile will be the same as the mother. A person may acquire a new domicile of choice. The onus is on the person to prove that he has abandoned his domicile of origin and a new domicile has been acquired. The person must show an intention to reside in the new country of domicile indefinitely. Taxation implications: Being Irish resident and Irish domiciled The individual will be taxed on worldwide income. Being Irish resident and non Irish domiciled The individual will be taxed on the remittance basis - all Irish sources of income, foreign income to the extent that it is remitted/brought into Ireland and employment income earned where the duties of employment are carried out in Ireland. Being non resident but ordinarily resident in Ireland The individual will be taxed on worldwide income, excluding: income earned from duties of employment carried on outside the State; and (b) foreign investment income if it is less than 3,810. Page 2 of 61

4 2137 Solution In order to be considered resident in Ireland for income tax purposes, a person must be in Ireland for: 183 days or more in a tax year, or 280 days or more in two consecutive tax years (known as the 280 day rule). A person is regarded as being present in Ireland if he is present at any time during a day. In connection with the 280 day rule, a person will not be regarded as resident for a tax year in which he has spent less than 30 days in total in the State. (a) The table below sets out the number of days that Greg has spent in Ireland since (b) (i) (ii) (iii) Tax year Dates Days Resident Ordinarily resident NO NO Jul 2016 to 31 Dec NO NO Jan 2017 to 31 Dec YES NO As Greg is a US citizen, it is assumed that he is also domiciled in the US and does not intend to change this. The income tax implications of Greg s time in Ireland are as follows: 2015 Greg spent 32 days in Ireland in He was therefore not resident in Ireland in He is taxed on Irish source income only, for example, income from an Irish rental property, an Irish bank account or a trade/profession/employment that is exercised in Ireland Greg moved to Ireland on 19 July He therefore spent 166 days in Ireland in This is less than 183 days in one tax year. Greg spent 32 days in Ireland in 2015 so therefore spent 198 days in Ireland in 2015 and 2016 combined. Greg does not meet the 280 day rule. He is therefore not resident in Ireland for He is taxed on Irish source income only for Greg spent 325 days in Ireland in He is therefore resident in Ireland in As he is not ordinary resident or domiciled in Ireland, he is subject to income tax in Ireland on the remittance basis. The remittance basis of assessment means that he is subject to income tax on the following: Irish source income; Foreign income remitted into Ireland; Employment income earned where the duties of employment are carried out in Ireland. As the duties of Greg s employment are being carried out in Ireland, the salary of 347,000 is subject to income tax in Ireland in As he has not remitted the UK dividend income or US rental income to Ireland (they have been lodged to his UK and US bank accounts respectively), he is not subject to Irish income tax on this income. Page 3 of 61

5 2138 Solution (a) The system applies to subcontractors working in the construction industry, forestry operations and meat processing industries. (b) It places an obligation on the principal contractor to deduct withholding tax of 0%, 20% or 35% from payments to subcontractors. The withholding tax deducted is paid to the Revenue Commissioners by the principal contractor. The subcontractor is then entitled to offset the withholding tax against tax liabilities owed to the Revenue Commissioners. Relevant Contracts Tax applies to relevant operations, which includes: 1. Construction, alteration, repairs, extension, demolition or dismantling of buildings or structures; 2. Installation in a building of a system of heating, lighting, air conditioning, sound proofing, ventilation, power supply, drainage, sanitation, water supply and burglar or fire protection; 3. Development of land; 4. Construction, alteration, repairs, extension or demolition of any works forming part of the land, including walls, roadworks, power lines, telecommunications systems, water mains; 5. External or internal cleaning of a building so far as carried out as part of the construction, alteration, repairs, extension of the building; 6. Forestry operations and meat processing operations. (c) The principal contractor is required to notify the Revenue Commissioners through ROS when he enters into a relevant contract with a subcontractor (referred to as contract notification). The principal contractor should establish the identity of the subcontractor engaged on a relevant contract. The Revenue Commissioners will acknowledge the contract notification and advise the principal contractor of the rate of RCT applicable to the subcontractor. In general, the rate advised will depend on the subcontractor s tax compliance record. A subcontractor, who has a good compliance record and qualified for 0% rate prior to the introduction of the online system, will continue to receive payments with 0% RCT deducted. Page 4 of 61

6 2139 Solution Professional Services Withholding Tax (PSWT) is required to be deducted by accountable persons making a payment to an individual or company for professional services. Accountable persons are generally public / state bodies, including: All Government departments; HSE; RTE; ESB; An Bord Bia; Semi state bodies; State sponsored bodies. Professional services include: Medical, dental, pharmaceutical, optical, veterinary; Architectural, engineering and surveying; Accountancy, auditing, financial services, marketing, advertising and consultancy; Solicitors, barristers; Training services on behalf of SOLAS. Examples: A solicitor providing legal services to a Government body; Doctors receiving payments from the HSE for providing services to patients under the medical card scheme; An engineer providing services to the ESB; An advertising company receiving payment for services provided to RTE. Mary should receive a certificate (Form F45) confirming the gross payment due to her business and the PSWT deducted from the payment. The gross payment should be included in Mary s income tax computation. Mary is also entitled to include a refundable tax credit for the PSWT deducted from the payment. Mary will therefore receive a refundable tax credit for the PSWT in her income tax computation. Page 5 of 61

7 2141 Solution (a) A taxpayer has three options available to calculate the preliminary income tax payment that is required to be paid for a tax year: 1. 90% of the current year s final income tax liability; % of the preceding year s final income tax liability; % of the pre-preceding year s income tax liability. (b) The105% option is only available if the direct debit option is used and it cannot be used if the tax liability for the pre-preceding year was nil. The Revenue Audit is used by the Revenue Commissioners to examine and verify the amounts/returns being submitted by taxpayers. It allows the Revenue Commissioners to carry out a detailed examination of the items included on a tax return to ensure that the income and claims for allowances and credits are correct. The system is required because the self-assessment system is based on the taxpayer s calculations and declarations. Page 6 of 61

8 Part B 2145 Solution Johnson Property 1 (w2) 7,349 Property 2 (w2) 170 Commercial property (w4) 14,663 Assessable Schedule D Case V income 22,182 Workings w1 Mortgage interest - residential property 2 In order to claim relief for interest paid on an Irish rental property, each tenancy must be registered with the Residential Tenancies Board (RTB). As Johnson has not registered the new tenancy with the RTB, he can only claim interest relief for interest paid on the tenants occupying the property from January to May ,080 x 5/12 2,117 Residential relief restricted to 80% 1,694 w2 Property 1 Property 2 Residential Case V income Rental income 19,000 7,807 Expenses: Mortgage interest ( 10,900 x 80%) (8,720) Mortgage interest (w1) (1,694) Insurance (927) (1,420) Cleaning (457) (1,531) Repairs (1,178) (1,536) Light and heat (369) (1,456) Profit or loss 7, w3 Commercial property mortgage interest Mortgage interest paid 6,870 Disallowed pre-letting expense (from April to August) (3,053) 3,817 w4 Commercial Case V income Rental income ( 1,600 x 5) 8,000 Premium ( 29,000 x (51-30)/50) 12,180 20,180 Allowable expenses: Mortgage interest (w3) (3,817) Estate agent fees (860) Legal fees (840) (5,517) 14,663 Page 7 of 61

9 2146 Solution Maurice and Zelda Income tax computation for 2017 Maurice Zelda Joint Schedule D Case IV deposit interest (w1) ,592 Schedule D Case V rental income (w3) 3,847 3,847 7,694 Schedule E salary 125, ,000 Schedule E benefit in kind (company car) (w4) 10,980 10,980 Schedule E benefit in kind (leisure centre) 1,990 1, ,613 4, ,256 Taxation: 42,800 x 20% 8,560 1,592 x 39% ,864 x 40% 41,146 Non-refundable tax credits: Married persons tax credit 3,300 PAYE employee tax credit 1,650 Medical expenses (w6) 408 DIRT deducted ( 1,592 x 39%) 621 Home carer tax credit (w5) 1,100 USC: Maurice 12,012 x 0.5% 60 6,760 x 2.5% ,272 x 5.0% 2,564 71,773 x 8% (exclude deposit interest from which DIRT deducted) 5,742 Zelda Income is below the 13,000 total income threshold for USC. 50,327 (7,079) 43,248 8,535 PRSI: Maurice 142,613 x 4% 5,705 Zelda Income below the 5,000 minimum income threshold for PRSI. 57,488 Refundable tax credits: PAYE paid in 2017 (52,900) Amount payable by Maurice and Zelda 4,588 Workings w1 Deposit interest Net amount /61% (gross) 1,592 Page 8 of 61

10 Maurice 796 Zelda 796 w2 Mortgage interest P1 P2 French Interest paid 7,120 8,620 7,970 Disallow pre-letting mortgage interest ( 8,620 x 6/10) (5,172) 7,120 3,448 7,970 Relief restricted to 80% 5,696 2,758 6,376 w3 Rental income P1 and P2 P1 P2 French Rental income 15,756 3,342 9,700 Expenses: Mortgage interest (w2) (5,696) (2,758) (6,376) Repairs (1,060) (2,470) Cleaning (500) (450) Letting fees (1,390) (1,060) 7,694 8,500 (806) (656) Maurice 3,847 Zelda 3,847 Tutorial notes: Repairs on property 2 are pre-letting expenses - disallowed. Cleaning cost for property 2 are pre-letting expenses - disallowed. The loss arising on the French property is a Case III loss. This loss is only available against Case III income and cannot be used against Case V income. w4 Benefit in kind (company car) Original market value 36,600 Business travel (kms) 6,720 BIK percentage 30% 10,980 Tutorial note: No BIK for company pension contributions. w5 Home carer tax credit or increased standard rate tax band (i) Home carer tax credit (maximum) 1,100 (ii) Increased standard rate tax band ( 3,847 x 20%) (exclude deposit interest) 769 In this case, option (i) is the more valuable option. Tutorial note: They must choose between the home carer tax credit and the increased standard rate tax band. They cannot choose both. w6 Medical expenses Page 9 of 61

11 Expenses incurred 3,520 Reimbursed (1,480) Qualifying for relief 2,040 Tax relief at 20% 408 Page 10 of 61

12 2148 Solution Joseph Smith Income tax computation for 2017 Schedule E salary 54,102 Round sum expenses ( 490 x 8 months) 3,920 Benefit in kind ( 81,000 x 4% x 4/12) 1,080 Schedule F Irish dividend grossed up ( 910/80%) 1,138 60,240 Taxation: 33,800 x 20% 6,760 26,440 x 40% 10,576 17,336 Non-refundable tax credits: Personal tax credit 1,650 Employee PAYE tax credit 1,650 Tuition fees (( 2,200-1,500) x 20%) 140 Rent relief ( 400 (max.) x 20%) 80 (3,520) 13,816 USC: 12,012 x 0.5% 60 6,760 x 2.5% ,468 x 5.0% 2,073 2,302 PRSI: 60,240 x 4% 2,410 18,528 Refundable tax credits: PAYE paid in ,210 Dividend withholding tax ( 1,138 x 20%) 228 (17,438) Amount payable by Joseph Smith 1,090 Tutorial notes: Mortgage taken out after 31 December no tax relief in relation to mortgage interest. Rental income - tax free under rent a room scheme (up to 14,000). Page 11 of 61

13 2149 Solution Lillian Powell Income tax computation for 2017 Schedule D Case IV credit union dividend 910 Schedule D Case V rental income (w1) 5,152 Schedule E salary 49,489 Schedule E benefits in kind (w2) 8,624 Schedule F Irish dividend grossed up ( 780/80%) ,150 Taxation: 37,800 x 20% 7, x 39% ,440 x 40% 10,576 18,491 Non-refundable tax credits: Personal tax credit 1,650 Single person child carer credit 1,650 Employee PAYE tax credit 1,650 DIRT deducted ( 910 x 39%) 355 (5,305) 13,186 USC: 12,012 x 0.5% 60 6,760 x 2.5% ,468 x 5.0% (exclude interest from which DIRT deducted) 2,273 2,502 PRSI: 65,150 x 4% 2,606 18,294 Refundable tax credits: PAYE paid in ,500 Dividend withholding tax ( 975 x 20%) 195 (16,695) Amount payable by Lillian Powell 1,599 Workings w1 Rental income Gross rent received ( 1,030 x 6 months) 6,180 Expenses: Letting fees (770) Insurance ( 430 x 6/10) (258) 5,152 Tutorial notes: Property not registered with RTB so mortgage interest not allowable. Insurance cost prior to letting is disallowed as a pre-letting expense. w2 Benefits in kind Page 12 of 61

14 (i) (ii) Company car Original market value 47,900 Business travel (51,500 kms x 95%) 48,925 BIK percentage 6% 2,874 Reimbursed to company (460) 2,414 Preferential loan 54,000 x (13.5% - 2.0%) 6,210 8,624 Tutorial note: Professional subscription relates to work => no BIK. Page 13 of 61

15 2150 Solution Thomas and Maria Income tax computations for 2017 Thomas Maria Joint Schedule E salary 81,800 18,135 99,935 Schedule E commission 13,000 13,000 Schedule E bonus (earned in 2017) 3,100 3,100 Schedule E benefits in kind (w1) 20,068 20,068 Schedule D Case IV income (w2) 2,551 2,551 Schedule D Case V income 3,389 3,389 Schedule F income ( 653/80%) Schedule F income ( 4,340/80%) 5,425 5, ,724 23, ,284 Pension contributions ( 350 x 12) (4,200) (4,200) 120,524 23, ,084 Taxation: 33,800 x 20% 6,760 23,560 x 20% 4,712 2,551 x 39% ,173 x 40% 33,669 42,800 x 20% 8,560 23,560 x 20% 4,712 2,551 x 39% ,173 x 40% 30,069 41,424 4,712 44,336 Non-refundable tax credits: Personal tax credit (1,650) (1,650) (3,300) PAYE employee tax credit (1,650) (1,650) (3,300) DIRT deducted (w2) (995) (995) 37,129 1,412 36,741 Refundable tax credits: PAYE paid in 2017 (34,010) (34,010) Dividend withholding tax (163) (1,085) (1,248) Tax payable 2, ,483 Year of marriage relief: Thomas Maria Total Tax liability as single persons 37,129 1,412 38,541 Tax liability under joint assessment 36,741 Additional liability when assessed as single persons 1,800 Date of marriage is 1 March 2017 => relief for 10 months ( 1,800 x 10/12) 1,500 Thomas's portion ( 1,500 x 37,129/38,541) 1,445 Maria's portion ( 1,500 x 1,412/38,541) 55 Workings w1 Page 14 of 61

16 Benefits in kind (i) Company car Original market value 45,000 Business travel (May to December) (kms) 16,400 Annual equivalent business kms 24,600 Annual BIK percentage 24% Annual BIK 10,800 BIK in respect of May to December 7,200 (ii) Accommodation Open market value ( ) 140,000 BIK at 8% 11,200 Market rent ( 1,000 x 12) 12,000 BIK in respect of accommodation (lower of two calculated figures) 11,200 (iii) Golf club membership 762 (iv) Preferential loan Annual BIK ( 13,500 x (13.5% - 2.0%)) 1,553 BIK for period from June to December ,068 w2 Schedule D Case IV income Credit union income 933 Bank deposit interest 623 1,556 DIRT at 39% 995 Gross interest 2,551 Page 15 of 61

17 2260 Solution (a) Gavin Hughes Income tax computation for 2017 Schedule D Case IV deposit interest ( 640/61%) 1,049 Schedule E employment income (w1) 61,590 Schedule F dividend income ( 640/80%) 800 Charges: 63,439 Covenant (10,100) Taxation: 33,800 x 20% 6,760 1,049 x 39% ,490 x 40% 7,396 Non-refundable tax credits: Personal tax credit 1,650 PAYE tax credit 1,650 DIRT deducted ( 1,049 x 39%) 409 Tuition fees (( 2,390-1,500) x 20%) ,339 14,565 (3,887) 10,678 Tax on covenant ( 10,100 x 20%) 2,020 Refundable tax credits: PAYE paid 11,290 Dividend withholding tax ( 800 x 20%) 160 (11,450) Tax liability outstanding 1,248 Tutorial notes: The covenant is allowable in full because Shelly is a permanently incapacitated adult. Relief for private health insurance is given at source. It is not required to be included in the income tax computation. As Gavin Hughes was not away from his employer s place of business for at least 70% of the time, he is not entitled to the 20% deduction in the BIK. Workings w1 Schedule E employment income - Gavin Hughes Salary 40,100 Page 16 of 61

18 Commission 12,250 BIK - company car ( 30,800 x 30%) 9,240 61,590 (b) Shelly Income tax computation for 2017 Schedule D Case IV covenant income 10,100 Schedule E employment income 7,100 Taxation: 17,200 17,200 x 20% 3,440 Non-refundable tax credits: Personal tax credit 1,650 PAYE tax credit ( 7,100 x 20%) 1,420 Medical expenses ( 2,710 x 20%) 542 Refundable tax credits: (3,612) Tax paid on covenant ( 10,100 x 20%) (2,020) Tax refund receivable 2,020 nil Page 17 of 61

19 Part C 1840 Solution F. Mondeo's income tax computation 2017 Schedule D Case V income 25,900 Taxed at 20% 5,180 Single person tax credit (1,650) Age tax credit (245) 3,285 Check for marginal relief: ( 25,900-18,000) x 40% 3,160 Income tax liability (lower of the two calculated amounts) 3,160 Page 18 of 61

20 2153 Solution Homer McCartney Year of assessment Year Basis of assessment From 1 February to 31 December 2011 (i) 1 Feb to 31 Oct ,200 (ii) 1 Nov to 31 Dec 2011 ( 19,100 x 2/8) 4,775 18, Twelve months ended 30 June 2012 (i) 1 Jul 2011 to 31 Oct 2011 ( 14,200 x 4/9) 6,311 (ii) 1 Nov 2011 to 30 Jun ,100 25, Twelve months ended 30 June ,800 Year 2 revision Assessed profit 25,411 Actual year from 1 Jan 2012 to 31 Dec 2012: 1 Jan to 30 Jun 2012 ( 19,100 x 6/8) 14,325 1 Jul to 31 Dec 2012 ( 23,800 x 6/12) 11,900 Actual year 2 profit is greater than assessed year 2 profit. No adjustment required. 26,225 23, Twelve months ended 30 June , Twelve months ended 30 June , Penultimate Twelve months ended 30 June ,200 Penultimate year revision Actual from 1 January 2016 to 31 December 2016: 1 Jan to 30 Jun 2016 ( 34,200 x 6/12) 17,100 1 Jul to 31 Dec 2016 ( 23,400 x 6/9) 15,600 32,700 Actual penultimate year profit is less than original assessment. No adjustment to original assessment. 34, Final Actual basis (1 Jan 2017 to 31 Mar 2017) 23,400 x 3/9 7,800 Page 19 of 61

21 2155 Solution Mandy Capital allowances 2017 Plant and equipment (w2) 40,888 Motor vehicles (w3) 3,938 Balancing allowance - trucks (w4) 4,150 Balancing allowance - motor vehicles (w5) 2,160 51,136 Workings w1 Additions to plant and equipment Computer equipment 78,000 Not in use at year end ( 2,800 x 9) (25,200) 52,800 Truck 42,000 94,800 Tutorial note: Computers must be in use in order to claim capital allowances. w2 Capital allowances - plant, equipment and trucks Total Cost 96, ,600 Additions (w1) 94,800 Disposals - trucks (93,300) 96, ,300 94,800 Tax written down value at 1 January , ,800 Additions (w1) 94,800 Disposals (46,650) Wear and tear at 12.5% for 2017 (12,000) (17,038) (11,850) (40,888) Tax written down value at 31 December ,000 51,112 82,950 w3 Capital allowances - motor vehicles Total Qualifying cost (based on emissions) 24,000 Additions (qualifying costs) 7,500 24,000 Disposals (24,000) 7,500 24,000 Tax written down value at 1 January ,000 Additions (qualifying costs) 7,500 24,000 Disposals (12,000) Wear and tear at 12.5% for 2017 (938) (3,000) (3,938) Tax written down value at 31 December ,562 21,000 Tutorial note: No capital allowances available in respect of leased vehicle. Page 20 of 61

22 w4 Balancing allowance - trucks Proceeds 42,500 Tax written down value (w2) 46,650 4,150 w5 Balancing allowance - motor vehicles Proceeds ( 12,300 x 24,000/ 30,000) 9,840 Tax written down value (w3) 12,000 2,160 Page 21 of 61

23 2156 Solution Bernard Laurelio Income tax computation for 2017 Bernard Spouse Joint Schedule D Case V rental income 4,000 Schedule E salary 60,460 Schedule F dividend income ( 2,300/80%) 2,875 4,000 63,335 67,335 S381 loss ( 4, ) (4,000) (840) (4,840) 62,495 62,495 Pension contributions (w1) (15,115) (15,115) 47,380 47,380 Taxation: 42,800 x 20% 8,560 4,580 x 40% 1,832 10,392 Non-refundable tax credits: Married person tax credit 3,300 PAYE employee tax credit 1,650 Medical expenses ( 1,600 x 20%) 320 (5,270) 5,122 USC: Spouse 12,012 x 0.5% 60 6,760 x 2.5% ,563 x 5.0% 2,228 2,457 Bernard Laurelio Total income is below the 13,000 threshold for USC. PRSI: Spouse ( 63,335 x 4%) 2,533 Bernard Laurelio's income is below the 5,000 threshold for PRSI. 10,112 Refundable tax credits: PAYE paid by spouse in ,870 Dividend withholding tax ( 2,875 x 20%) 575 (9,445) Tax payable by Bernard Laurelio and spouse 667 Workings w1 Pension contribution Spouse Net relevant earnings 60,460 At age 48, the relevant percentage of net relevant earnings is 25%. Maximum relief that can be claimed in ,115 Page 22 of 61

24 Premiums paid in ,900 Amount on which tax relief can be claimed in ,115 Tutorial notes: Bernard Laurelio has no taxable income in 2017 so cannot claim any relief for pension contributions in There is no increase in the standard rate tax band because Bernard Laurelio's income is reduced to nil by losses. Page 23 of 61

25 2157 Solution Jeremy Schedule D Case I tax adjusted profit for 2017 Profit per financial statements 21,865 Adjust: Deposit interest received (3,320) Dividends received (4,250) Depreciation 8,200 Drawings 17,600 Preliminary tax paid 4,050 Legal fees relating to purchase of shop 2,130 Motor expenses - personal use ( 5,400 x 40%) 2,160 Electricity - personal 1,000 Telephone - personal mobile 400 Telephone - home business paid personally ( 1,300 x 10%) (130) Capital repayment of bank loan ( 3, ) 3,210 Purchase of cash register (capital expenditure) 1,850 32,900 Tax adjusted profit 54,765 Capital allowances Fixtures and fittings (w1) 3,769 Motor vehicles (w1) 3,000 Restrict for personal use of car ( 3,000 x 40%) (1,200) 1,800 Fixtures and fittings balancing allowance (w2) 775 6,344 Workings w1 Capital allowances F&F MV F&F Total Original cost 28,600 26,000 Qualifying cost (motor vehicle based on emissions) 28,600 24,000 Additions ( 10, ,850) 12,450 Disposal (10,900) 17,700 24,000 12,450 Tax written down value at 1 January ,450 18,000 39,450 Additions 12,450 12,450 Disposal at tax written down value (8,175) (8,175) Wear and tear at 12.5% (2,213) (3,000) (1,556) (6,769) Tax written down value at 31 December ,062 15,000 10,894 36,956 w2 Fixtures and fittings balancing allowance Proceeds 7,400 Tax written down value at disposal (w1) 8,175 Page 24 of 61

26 775 Page 25 of 61

27 2159 Solution (a) Sorcha Schedule D Case II tax adjusted profit for 2017 Profit per financial statements 58,563 Adjust: Dividends received from Irish company (net) (4,000) Depreciation 19,900 New furniture for office 4,600 Donation to Amnesty International 1,320 Drawings 34,400 Sorcha s home phone bill (personal element is 380 x 90%) 342 Speeding tickets 380 Motor lease expenses ( 13,600 x (( 39,000-12,000)/ 39,000) 9,415 Entertainment of customers 2,660 Profit on disposal of non-current asset (1,850) Pension contribution for Sorcha 21,160 88,327 Tax adjusted profit 146,890 Tutorial note: Motor lease expense are restricted on the basis of CO2 emissions. Capital allowances Furniture and equipment capital allowances (w1) 4,203 Furniture and equipment balancing allowance (w2) 266 4,469 Workings w1 Capital allowances - furniture and equipment Total Cost 15,800 13,220 5,450 Additions 4,600 Disposals (5,450) 15,800 13,220 4,600 TWDV at 1 January ,925 6,610 3,406 15,941 Additions (new furniture for office) 4,600 4,600 Disposal at tax written down value (3,406) (3,406) Wear and tear at 12.5% for 2017 (1,975) (1,653) (575) (4,203) TWDV at 31 December ,950 4,957 4,025 12,932 w2 Balancing allowance Proceeds 3,140 TWDV at disposal (w1) 3, Tutorial note: Computers bought in June 2017 not in use at year end so no capital allowances can be claimed in Page 26 of 61

28 (b) Sorcha Income tax computation for 2017 Tax adjusted profit 146,890 Capital allowances (4,469) Schedule F dividend income ( 4,000/80%) 5, ,421 Pension contributions (w3) (21,160) 126,261 Taxation: 33,800 x 20% 6,760 92,461 x 40% 36,984 43,744 Non-refundable tax credits: Single person tax credit 1,650 Earned income tax credit 950 (2,600) 41,144 USC: 12,012 x 0.5% 60 6,760 x 2.5% ,272 x 5.0% 2,564 29,956 x 8% 2,396 47,421 x 11% 5,216 10,405 PRSI: 147,421 x 4% 5,897 57,446 Refundable tax credits: Dividend withholding tax ( 5,000 x 20%) (1,000) Tax payable by Sorcha 56,446 Workings w3 Pension contributions Net relevant earnings (maximum) 115,000 At age 33, the relevant percentage of net relevant earnings is 20%. Maximum relief that can be claimed in ,000 Premiums paid in ,160 Amount on which tax relief can be claimed in ,160 Page 27 of 61

29 2160 Solution Graham and Vanessa Income tax computation for 2017 Graham Vanessa Joint Tax adjusted profit 308,000 Capital allowances (27,720) 280,280 Pension contributions (w1) (23,000) Schedule D Case II income 257, ,280 Schedule D Case III income from foreign rental property 2,215 2,215 4,430 Schedule D Case IV deposit interest ( 280/61%) Schedule D Case V income 3,555 3,555 7,110 Schedule F dividend income (gross) ( 280/80%) ,630 6, ,630 Allowances: Permanent Health Insurance premium (is within permitted limit) (2,700) 266,930 Taxation: 42,800 x 20% 8,560 5,770 x 20% (w2) 1, x 39% ,900 x 40% 87,160 97,053 Non-refundable tax credits: Married persons' tax credit 3,300 Earned income tax credit 950 DIRT deducted ( 460 x 39%) 179 Medical expenses (w3) 90 USC: Graham 12,012 x 0.5% 60 6,760 x 2.5% ,272 x 5.0% 2,564 29,956 x 8% 2, ,400 x 11% 20,504 Vanessa No USC - income is below minimum total income ( 13,000). PRSI: Graham 286,630 (income before deduction of pension) x 4% 11,465 Vanessa Higher of (i) 6,000 x 4% and (ii) minimum contribution of Refundable tax credits: (4,519) 92,534 25,693 11, ,192 Page 28 of 61

30 Dividend withholding tax ( 350 x 20%) (70) Tax payable by Graham and Vanessa 130,122 Preliminary tax paid (128,900) Amount outstanding 1,222 Sufficiency of preliminary tax payment - lower of: (i) 100% of 2016 liability 140,600 (ii) 90% of 2017 liability ( 130,122 x 90%) 117, ,110 => preliminary tax payment of 128,900 was sufficient. Tutorial note: Graham's USC is calculated based on income before deduction of pension and excluding income from which DIRT deducted. Workings w1 Pension contributions Net relevant earnings (maximum) 115,000 At age 37, the relevant percentage of net relevant earnings is 20%. Maximum relief that can be claimed in ,000 Premiums paid in ,150 Amount on which tax relief can be claimed in ,000 w2 Home carer tax credit or increased standard rate tax band (i) Home carer tax credit (maximum) 1,100 (ii) Increased standard rate tax band ( 5,770 x 20%) (exclude deposit interest) 1,154 In this case, option (ii) is the more valuable option. Tutorial note: They must choose between the home carer tax credit and the increased standard rate tax band. They cannot choose both. w3 Medical expenses Expenses incurred 850 Insurance reimbursement (400) Qualifying for tax relief 450 Tax relief at 20% 90 Page 29 of 61

31 2161 Solution Ricardo and Annette Income tax computation for 2017 Schedule D Case II income 93,400 Schedule D Case V income (w1) 2,053 Schedule F dividend income (gross) (w2) ,366 Annette's schedule E salary ( 31,100 x 7/12) 18, ,508 Charges: Maintenance payments (w3) (2,750) Allowances: Permanent health insurance premiums (w4) (9,156) 102,602 Taxation: 42,800 x 20% 8,560 18,142 x 20% 3,628 41,660 x 40% 16,664 28,852 Non-refundable tax credits: Married personal tax credit 3,300 Earned income tax credit (Ricardo) 950 PAYE employee tax credit (Annette) 1,650 Medical expenses (w5) 148 (6,048) 22,804 Refundable tax credits: PAYE paid by Annette ( 4,665 x 7/12) 2,721 Dividend withholding tax ( 913 x 20%) 183 (2,904) Tax payable by Ricardo 19,900 Annette Income tax computation for 2017 Schedule D Case IV (maintenance payments) (w3) 2,750 Schedule E salary ( 31,100 x 5/12) 12,958 15,708 Taxation: 15,708 x 20% 3,142 Non-refundable tax credits: Single person tax credit 1,650 Single person child carer credit 1,650 PAYE employee tax credit 1,650 (4,950) nil Refundable tax credits: PAYE paid by Annette ( 4,665 x 5/12) (1,944) Page 30 of 61

32 Tax payable by Annette 1,944 Workings w1 Schedule D Case V income Rental income ( 1,060 x 2) 2,120 Expenses: Insurance ( 400 x 2/12) (67) 2,053 Tutorial note: The 3,500 cost of having the property repainted is not deductible because (i) Ricardo occupied the property and (ii) the property was not subsequently leased out. w2 Schedule F dividend income 4 February June 360 Net dividend received 730 Grossed up ( 730/80%) 913 w3 Maintenance payments Payments ( 1,000 x 5 months) 5,000 Attributable to children (2,250) Attributable to Annette 2,750 w4 Permanent health insurance premiums Premiums paid ( 763 x 12) 9,156 96,366 x 10% (maximum allowable for Ricardo) 9,637 Allowed in ,156 Tutorial note: The 10% restriction on PHI is considered on an individual basis, i.e., with reference to each individual party's total income. w5 Medical expenses Expenses incurred 1,330 Reimbursed by insurer (590) Qualifying for tax relief 740 Tax relief at 20% 148 Page 31 of 61

33 Part D 2162 Solution (a) Anthony and Lilly Capital Gains Tax liability Anthony Lilly Total Property (w1) 52,540 House (w2) 87,420 Necklace (w3) 2,795 52,540 90,215 Annual exemption (1,270) (1,270) 51,270 88,945 CGT at 33% 16,919 29,352 46,271 Workings w1 Property - Anthony Proceeds 305,111 Legal fees (3,860) 301,251 Cost 193,300 Legal fees 5, ,810 Indexation factor (96/97) (248,711) Chargeable gain 52,540 w2 House - Lilly Proceeds 206,566 Legal fees (5,310) 201,256 Cost 7,710 Indexation factor (74/75) ,041 Enhancement expenditure 44,600 Indexation factor (96/97) ,795 (113,836) Chargeable gain 87,420 w3 Necklace - Lilly Proceeds 6,522 Cost 2,800 Indexation factor (93/94) (3,727) Chargeable gain 2,795 (b) CGT payment dates for disposals are as follows: If the disposal is made in the period 1 January to 30 November (the initial period) the tax is due on or before 15 December in that tax year. Page 32 of 61

34 If the disposal is made in the period 1 December to 31 December (the later period) the tax is due on or before 31 January in the following year. Page 33 of 61

35 2164 Solution (a) Paulie and Penelope Capital Gains Tax liability Paulie Penelope Total Commercial premises (w1) 63,890 Apartment (w3) 73,030 Diamond ring (w4) 4, ,920 4,086 Annual exemption (1,270) (1,270) 135,650 2,816 CGT at 33% 44, Painting (w2) ,765 1,175 45,940 Workings w1 Commercial premises - Paulie Proceeds 349,016 Cost 193,000 Indexation factor (95/96) ,461 Enhancement expenditure 32,410 Indexation factor (99/00) ,665 (285,126) Chargeable gain 63,890 Tutorial note: General repairs are not deductible for CGT purposes. w2 Painting - Penelope Proceeds 3,032 Cost 1,442 Indexation factor (97/98) (1,777) Chargeable gain 1,255 Capital gains tax at 33% 414 Check for marginal relief: ( 3,032-2,540)/2 246 Claim marginal relief. Tutorial note: Televisions, DVD players and cars are wasting chattels - exempt from CGT. w3 Apartment - Paulie Proceeds (deemed) 287,321 Cost 161,000 Indexation factor (93/94) Page 34 of 61

36 (214,291) Chargeable gain 73,030 (b) w4 Diamond ring - Penelope Proceeds 8,990 Cost 3,920 Indexation factor (96/97) (4,904) Chargeable gain 4,086 CGT payment dates for disposals are as follows: If the disposal is made in the period 1 January to 30 November (the initial period) the tax is due on or before 15 December in that tax year. If the disposal is made in the period 1 December to 31 December (the later period) the tax is due on or before 31 January in the following year. Page 35 of 61

37 2165 Solution (a) (b) Victor and Eva Capital Gains Tax Liability Victor Eva Total Property (w1) 19,248 Shares (w2) (1,437) Land (w3) 20,916 40,164 (1,437) Annual exemption (1,270) Transfer loss (1,437) 1,437 37,457 Capital gains tax at 33% 12,361 12,361 Workings w1 Property - Victor Proceeds 309,548 Cost (no indexation) (290,300) Chargeable gain 19,248 w2 Shares - Eva Proceeds 15,113 Cost 16,550 Indexation factor (94/95) (21,664) Chargeable gain (6,551) Actual Proceeds 15,113 Cost (16,550) Gain (1,437) Indexation cannot increase a loss. (1,437) w3 Land - Victor Proceeds 47,000 Cost ( 94,000 x ( 47,000/( 47, ,900))) 20,000 Incidental costs ( 2,000 x ( 47,000/( 47, ,900))) ,426 Indexation factor (95/96) (26,084) Chargeable gain 20,916 Michael inherited the property from his father, therefore it passed to Michael on his father s death. No CGT is payable on the transfer of assets at death. (c) CGT payment dates for disposals are as follows: If the disposal is made in the period 1 January to 30 November (the initial period) the tax is due on or before 15 December in that tax year. Page 36 of 61

38 If the disposal is made in the period 1 December to 31 December (the later period) the tax is due on or before 31 January in the following year. Page 37 of 61

39 2167 Solution Steve and Stacey (a) Capital Gains Tax liability Steve Stacey Total Principal private residence (w1) 17,334 17,334 Antique table - Stacey (w2) 903 House swap (w4) 117, , , ,632 Annual exemption (1,270) (1,270) 133, ,362 CGT at 33% 44,041 44,339 (b) Tutorial note: Household items are wasting chattels and are exempt from CGT. CGT payment dates for disposals are as follows: 44,041 44,339 88,380 If the disposal is made in the period 1 January to 30 November (the initial period) the tax is due on or before 15 December in that tax year. If the disposal is made in the period 1 December to 31 December (the later period) the tax is due on or before 31 January in the following year. CGT filing date is 31 October 2018 Son s CGT liability He had lived in the apartment all of the time he owned it, therefore full PPR relief will be available on the disposal and no capital gains tax liability will arise. Workings w1 Principal Private Residence Proceeds 719,950 Cost 128,000 Indexation factor (89/90) ,384 Enhancement expenditure 156,000 Indexation factor (98/99) ,072 Enhancement expenditure 34,700 No indexation 1 34,700 (416,156) 303,794 Principal Private Residence Relief (w2) (269,127) Chargeable gain 34,667 w2 Principal Private Residence Relief Months Period of ownership (1 October 1989 to 1 July 2017) 333 Page 38 of 61

40 Periods of occupation: 1 October 1989 to 1 May May 1995 to 1 August August 1998 to 1 June July 2005 to 1 July Relief ( 303,794 x 295/333) 269,127 Tutorial note: The period of absence in Spain does not qualify for principal private residence relief. w3 Antique table Proceeds 3,450 Cost 2,036 Indexation factor (96/97) (2,547) Chargeable gain 903 Capital gains tax at 33% 298 Check for marginal relief: ( 3,450-2,540)/2 455 w4 House swap Proceeds 500,490 Cost 265,700 No indexation 1 (265,700) Chargeable gain 234,790 Page 39 of 61

41 2169 Solution (a) Ivor and Sandy Ivor Sandy Total Principal private residence (w1) 23,902 23,902 Shares in Tiger - acquired January 1997 (w3) Shares in Tiger - acquired March 2000 (w4) 2,914 23,902 26,816 Annual exemption (1,270) (1,270) 22,632 25,546 48,178 CGT at 33% 7,469 8,430 15,899 (b) (i) (ii) CGT payment dates for disposals are as follows: If the disposal is made in the period 1 January to 30 November (the initial period) the tax is due on or before 15 December in that tax year. If the disposal is made in the period 1 December to 31 December (the later period) the tax is due on or before 31 January in the following year. Workings w1 Principal private residence Proceeds 187,200 Cost 3,700 Indexation (74/75) (27,854) 159,346 Principal Private Residence Relief (w2) (111,542) Chargeable gain 47,804 w2 Principal Private Residence Relief Months Period of ownership (6 April 1974 to 5 August 2017) 520 Periods of occupation: 6 April 1974 to 30 June June 1986 to 30 April 1991 (maximum of 48 months) (note (i)) April 1991 to 1 August August 1998 to 31 August August 2000 to 31 May May 2004 to 5 August 2017 (only last 12 months) (ii) Relief ( 159,346 x 364/520) 111,542 Tutorial notes: Absent because of work in Ireland - maximum of 48 months allowed. Absence not due to work - only last 12 months allowed. w3 Shares in Tiger - acquired January 1997 Proceeds (6,000 x 12 per share) 72,000 Cost 60,357 Page 40 of 61

42 Indexation factor (96/97) (75,507) (3,507) Actual Proceeds 72,000 Cost (60,357) 11,643 Indexation cannot turn an actual gain into a loss. No gain/no loss. w4 Shares in Tiger - acquired March 2000 Proceeds (1,700 shares x 12 per share) 20,400 Cost ( 25,865 x 1,700/3,000) 14,657 Indexation factor (99/00) (17,486) Chargeable gain 2,914 Page 41 of 61

43 Part E 831 Solution Rental income (eight months) 34,400 Premium on short lease 120,000 Premium included as rental income: ( 120,000 x (51-8)/50) 103, ,600 Less interest on borrowings (eight months) (5,580) 132,020 Page 42 of 61

44 2170 Solution (a) Red Tax adjusted profits for the year ended 30 June 2017 Loss per accounts (34,606) Adjust: Other income (franked investment income not taxable) (3,100) Depreciation 54,200 Profit on disposal of non-current assets (5,480) Parking fines and speeding tickets 5,720 Lease charges ( 6,330 x (( 32,000-12,000)/ 32,000)) 3,956 Political donation 4,030 Decrease in general allowance for irrecoverable debts (300) Interest on late payment of VAT 7,350 Client Christmas presents 1,490 67,866 Tax adjusted profit 33,260 (b) Capital allowances for the year ended 30 June Total Cost 48,100 60,100 82,400 Wear and tear at 12.5% to 1 July 2016 (30,063) (22,538) (20,600) 18,037 37,562 61, ,399 Addition 2017 (w2) 18,737 18,737 Disposal 2017 (18,037) (18,037) Wear and tear 2017 (7,513) (10,300) (2,342) (20,155) 30,049 51,500 16,395 97,944 Workings w1 Balancing charge Proceeds of disposal 21,000 Tax written down value at disposal (18,037) Balancing charge 2,963 w2 Cost of addition for capital allowances Cost 21,700 Balancing charge (w1) (replacement option) (2,963) 18,737 Tutorial note: New computer system not in use at financial year end => not eligible for capital allowances. (c) Corporation tax computation for the year ended 30 June 2017 Tax adjusted profit 33,260 Capital allowances (20,155) 13,105 Corporation tax at 12.5% 1,638 Page 43 of 61

45 2171 Solution (a) Alta Schedule D Case I income for the year ended 30 November 2017 Loss per accounts (33,575) Adjust: Other income (190,140) Depreciation 28,900 Pension contributions accrual (only amounts paid allowable) 3,040 Motor expenses - parking fines 580 Motor expenses - speeding tickets 1,330 Professional fees - disposal of property 6,720 Decrease in general allowance for irrecoverable debts (6,400) Sundry expenses - interest on late payments of PAYE and VAT 6,390 Sundry expenses - client entertainment 5,740 Sundry expenses - subscription to political party 1,450 (142,390) Tax adjusted loss (175,965) Tutorial note: Car tax paid for directors' personal cars is a BIK for the director. The expense is deductible for the company. (b) Corporation tax computation for the year ended 30 November 2017 Rate Schedule D Case III income (deposit interest) 10,950 Schedule D Case V income (rental income) 59,400 70,350 25% 17,588 Chargeable gain (w1) 38, % 4,848 22,436 Loss relief (w5) (22,436) Corporation tax Nil Working w1 Chargeable gain Proceeds 471,127 Solicitor costs (6,720) 464,407 Cost 268,100 Indexation factor (95/96) ,364 Enhancement expenditure 93,840 Indexation factor (00/01) ,353 (449,717) Capital gain 14,690 Chargeable gain ( 14,690/12.5% x 33%) 38,782 w2 Page 44 of 61

46 Capital allowances - motor vehicles Car 1 Car 2 Car 3 Total Qualifying cost (based on emissions) 24,000 10,150 Wear and tear at 12.5% to 1 December 2016 (3,000) (1,269) 21,000 8,881 29,881 Wear and tear 2017 (3,000) (1,269) (4,269) 18,000 7,612 25,612 Tutorial note: No capital allowances available for car 3 due to level of emissions. w3 Capital allowances - other than motor vehicles Total Cost 121,500 78,000 38,700 Wear and tear at 12.5% to 1 December 2016 (60,750) (19,500) (4,838) 60,750 58,500 33, ,112 Wear and tear 2017 (15,188) (9,750) (4,838) (29,776) 45,562 48,750 29, ,336 w4 Capital allowances Motor vehicles (w2) 4,269 Plant and machinery, vans and computer equipment (w3) 29,776 34,045 w5 Loss relief Tax adjusted losses 175,965 Capital allowances (w4) 34, ,010 Tax on non-trading income 22,436 Losses required to offset tax on non-trading income ( 22,436/12.5%) 179,488 Remaining losses available to carry forward 30,522 Page 45 of 61

47 2173 Solution (a) Corporation tax computations mnths 12 mnths 6 mnths 6 mnths 30 Jun 30 Jun 31 Dec 31 Dec Rate Rate Tax adjusted profit (w1) 29,200 14,600 Capital allowances (w4) (9,788) (4,894) Schedule D Case I income 19, % 2,427 9, % 1,213 Schedule D Case III income 25% 4,400 25% 1,100 Chargeable gain (w5) 55, % 6, % Corporation tax 9,407 2,313 Workings w1 Tax adjusted profit Loss per accounts (2,143) Adjust: Profit on sale of land (27,300) Deposit interest (gross - without deduction of DIRT) (4,400) Depreciation 60,290 Leasing charge ( 5,340 x (( 33,600-12,000)/ 33,600)) 3,433 General provision for repairs 5,550 Increase in general allowance for irrecoverable debts 1,660 Legal fees relating to disposal of land 2,560 Client entertainment 960 Interest on late payment of VAT 1,880 Clamping fines 1,310 45,943 43,800 Apportionment: 12 months ended 30 June ,200 6 months ended 31 December ,600 43,800 Tutorial note: No adjustment in respect of payment of personal telephone bills - will be a BIK for the managing director. w2 Capital allowances - motor vehicles 2014 Qualifying cost (based on emissions) 24,000 Wear and tear at 12.5% to 1 July 2016 (9,000) 15,000 Wear and tear at 12.5% for year ended 30 June 2017 (3,000) 12,000 Wear and tear at 12.5% for six months ended 31 December 2017 (1,500) 10,500 w3 Page 46 of 61

48 Capital allowances - fixtures, fittings, plant and machinery Total Cost 28,900 25,400 Wear and tear at 12.5% to 1 July 2016 (10,838) (3,175) 18,062 22,225 Wear and tear at 12.5% for year ended 30 June 2017 (3,613) (3,175) (6,788) 14,449 19,050 Wear and tear at 12.5% for six months ended 31 December 2017 (1,806) (1,588) (3,394) 12,643 17,462 w4 Capital allowances 12 mnths 6 mnths 30 Jun 31 Dec Motor vehicles (w2) 3,000 1,500 Fixtures, fittings, plant and machinery (w3) 6,788 3,394 9,788 4,894 w5 Chargeable gain Proceeds 70,500 Auctioneer fees (3,590) Legal fees (2,560) 64,350 Cost (no indexation) (43,200) Capital gain 21,150 Chargeable gain ( 21,150 x 33%/12.5%) 55,836 (b) Small Irish resident company (i) For year ended 30 June 2017: Preliminary corporation tax payment 23 May 2017 Pay final corporation tax and file return 23 March 2018 (ii) For period ended 31 December 2017: Preliminary corporation tax payment 23 November 2017 Pay final corporation tax and file return 23 September 2018 Page 47 of 61

49 2174 Solution A close company is a company controlled by: (i) (ii) (i) (ii) (iii) five or fewer participators; or any number of participators who are also directors of the company. Control is deemed to be an interest of over 50%. A participator is someone who has an interest in the share capital of the company, i.e. the shareholders. In this question, the shareholders are not directors. Therefore it is necessary to determine if condition (i) above is met. When calculating the number of shares that an individual owns, it is necessary to take into account the shares owned by the individual and associates of the individual. Associates include the following: family members; any other company controlled by the individual; shares held by a trust in which the individual has an interest. Mr Farmer, Mrs Farmer, Mr Farmer Junior and the Farmer family trust are treated as one shareholder for the purpose of this question: Shares % Mr Farmer 270 Mrs Farmer 250 Mr Farmer Junior 300 Farmer family trust 522 1, % Mr Trader % Mr Flynn 1, % Mr Bush % Mr Clinton 2, % 6, % Storm is a close company. Page 48 of 61

50 2176 Solution The payment of expenses for participators or their associates, who are not directors/employees of the company, are treated as distributions. (i) (ii) (iii) The company is required to account for dividend withholding tax on the payment and cannot claim a deduction for corporation tax purposes. Bart Banjo - medical insurance premiums Bart Banjo is a participator of the close company and owns 10% of the share capital. However, Bart Banjo is also a director of the company, therefore the close company rules do not apply. The company will be entitled to a deduction of the expense for corporation tax purposes. The premium will be treated as a benefit-in-kind for Bart Banjo and the company will account for income tax through payroll. H. Henderson - holiday expenses H. Henderson is a participator and owns 8% of the share capital. H. Henderson is not a director, therefore the close company rules apply. The company is not entitled to deduct the expense paid for corporation tax purposes. The expense is treated as a distribution. The company must pay dividend withholding tax (DWT) on the expense. H. Henderson will be subject to income tax on the amount of the expense and will be entitled to a credit for DWT. Linda Brennan - medical expenses Linda Brennan s spouse is a participator of the company and owns 5% of the share capital. Linda Brennan is an associate of the company, is not an employee. Close company rules therefore apply. The expense is treated as a distribution. The company must pay dividend withholding tax (DWT) on the expense. Linda Brennan will be subject to income tax on the amount of the expense and will be entitled to a credit for DWT. Page 49 of 61

51 2177 Solution (a) Maximum interest that is allowed as an expense is lower of: (i) 13% of nominal value of issued share capital 273 (ii) 13% of loans from directors: Loan ( ) Mr Halliday 2,900 Mr Dimbleby 3,800 Mr Simpson 5,400 12,100 12,100 x 13% 1,573 Restricted allowable interest is therefore: 273 Allowable in respect of Mr O'Malley ( 2,700 x 4%) 108 Interest allowable in the corporation tax computation 381 Tutorial note: Restriction on allowable interest applies to directors owning more than 5% share capital. As Mr O'Malley owns 2%, the restriction does not apply to his loan. (b) Amount of interest treated as distribution Loan Interest Mr Halliday 2, Allowed as interest x 2,900/12,100 (65) Treated as distribution 51 Mr Dimbleby 3, Allowed as interest x 3,800/12,100 (86) Treated as distribution 66 Mr Simpson 5, Allowed as interest x 5,400/12,100 (122) Treated as distribution 94 Total distribution 211 The company is required to pay dividend withholding tax on 211. The directors are required to pay income tax on the same amount. They receive credit in respect of the dividend withholding tax paid by the company in their income tax computations. Page 50 of 61

52 2178 Solution 2016 Rate Rate 2017 Trade 1 21,300 Trade 2 15,500 12,100 Current year loss relief (w1) (12,100) Prior year loss relief (w1) (36,800) 12.50% nil 12.50% nil Case III income 7,100 25% 1,775 7,500 25% 1,875 Case V income 9,300 25% 2,325 5,200 25% 1,300 4,100 3,175 Current year loss relief (value basis) ( 19,500 x 12.5%) (w1) (2,438) Corporation tax 4, Working w1 Utilisation of losses Trade 1 loss ,400 Current year loss relief against trade 2 (12,100) 56,300 Prior year loss relief against trade income (36,800) 19,500 Current year loss relief against non-trade income (value basis) (19,500) nil Page 51 of 61