taxmagic 2015 ALAN MOORE THE SUNDAY BUSINESS POST

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2 taxmagic 2015 ALAN MOORE THE SUNDAY BUSINESS POST

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4 taxmagic 2015 Alan Moore BA BComm MBA AITI CTA is widely known for his regular tax features in The Sunday Business Post. He has more than 30 years' experience in taxation, 13 of these with Revenue, in the areas of VAT, Capital Acquisitions Tax, Income Tax, Corporation Tax and Capital Gains Tax. A former inspector of taxes and Council Member with the Irish Taxation Institute, he was private sector consultant to the Revenue Commissioners on the drafting of the Taxes Consolidation Act He is Principal with Alan Moore Tax Consultants. ALAN MOORE THE SUNDAY BUSINESS POST

5 Neither Alan Moore nor the authors accept any responsibility for loss or damage occasioned by any person acting or refraining from acting as a result of the material in this book. Professional advice should always be sought before acting on any issue covered in this book. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the copyright holder, application for which should be addressed to the publisher. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature. Illustrations Sean Lennon 2015 ISBN Alan Moore 220 The Capel Building, Mary s Abbey, Dublin 7 Printed in Ireland Phone: +353 (0) Fax: +353 (0) Web: alan@alanmoore.ie The Sunday Business Post, Hambleden House 19/26 Pembroke Street Lower, Dublin 2 Phone: +353 (0) Fax: +353 (0) Web: events@sbpost.ie

6 Chapter 1 Tax Basics The Irish Tax System taxmagic 2015 Chapter 1 Tax basics... 5 The Irish tax system... 6 Chapter 2 Income tax... 9 Persons liable to income tax Residence Domicile Ordinary residence Non-residents Case study: Arabian nights Summary of residence, ordinary residence and domicile Computing your income tax Income tax computation for the tax year Case study: Pension at the point of retirement Case study: Drive time Case study: Losses have their uses Chapter 3 PRSI The PRSI system Employed contributors Self-employed contributors Universal social charge (USC) Chapter 4 Capital gains tax Persons liable to capital gains tax Residence, ordinary residence, and domicile Case study: CGT holiday Case study: Hidden CGT problem Married couples Computing your CGT Case study: Development land Chapter 5 Corporation tax Persons liable to corporation tax Company residence Incorporating a business Case study: Income-shifting Case study: Love Ulster Case study: PPR Computing your corporation tax Sale and purchase of a business carried on by a company Chapter 6 Value-added tax (VAT)

7 taxmagic 2015 Persons who must register for VAT VAT rates VAT on property transactions Computing VAT liability Case study: Trapped VAT Chapter 7 Capital acquisitions tax Capital acquisitions tax Persons liable to capital acquisitions tax Computing CAT liability CAT planning Case study: Giving it all away Case study: Giving it all away II Case study: Tax-free gift Case study: Domicile and CAT Chapter 8 Stamp duties Documents and transactions liable to stamp duties Computing your stamp duty Chapter 9 Farmers Tax planning for farmers Income tax Corporation tax Capital gains tax VAT Capital acquisitions tax Stamp duties Chapter 10 Charities Regulation of charities Charitable purposes Acquiring charitable exemption Chapter 11 Marriage breakdown General issues Tax consequences of marital breakdown Chapter 12 The inspector calls Proper records Revenue powers Revenue audit Case study: The 1993 Act hasn t gone away Chapter 13 Business by business guide Chapter 14 International tax Investing in foreign property Chapter 15 Wealth magic Reality check Financial plan Wealth creation

8 Chapter 1 Tax Basics The Irish Tax System Risk management Estate planning Chapter 16 Tax planning Tax planning Index

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10 Chapter 1 Tax Basics The Irish Tax System Chapter 1 Tax basics IN A NUTSHELL The simplest way to avoid tax is to live off your capital or borrowings, and if you must pay tax, pay capital gains tax (33%) rather than income tax (40%), PRSI (4% for self-employed) and universal social charge (up to 10%). Contents The Irish tax system, 6 5

11 taxmagic 2015 Deduct: Carried forward loss, current capital allowances (see 2.30). Step 3. To arrive at your INCOME FROM INVESTMENTS AND PROPERTY: Take your rental income (net of interest and property-related expenses) (see 2.38); Deduct: Carried forward rental loss, current capital allowances, (see 2.39); Add: Interest that has not subjected to withholding tax (see 2.36); Add: Income from foreign property (see 2.37); Add: Dividends from Irish companies (see 2.40); Add: Miscellaneous income (see 2.41). Step 4. To arrive at your INCOME FROM ALL SOURCES (see 2.42), add the results of Steps 1-3. Step 5. To arrive at your TOTAL INCOME (see 2.50): Deduct: A loss incurred (in the current year) in a trade or profession (see 2.43); Deduct: Expenditure on heritage buildings or gardens, 2.44; Deduct: Schedule D Case V excess capital allowances, 2.45; Deduct: Income covenanted to colleges (max 5% of income), 2.46; Deduct: Income covenanted to elderly relative or incapacitated person (no limit), 2.47; Deduct: Interest on loan to invest in a company (see 2.48) or partnership (see 2.49). Step 6. To arrive at your TAXABLE INCOME: Deduct: Allowance in respect of carer for incapacitated person (see 2.52); Deduct: Permanent health contributions (see 2.53); Deduct: Foreign earnings deduction (see 2.54); Deduct: Special assignee relief (see 2.55); Deduct: EIIS investment (see 2.56); Deduct: Film investment (see 2.57); Deduct: Gift to Minister for Finance (see 2.58); Deduct: Gifts to approved bodies (see 2.59); Deduct: Owner-occupier allowance (see 2.60). Step 7. To calculate your GROSS TAX LIABILITY: Calculate your tax at the standard rate and at the higher rate (see 2.62); Step 8: Deduct TAX CREDITS to arrive at NET TAX LIABILITY: Deduct: Basic personal tax credit (see 2.65); Deduct: Single parent child carer credit (see 2.69); Deduct: Age tax credit (see 2.70); Deduct: Incapacitated child tax credit (see 2.71); Deduct: Dependent relative tax credit (see 2.72); Deduct: Employee (PAYE) tax credit (see 2.73); Deduct: Medical and dental expenses tax credit (see 2.51); 20

12 Chapter 2 Income Tax Case Study: Losses Have Their Uses they become seriously ill and lose their job. You must usually have been ill for a delay period (three to six months) before the income starts to become payable. The maximum allowance is 10% of your total income for the tax year. EXAMPLE Your total income (from your employment) for a tax year was 40,000. You contributed 100 per month by bank direct debit to a Revenue-approved permanent health contributions scheme. You may deduct 1,200 ( 100 x 12) when calculating your taxable income for the year. Therefore, in the absence of any further deductions, your taxable income is 38,800. TIPS 1. Check your financial records to see whether you have been paying contributions for serious illness protection. If you have, and you have not claimed relief, you can put in a claim going back four years. Make sure you have a copy of the policy document and evidence of payment (for example, bank direct debits). Many employers operate group schemes and deduct the contribution from the employee s pay slip. 2. In the case of a married couple assessed jointly, the 10% ceiling applies to their joint total income Foreign earnings deduction If you are based in Ireland but spend time working in Algeria, Brazil, China, Congo, Egypt, Ghana, India, Kenya, Nigeria, Russia, Senegal or Tanzania, you are entitled to a deduction (not to exceed 35,000) proportionate to the number of qualifying days (at least 60) spent working in these countries. EXAMPLE You work for a private company with operations in China. You earn 120,000 per annum. In 2015, you spend 62 days in China. You are entitled to a deduction of (62/365) x 120,000 = 20,383 Therefore your income subject to tax is 99,617 ( 120,000-20,383). TIP There is no minimum stay abroad per period abroad. All that is required is that at least 60 days must be spent in the countries specified. TRAPS 1. Employee expenses cannot be included as income when calculating the relief. 2. The relief does not apply to income taxed under the remittance basis. 3. The relief is subject to the high earner restriction (see 2.90). 4. The relief does not apply to State or State-funded employment Special assignee relief If you are assigned from abroad (a country with which Ireland has a tax treaty) to take up employment with your employer s Irish operation, you are entitled to deduct in respect of 30% of your relevant income above 75,000. The relief only applies to employees who arrive before 31 December EXAMPLE You arrive in ROI on 1 July 2015 to take up employment with your firm s Irish subsidiary. Prior to your arrival in Ireland, you lived and worked abroad for 7 years. Your salary is 350,000 ( 175,000 for the 6 months to 31 December 2015). Your 175,000 salary for 2015 is above the scaled back threshold of 37,500. You are entitled to a deduction of 30% x 175,000 = 52,500. Therefore, your income subject to tax is 122,500 ( 175,000-52,000). TIPS 1. Your employer can also pay for school fees of up to 5,000 per annum tax free, per child. 55

13 Chapter 4 Capital Gains Tax Universal Social Charge (USC) Chapter 4 Capital gains tax IN A NUTSHELL 1. Capital gains tax (CGT) is the government s way of taking 33% of the profit (the gain ) you make when you sell an asset (for example, a house other than your principal private residence) at a profit. It is open to Revenue to construe a series of capital transactions by an individual as a trade the profits of which are liable to income tax (40%). 2. If you are Irish resident you are caught on your worldwide gains in the tax year. 3. You cannot avoid CGT on the sale of Irish land or buildings by claiming you are non-resident. 4. The main reliefs are principal private residence relief and retirement relief which applies if you are aged 55 and you dispose of your business. Indexation (i.e., inflation) relief and rollover relief were abolished from 4 December Contents Persons liable to capital gains tax, 86 Residence, ordinary residence, and domicile, 87 Case study: CGT holiday, 88 Case study: Hidden CGT problem, 89 Married couples, 89 Computing your CGT, 90 CGT computation for the tax year 2015, 91 Case study: Development land, 97 83

14 taxmagic 2015 Trading income: 60,000 Other profits: 9,000 Total charges (all trade charges): 10,000 Your company can maximise its loss relief as follows: (a) Use the general loss relief to offset the 110,000 trading loss against other profits of the current accounting period. This reduces the loss to 102,000. (b) Use the general loss relief to carry back the 102,000 loss against 24,000 (calculated as 25, ,000-12,000) total profits of the preceding accounting period. (c) Use the balance of 78,000 as a terminal loss against the trading income of 2012 and The 15,000 trade charges for 2012 bring the loss up to 93,000, and this can be used against the 45,000 trading income, leaving a balance of 48,000 for carry back against 60,000 trading income of The 10,000 trade charges for 2011 bring the loss up to 58,000 and this can be set against the 60,000 trading income, leaving a balance of 2,000 trading income taxed in that year. TIPS 1. Unlike an individual, a company can set a current trading loss against chargeable gains included in total profits for the same period. 2. Unlike an individual, a company can carry back a trading loss for set off against profits of the preceding period. 3. Unlike an individual, a trading company does not augment its trading loss with capital allowances, as the capital allowances are deductible as trading expenses. TRAPS 1. Only a company that is within the charge to corporation tax can claim loss relief. Therefore, a non-resident company cannot set its losses against its trading income. Similarly, a mutual trading society cannot claim loss relief, as it is not possible for an entity to trade with itself. 2. A company can offset a loss incurred in a 12.5%-taxed trade on a value basis against a loss in a 25%-taxed trade. 3. You cannot set a loss incurred in a trade or profession carried on abroad against total profits. You may only set such a loss against Case III income, and you may carry forward any unused excess for set off against Case III income of the next and subsequent accounting periods. 4. If a company fails to file a self-assessment return on or before the return filing date, any claim for relief in respect of trading losses or excess capital allowances included in the return is restricted to 50% of what it would otherwise have been. This restriction may not exceed 158,715 in each case. If the company files the return within two months after the return filing date, any claim for relief in respect of trading losses or excess capital allowances included in the return is restricted to 75% of what it would otherwise have been. This restriction may not exceed 31,750 in each case. These restrictions do not deny relief. They simply delay the effect of the relief until a later accounting period Expenditure on heritage buildings and gardens If a company incurs expenditure on the repair, maintenance or restoration of an approved heritage building or garden, it can set the expenditure against its total profits of the accounting period in which the expenditure was incurred. TIPS 1. This relief, which also applies to individuals, is discussed in more detail in See, in particular, the restrictions applicable to passive investors. 2. If a company has large profits, it can use this relief to acquire a corporate retreat, but: (a) the premises must be kept open to the public for 60 days a year, (b) any director s private use of the property is taxed as benefit in kind, and (c) any shareholder s private use of the property could potentially be taxed as a distribution Gift to the Minister for Finance If a company makes a donation to the Minister for Finance (in effect, the Department of Finance) towards public expenditure, it may deduct the donation from its total profits for the accounting period in which the donation was made Rental capital allowances A property rental company must deduct the capital allowance from the class of income to which the allowance relates. It must carry forward excess allowances against income of the same class in the next and later periods. The company may, within two 118

15 taxmagic 2015 She has three daughters: Sindy, Barbie and Maybelle. She wants to give each daughter 3m cash and retain 3m for herself. She feels she has paid enough tax ( 3m) and does not understand why Revenue want more from her daughters. TIPS 1. She could buy each daughter a 3m house and gift it to them tax-free after they have lived in it for 3 years. 2. She could buy each daughter a farm, and provided each daughter qualified as a farmer (80% farming assets), each daughter would get a 90% reduction in value and pay tax on 300, More complex she could move abroad and the daughters could move abroad. From a position of non-residence and non-ordinary residence, she could gift 3m tax-free to each daughter provided the daughter was non-resident and non-ordinarily resident at the time. 4. This situation could have been avoided had she transferred the land to the daughters (tax-fee under retirement relief) and have them pay the CGT five years ago they would have been able to offset the CAT against the CGT. Case study: Tax-free gift Simon Brogan, aged 49, is resident, ordinarily resident and domiciled in the Republic of Ireland. His wife died fifteen years ago and he has not remarried. He has a net worth of 40m, with 10m in cash. He has one daughter, Alyssa, aged 25. He wants to give her 3m worth of assets, but wishes to minimise any tax. Advise Simon. TIPS 1. Purchase a residence worth 3m, allow Alyssa to live in it for three years, then gift it to her. 2. Give Alyssa 3m on condition she uses it to buy agricultural property (90% reduction means that if she qualifies as a farmer she will be taxed on 300,000, which is just above the 250,000 threshold). 3. Purchase a vineyard in France or Italy worth 3m it could include a mansion house appropriate to the property and gift it to Alyssa. Case study: Domicile and CAT Roger Entwhistle is English domiciled and has lived in ROI for the past 20 years. He owns a farm in Waterford worth 2m and has offshore financial assets of 20m. His wife has predeceased him. He wishes to pass the offshore assets to his son, Jake, resident in Canada. What are the CAT consequences? The CAT rules changed from a domicile basis to a residence basis in Non-Irish domiciliaries are caught on the residence basis once they have been ROI resident for five years. Roger should have passed the assets into trust prior to December If Jake takes the assets, there is a prima facie CAT liability. TIPS 1. Become non-resident and gift while non-resident 2. Gift the cash on condition it is used to purchase agricultural assets in a EU state (Vineyard in Tuscany) Post-death planning Disclaimer Where beneficiary: (a) disclaims a benefit under a will or intestacy, or an entitlement to an interest in trust property, 160

16 Chapter 12 The Inspector Calls Revenue Audit Work in progress understated/omitted Unknown destination of missing sales Excessive provisions for old/obsolete stock Profit and loss account Capital versus Revenue expenditure (fixed assets) Capital versus Revenue expenditure (capital restructuring) Non-business expenditure included in accounts Non-deductible interest (investment, corporate, or personal) Non-allowable provisions (bad debts, warranties, etc.) Reserves non-commercial basis Expenses related to other companies not carrying on the trade Creditors/accruals overstated Capital account Unexplained capital introduced Unrecorded drawings Business assets transferred at less than arm s length or below cost Directors Untaxed emoluments/benefits Assets transferred at undervalue Personal expenditure not identified Capital expenditure on non-business property owned by the company director Excessive expenses reimbursed Expenses not incurred for business purposes Undisclosed commissions received by director in relation to company transactions (for example, supply of goods to the company, director getting a percentage payback) Benefit in kind of various types Share options Directors acting as consultant to a company either directly or via another company PAYE (Not) all emoluments subject to PAYE Verifiable expenditure for business purposes Overtime/bonuses Part-time and casual staff Contract for services versus contract of services Notional statement of tax credits and standard rate cut-off point computed by wages department or agents and used instead of the official version Bogus invoices used to create fund for untaxed payments Construction industry country money entitlement Bogus patent royalties Emoluments from non-resident/parent companies 195

17 Chapter 15 Wealth Magic Investing In Foreign Property Chapter 15 Wealth magic IN A NUTSHELL 1. Get real know your present situation and make a realistic plan. 2. Use your talents to do what you do best. Underspend. 3. Invest your surplus. Leverage your investment. 4. Protect your wealth and pass it on. Contents Reality check, 244 Financial plan, 250 Wealth creation, 251 Risk management, 252 Estate planning

18 Chapter 16 Tax Planning Tax Planning The following methods can be used to pay staff tax-efficiently: (a) Issuing restricted shares to staff. BIK is reduced as follows, depending on the length of the period for which the employe cannot dispose of the shares: Specified period Reduction 1 year 10% 2 years 20% 3 years 30% 4 years 40% 5 years 50% > 5 years 60% EXAMPLE X Ltd, a software company, founded by X. X owns 100% of the shares in X Ltd. He has 5 employees one of these Z is a key employee. X wants to give Z 10% of his shares. Based on current projected profits these are independently valued at 50k. Even if X gifts the shares to Z, the fact that they derive from the employment means they are subject to income tax. Solution: Issue new (5 year) restricted shares to Z, diluting X. Z pays tax on 20k (60% reduction) say 10k. (b) R & D surrender. A company can surrender R & D tax credit, in order to reduce a key employee s tax liability, provided the employee s income tax as a percentage of his total income does not fall below 23% for the year of the claim. Remember R & D credit must be claimed within 12 months of end of accounts period otherwise the claim is invalid. EXAMPLE X Ltd, the company in the previous example, has 25k in R & D credit. X Ltd can surrender 10k of its R & D credit to pay the 10k tax owed by Z key employee on the issue of restricted shares. The surrender of the credit is not itself a BIK event. What s been achieved: 257