Reed Case V profits 310, ,000 Corporation tax at 25% 77,500 95,000. Group relief from VLL (58,750)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2010 Answers 1 Briefing notes for a meeting with John and Martha Heaney Prepared by: Tax assistant Date: 10 December 2009 (i) Research and development (R&D) credit Revenue expenditure A tax credit of 25% is available on incremental expenditure by a company incurred wholly and exclusively on R&D on or after 1 January 2009 (previously 20%). The base year is set at The credit can be set first against profits of the current year, carried back against the preceding accounting period and then carried forward indefinitely. Where there is R&D credit remaining, the company can claim to have the amount of that excess paid to them by the Revenue in three instalments over a period of 33 months from the end of the accounting period in which the expenditure was incurred. The amount of tax credits payable to a company is limited to the corporation tax payable by the company for the ten years prior to the accounting period preceding the period in which the expenditure was incurred, or the amount of PAYE, PRSI and levies, which the company is required to remit in the period in which the expenditure was incurred. Claims must be made within 12 months of the end of the accounting period. Capital expenditure In general an extension to a building used for R&D purposes will qualify for R&D relief. A credit is available in respect of new expenditure on the construction or refurbishment of a building or structure, where the R&D activities carried on by a company in that building over a four year period ( specified relevant period ) represent at least 35% of all activities carried on in the building. The credit is calculated by reference only to the portion of the building or structure to be used for R&D activities. The credit, at 25%, can be used to reduce the corporation tax liability of the company in the year the expenditure was incurred as outlined above for R&D revenue expenditure. A clawback arises where the building is sold or ceases to be used for R&D purposes within ten years. In this case, no relief is available as Reed is not itself using the property for R&D purposes. Group relief R&D credits on both revenue and capital expenditure can be group relieved. For R&D purposes, a group consists of a company, its 51% subsidiaries and their 51% subsidiaries. Thus, Heaney Holdings Ltd (HHL), Valens Lighting Ltd (VLL), Reed Ltd (Reed) and Zeta Ltd (Zeta) are group companies for the purpose of this relief up to 1 June 2009, when Zeta leaves the group. The total R&D credit available within the group is allocated to each company as required. A joint election in writing must be made to Revenue to claim the credit. Once an election is made, the credit may be used by the group company in the current year, prior year or carried forward or refunded as outlined above. As VLL wish to relieve their R&D expenditure as quickly as possible, the following claims could be considered: Year ending 31 December VLL Case I profits 821,000 1,112,000 Corporation tax at 12 5% 102, ,000 R&D credit at 25% (102,625) (139,000) Net corporation tax due 0 0 Reed Case V profits 310, ,000 Corporation tax at 25% 77,500 95,000 Group relief from VLL (77,500) (95,000) Net corporation tax due 0 0 Zeta Case I profits 470, ,000 Corporation tax at 12 5% 58,750 55,625 Group relief from VLL (58,750) *(55,625) Net corporation tax due 0 0 * Restricted to date of leaving the group 19

3 VLL R&D credit Qualifying expenditure in ,725,000 Qualifying expenditure in ,000 2,225,000 Credit at 25% 556,250 Claimed as follows by election: VLL claim (241,625) Group relief to Zeta (114,375) Group relief to Reed (172,500) (528,500) Unused credit by election to VLL 27,750 Tutorial note: The use of R&D credits provided above is one possible answer, however, other tax efficient schedules will also attract appropriate marks. VLL could make a claim to relieve the balance of the credit by payment as follows: 33% of the remaining balance to be paid by the Revenue to the company as a first instalment. That payment of 9,158 ( 27,750 at 33%) will be paid by 21 September The remaining credit of 18,592 can be offset against the liability for the accounting period ended 31 December 2010 and the Revenue will pay 50% of the remaining balance as a second instalment by 21 September The remaining balance, if any, will be offset against the liability for the accounting period ended 31 December 2011, and the balance of unused tax credit will be paid by the Revenue by 21 September (ii) Capital gains tax exposure Disposal of shares in Zeta by VLL The holding company exemption will apply to this disposal as: VLL has held a minimum of 5% shareholding in Zeta for at least 12 months in the last two years; and Zeta is an Irish resident trading company whose shares do not derive the greater part of their value from land in the State. Disposal of commercial unit by Zeta Both Reed and Zeta were part of the HHL capital gains tax group prior to the above disposal of shares by VLL. Group relief would have applied to the inter-group transfer of the building from Reed to Zeta in 2004 resulting in no chargeable gain; thus: Reed was deemed to have disposed of the buildings at a price giving rise to no gain/no loss, i.e. 400,400 ( 350,000 x 1 144). Zeta was deemed to have acquired the asset at the original date as, and cost to, Reed. As Zeta ceases to be a member of the group within ten years of the transfer of the unit it is deemed to have sold and immediately re-acquired the building at the date of acquisition from Reed in The resultant tax on the gain of 69,920 is payable by Zeta. Market value in ,000 Less original cost 350,000 Indexed by (400,400) Gain 349,600 Taxed at 20% 69,920 On the subsequent sale of the property by Zeta in 2009, a capital gain of 150,000 ( 900, ,000) arises. The tax on this gain of 37,500 (25%) is also payable by Zeta. Tutorial note: A capital gains tax group is defined as a company, its 75% subsidiaries and their 75% subsidiaries. 20

4 (iii) Purchase of the trade of or shares in the UK company by HHL Purchase of the trade of the UK company The profits of the trade would be taxable in Ireland. If the trade is carried out wholly outside of Ireland, the profits are taxable under Case III to Irish corporation tax at 25%. If HHL takes any part in the management, oversight or running of the trade, the profits will be taxable under Case I at 12 5%. If the funds borrowed are used wholly and exclusively for the purpose of the trade, they will be deductible for corporation tax purposes, as a trading expense. If the profits are subject to UK corporation tax then credit will be available in Ireland for the UK tax paid. Capital gains tax (CGT) will arise on any future disposal of the trading assets. Tutorial note: As the trade operates from a factory in the UK, it is likely to be considered a permanent establishment with the profits arising from the branch liable to UK corporation tax. Purchase the shares in the UK company Interest relief, as a non-trade charge, would be available on funds borrowed for the purpose of acquiring the shares in, or being lent to, the UK company where the following conditions are met: the UK company is a trading company; HHL owns at least 5% of the ordinary shares in the UK company; HHL does not recover any capital from the UK company; and there is one common director in both HHL and the UK company. The interest paid can be claimed in the year it is paid against all the income of HHL and group relieved to other group companies where a 75% shareholding relationship exists i.e. to VLL and Reed. Where it is not used, it is not available for carry forward to future years. The profits of the UK subsidiary company will only be taxable in the UK unless managed and controlled from Ireland. Dividends received from the UK company by HHL will be liable to Irish corporation tax at 12 5%, however, a tax credit will be available for the underlying corporation tax suffered by the UK subsidiary on the profits out of which the distribution is made. Tutorial note: No withholding tax will be deducted from the distributions by either the UK or Ireland from dividends paid by the UK company. In the event that the UK subsidiary is subsequently sold, the sale would be exempt from Irish CGT under the holding company regime (similarly to the disposal shares by VLL as set out in (ii) above). 2 (a) MEMORANDUM To: Tax manager From: Tax assistant Date: 6 December 2010 Subject: Tom various tax issues relating to the incorporation of business (i) Potential tax saving from trading as a company In order for incorporation to be considered, a significant ongoing tax advantage should be achieved. This is only likely to arise where the drawings requirement of the sole trader is less than the trading profits. The alternative tax and levies liabilities on a sole trade basis and on incorporation, based on annual profits of 295,000 projected for the year ended 31 March 2011 and a drawings requirement of 125,000 are set out in Appendix 1. As the company will carry on a profession and will be a close company, in addition to corporation tax at 12 5%, it will be liable to a service company surcharge of 15% on half of its undistributed professional income. As shown in Appendix 2, this would result in a surcharge arising of 11,156, giving an overall effective rate of corporation tax of 19%. Nevertheless advantages will be achieved by incorporation in terms of an overall saving of 56,895 as follows: Tax liability based on sole trade 142,203 Tax liability based on company (74,152) Close company surcharge (11,156) Savings due to incorporation 56,895 21

5 APPENDIX 1: Alternative tax and levies liabilities on a sole trade basis and on incorporation Tax exposure assuming sole trade status based on profits of 295,000 Schedule D, Case II 295,000 Tax 36,400 at 20% 7, ,600 at 41% 106, ,306 Non-refundable tax credits Personal credit (1,830) 111,476 PRSI at 3% 8,850 Health levy 11,625 Income levy 10,252 30,727 Tax, PRSI & levies 142,203 Tax exposure assuming incorporated status and drawings via a salary of 125,000 Net profit per accounts 295,000 Less salary (125,000) Taxable profits 170,000 Corporation tax at 12 5% 21,250 Income tax on salary of 125,000 Schedule E salary 125,000 Tax 36,400 at 20% 7,280 88,600 at 41% 36,326 43,606 Non-refundable tax credits Personal credit (1,830) 41,776 PRSI at 3% 3,750 Health levy 4,542 Income levy 2,834 11,126 Tax, PRSI & levies 52,902 Total tax exposure 74,152 ( 21, ,902) Tutorial note: the levies are calculated as follows: Health levy Income levy 75, % 2,501 75, % 1,253 25, % 1,003 25, % , % 1,038 24, % 829 4,542 2,834 APPENDIX 2: Close company surcharge Distributable trading income Taxable profits 170,000 Less corporation tax (21,250) 148,750 50% of distributable trading income 74,375 Surcharge of 15% 11,156 Tutorial note: The new relief from corporation tax for start-up companies will not apply in this instance as the company is taking over an existing trade. 22

6 (ii) (iii) Tax exposure arising on the transfer of the trade to a company Capital gains tax (CGT) The transfer of a trade to a company gives rise to a CGT liability on the transfer of the chargeable assets; in this case, the premises and goodwill. The premises will give rise to a capital gain of 270,000 ( 500, ,000) and the goodwill, as it has a nil base cost, of 100,000. This CGT can be deferred where all of the assets of the trade, excluding cash, are transferred for consideration in shares. A partial deferral can be achieved where non-share consideration is received. In this case, Tom expects that the consideration will consist of 50,000 in cash and the balance in shares. The creditors will also constitute consideration and therefore the total value of the business is the value of the assets of 685,000 ( 500, , ,000). The value of the shares is therefore 595,000 ( 685,000 90,000 cash and creditors). The CGT relief applies by reducing the future value of the shares by the gain deferred, any gain arising on the non-share consideration is liable to CGT now. The deferred capital gain on the premises and goodwill will be 321,387 ( 370,000 x 595,000/ 685,000). The base cost of the shares, in the event of a future disposal will thus be 273,613 ( 595, ,387). The balance of the gain of 48,613 ( 370, ,387) will be liable to tax now at 25% subject to the annual allowance. In the event that the premises are not transferred to the company on incorporation, no CGT relief will be available and the total CGT liability on the goodwill gain of 100,000 will be due for payment immediately. The base cost for a future disposal of the shares will then be 95,000 ( 100, ,000 90,000). Value added tax (VAT) The transfer of ownership of goods in connection with the transfer of a business to another taxable person is not considered to be a supply of goods for VAT purposes. Stamp duty Stamp duty will arise at 6% on the value of the premises, goodwill and debtors, i.e. 685,000. Debtors cannot be offset by creditors for stamp duty purposes. Income tax implications of ceasing the sole trade The incorporation of the business causes a cessation of trade for tax purposes. Consideration must be given to the most efficient date to cease trading. Tom has expressed a preference for 31 December 2010 but at latest, by 31 March Details of the potential assessments for each year under the cessation rules for the two alternative dates, based on the actual and projected profits, are given in Appendix 3. From this it can be seen that it is more tax efficient to cease trading on 31 March 2011 as this will avoid the revision of the 2009 tax year to the higher, actual profit figure and thus an overall reduction in taxable profits of 8,750 ( 462, ,750). APPENDIX 3: Cessation assessments Cessation on 31 December 2010 Tax year Original Final assessment assessment 2010 Period 1 January 2010 to 31 December , , Year ending 31 March ,000 Revision to actual 187,500 ( 105,000/12 x 3) + ( 215,000/12 x 9) Taxable profits 462,500 Cessation on 31 March 2011 Tax year Original Final assessment assessment 2011 Period 1 January 2011 to 31 March , Year ending 31 March ,000 Revision to actual 275,000 ( 215,000/12 x 3) + ( 295,000/12 x 9) 2009 Year ending 31 March , ,000 Taxable profits 453,750 23

7 (b) Retirement relief In the event that Tom sells the business to Julie in five years time, retirement relief may apply if the following conditions are met: The disposal is to a child Julie will be considered a child of Tom s as she will have worked with him substantially on a full time basis for a period of five years ending with the disposal. The company is a trading company and Tom owns at least 25% of the shareholding in the company these conditions will also be met. Tom has been a full-time working director of the company for a period of ten years ending on the date of the disposal for the purpose of this condition the period of time that Tom owned the business prior to incorporation will be regarded as a period during which he was a full-time director provided he received shares as some or all of the consideration on incorporation of the trade and deferral relief had been claimed. As outlined in (a)(ii) above, deferral relief would only be available if the property was transferred to the company, in which case this condition would also be satisfied and retirement relief would be available. However, in the event that the property does not transfer on incorporation, but is retained by Tom personally, retirement relief will not be available as this condition cannot be met. 3 Joanne (a) The settling of assets on trust by Joanne in 2008 is a disposal for capital gains tax (CGT) purposes. The transfer of the assets is deemed to be at market value resulting in the apartment in Dublin giving rise to a capital gain of 100,000 and the Berlin office block giving rise to a capital loss of 120,000. A transfer of cash does not give rise to CGT. The trustees of a trust, the settlor of the trust and anyone connected to the settlor are connected persons for the purposes of CGT. Thus, Joanne is considered connected with the trust and any losses on transfers of assets to the trust can only be offset against gains made on the disposal of other assets to the trust. Therefore, the loss on the Berlin office block can only be used against the gain on the Dublin apartment, and the balance of the loss must be carried forward for use only against any future gains on assets transferred to the trust. The capital gain arising on the disposal of the US shares is liable to tax in the normal manner. Dublin Berlin US apartment offices shares Market value 650, , ,000 Less original cost (550,000) (630,000) (198,000) Gain/(loss) 100,000 (120,000) 152,000 Less losses (100,000) Taxable gain ,000 Less annual exemption (1,270) 150,730 Tax at 20% 30,146 Loss carried forward (20,000) The disposal of the US shares took place in January 2008, so the CGT was payable on 31 October (b) (i) Martin The creation of the life interest in the Dublin apartment is a gift from Joanne to Martin for capital acquisitions tax (CAT) purposes. The value of the gift is based on Martin s age, giving rise to a CAT liability of 27,614. Market value of life interest ( 650,000 x ) 184,470 Less small gift exemption (3,000) Less class 2 threshold (43,400) Taxable gift 138,070 Tax at 20% 27,614 Martin would have been liable to income tax during his lifetime on the rental income arising from the property. Tutorial note: As Martin died within five years of receiving the gift, his estate is entitled to a refund of the CAT paid on the basis that if he had paid by instalments, all outstanding instalments at the date of death would have been cancelled. Had Martin paid by instalments, the first instalment would have been payable 12 months after the valuation date, i.e. June Therefore at the date of death four instalments would have been outstanding resulting in a refund to Martin s estate of 22,091 ( 27,614 x 4/5ths). 24

8 (ii) (iii) Jack Jack is entitled to the income from the Berlin property until he reaches the age of 25. Where income is settled on a minor (under 18 and unmarried) it is treated as the income of the settlor during their lifetime. Thus the income would be deemed to be that of Joanne and taxed on her accordingly. Any income tax paid by Joanne on this income can be recovered from the trust. From the age of 18 to 25, Jack will be liable to income tax on the benefit of the rental income arising from the property. Tutorial note: While Jack is also technically liable to capital acquisition tax on this annual benefit, it is understood that the Revenue do not to seek to collect this tax where income tax is paid on the same income. On attaining his 25th birthday Jack will be liable to CAT on the inheritance of the Berlin office block from Joanne based on the market value of the property at that time, subject to any class 1 threshold available. Tim Tim is deemed to receive a gift from Joanne on creation of the life interest in the equities and is liable to CAT on this benefit. As he and Joanne are not married, he is treated as a stranger in blood and only entitled to the class 3 threshold of 21,700. His CAT liability was therefore 40,175. Market value of life interest ( 350,000 x ) 225,575 Less small gift exemption (3,000) Less class 3 threshold (21,700) Taxable gift 200,875 Tax at 20% 40,175 Tim will be liable to income tax during the period of the life interest on the dividend income arising from the equities. (c) (i) Martin s death On Martin s death, Jack becomes absolutely entitled to the property as against the trustees and is liable to CAT on the remainder interest in the property taken from his mother on the death of Martin resulting in a liability of 16,500. Market value property to Jack 500,000 Less class 1 threshold (434,000) Taxable gift 66,000 Tax at 25% 16,500 Even though Joanne is still alive, no small gift allowance is available to Jack as he received the benefit on a death (of Martin). (ii) Gift from Tim of life interest to Jack In August 2010 when Tim gifts his life interest to Jack, two charges to CAT arise: 1. Jack is deemed to take the remainder interest in the equities from the original disponer, Joanne. CAT is payable on this interest based on the deemed death of Tim immediately before the release of his life interest. 2. A second benefit is deemed to be taken by Jack from Tim of his life interest in the equities. The gift tax is assessed on the value of the remaining life interest at the date of the transfer based on Tim s age and the market value of the benefit at that date i.e. 189,999 ( 310,000 x ). As both charges to tax arise on the same event, and on the same property, the first charge can be credited against the second. Remainder interest in equities from Joanne Life interest in equities from Tim Market value of equities 310,000 Market value of Tim's life interest 189,999 Plus prior benefits 500,000 Plus prior benefits *500, , ,999 Less class 1 threshold (434,000) Less small gift exemption (3,000) Taxable gift 376,000 Less class 1 threshold (434,000) Tax at 25% 94,000 Taxable gift 252,999 Credit for prior tax paid (16,500) Tax at 25% 63,250 Net tax payable 77,500 Credit for prior tax paid 94,000 Net tax payable 0 *The benefit of the remainder interest is not aggregated for the purpose of calculating this tax. 25

9 The total tax payable on both benefits is therefore 77,500 ( 77, ). Tutorial note: as Jack is only 18, both the apartment and the equities will continue to be held in the trust, on a bare trustee basis, until he reaches the age of Jim Lyons (a) (i) Residence and ordinary residence status Jim lived in Ireland on a full time basis from 1993 until 1 April 2006, so he would be considered as Irish resident and ordinarily resident, but non-domiciled in the year For the 2006 tax year, Jim spent 90 days in the State. In order to be considered resident, an individual must be either present in the State for 183 days in one year or 280 days taking the current and preceding year together. As Jim was resident for the tax year 2005, he will meet the 280 day rule and therefore be considered resident and ordinarily resident for In respect of the tax years 2007, 2008 and 2009, where an individual spends less than 30 days in the State in any tax year, these days are not counted for the purpose of determining residence. Consequently, the annual leave of 25 days that Jim spent in Ireland during each of these years is ignored for this purpose, so Jim will be considered non-irish resident for the years 2007, 2008 and 2009, as he does not meet any of the residency tests. An individual becomes ordinarily resident once she/he has been resident for at least three years and remains ordinary resident for three tax years after they cease to be resident. In Jim s case, he would still be considered as ordinarily resident for 2007, 2008 and 2009, but he will not be treated as ordinarily resident for If Jim returns to Ireland on 10 July 2010, he will be considered resident for the year 2010 as he will be in the State for 268 days (including 1 June and 10 July as he will have been present in the State for part of both days). If he decides to remain in the US, he will not be Irish resident for 2010 as he will only have been in the State from 1 March to 1 June, a total of 93 days. (ii) Income tax exposure for the 2010 tax year For income tax purposes, a resident, non-domiciled individual is taxable in Ireland on income arising in Ireland, employment income to the extent that the employment is carried on in Ireland, and foreign income remitted to Ireland. However, as in 2010 Jim will be becoming resident in Ireland after a period of non-residence, he will be entitled to be taxed under the limited remittance basis on the greater of his income remitted to the State ( 120,000) or 100,000 plus 50% of the excess of his Schedule E income over 100,000, i.e. 170,000 ( 100, ,000 x 50%). In the absence of this relief, he would have been taxed on 176,219 ( 240,000 x 268/365). The limited remittance basis applies where the employee meets the following conditions: Irish resident; before coming to Ireland had been resident in a relevant double taxation agreement country; continues to be paid from abroad; and be on assignment in Ireland for at least three years. In addition the employer must be a company incorporated and resident in a non-eea state with which Ireland has a double tax treaty. On the basis of the information provided Jim and his US multinational employer satisfy all of these conditions. (b) (c) Inheritance from Jim s father For capital acquisitions tax (CAT) purposes, an individual is liable to tax on gifts or inheritances where either the beneficiary or the disponer are resident or ordinarily resident in the State at the date of the gift/inheritance. Domicile is not a consideration. In the case of an inheritance, the date of the inheritance is the date of death. In Jim s case, if he remains non-resident for the 2010 tax year, he will not be liable to CAT. If he becomes resident in 2010, he will still not become liable to CAT as he is non-domiciled and has not been Irish resident for five consecutive years preceding Sale of US house and remittance of funds For capital gains purposes, a resident, non-domiciled individual is liable to capital gains tax (CGT) on gains arising from the disposal of Irish assets and amounts remitted to the State in respect of chargeable gains on the disposal of foreign assets. The foreign remitted gains are chargeable in the year they are received in the State. Losses arising on the disposal of foreign assets are not allowable. In the event that Jim disposes of the US property while he is still non-resident, the gain will not be taxable in Ireland. If he returns to Ireland and therefore becomes resident for 2010 but does not remit the proceeds, the gain will also not be taxable in Ireland. However, if he decides to return to Ireland and becomes resident prior to the sale of the property, and subsequently remits 500,000 from the sale of the US property to purchase the Dublin property, this will be considered a remittance. The Revenue will deem the full chargeable gain to be remitted first and will thus seek to collect CGT on the entire disposal. This will amount to 37,

10 Sale proceeds 1,000,000 Less deemed cost (850,000) 150,000 Less annual exemption (1,270) Taxable gain 148,730 Tax at 25% 37,183 If Jim decides to return to Ireland, he should consider postponing his return until after 3 October to ensure that he is not in the country for 183 days during 2010 and therefore not be liable to CGT on the proceeds of the sale of the property in the US, even if he subsequently remits the proceeds. However, this decision must be made taking into account the loss of the limited remittance basis relief which would then be unavailable to Jim as he would be non-resident in that year. 5 Paul Carr (a) (b) (c) (d) Paul should qualify for seed capital relief in respect of his investment in Carr Medical Ltd. In order to qualify for this relief the investor must: be a full-time employee or director of the new company before the end of six months after the tax year in which the business is established; derive not less than 75% of his total income from Schedule E sources in the tax years 2006 to In addition non-employment income cannot exceed 25,000 in any of these three years; not possess or be entitled to acquire more than 15% of the ordinary share capital of another company except where that company s turnover does not exceed 127,000 and is a trading company; and acquire at least 15% of the issued share capital of the seed capital company and retain it for at least one year from the date of investment. In addition, the new company must be carrying on trading operations of a business expansion scheme (BES) nature and be certified by a granting authority. Manufacturing would be considered a qualifying trade for this purpose. This relief provides a refund of income tax paid by the claimant in the six years prior to setting up a business. Paul s investment, subject to an annual maximum of 100,000, will be deducted from his total income in any two of the six tax years prior to the year of the investment i.e to Paul can elect the most beneficial years in which to claim relief. The refund will be limited to the income tax actually paid in the year. It should be noted, however, that seed capital investment is a specified relief for high earners purposes. Paul borrowed 100,000 to purchase the shares. Interest relief is available on loans taken out to acquire or lend to a trading company in which the individual is an employee or director and the individual owns at least 5% of the ordinary share capital. Relief is available at the individual s marginal rate of tax. However, interest relief is not available where seed capital relief or BES relief has been claimed. Approved share option scheme An approved share option scheme provides an exemption from income tax on the gain arising on the date of exercise of the option but capital gains tax remains chargeable on disposal of the shares. In order to qualify the shares must not be sold within three years of the date of the grant; options must be awarded to all eligible employees and the option price must not be less than market value at the date of grant. However, key employees can still be incentivised through such a scheme as the level of options granted to an individual employee can be increased at the discretion of the company provided that they do not exceed 30% of the total options granted in that tax year. As the company is unlisted, the market value of the shares must be agreed with the Revenue in advance of any option being granted under the scheme. The company also has an annual reporting obligation to the Revenue of any options granted. Inducement payment to Gary An inducement payment is liable to income tax under Schedule E as remuneration of employment unless it can be shown that the recipient has given up a specific right by taking up the employment. This does not appear to be the case here, so such a payment to Gary is unlikely to be tax efficient. Value added tax (VAT) Sales from Carr Medical Ltd are to customers within Ireland, within the EU and outside of the EU. The rules applying to each are: Sales to Irish customers Sales of the product attract VAT at 21 5%. 27

11 Purchases from Irish suppliers Where, as in the case of Carr Medical Ltd, 75% of turnover is sold outside of the State, the company can apply for a s.13a authorisation which allows for the zero rating of all purchases from within the State, the EU and outside of the EU. However, the normal exclusions from VAT refunds continue to apply i.e. VAT on petrol, entertainment expenses, etc. Sales to the EU The sale of goods from one EU country to another is an inter-community supply. Carr Medical Ltd is liable to charge VAT at 21 5% on its products, however, it may zero-rate the supply of goods to a customer in another EU member state if: 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; this number, together with the supplier s VAT registration number, is quoted on the sales invoice; and the goods are dispatched or transported to that other member state. If these four conditions are not met Carr Medical Ltd will be liable for VAT at the appropriate Irish rate. The onus of responsibility for ensuring that the EU customer is VAT registered rests with the Irish supplier and in the event that there is a problem with the EU customer, the VAT will be collected from the Irish company. A quarterly report must be sent to the Revenue setting out the inter-community zero rated supplies on a VIES return. An Interstat return must also be made to the Revenue where turnover to EU countries exceeds 635,000 per annum. Sales outside of the EU The zero rate of VAT applies to the supply of goods that are transported directly by or on behalf of the supplier to a place outside the EU. The trader must retain documentary evidence that the goods were transported outside of the EU in the event of a request from the Revenue. 28

12 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2010 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. Marks 1 (i) R&D credit at 25% available based on difference over 2003 spend 1 Available for offset in current year, preceding year and carried forward 1 Option to claim repayment from Revenue for unused credit 1 But restrictions on amounts repayable 12 month deadline for claiming repayment R&D credit also available on capital expenditure on building 1 No R&D credit allowed to Reed Ltd as building leased 1 Credit allowed if 35% of extension used for R&D over four-year period 1 Clawback arises if building sold within ten years Both types of credit available for group relief 1 Application to HHL group 1 Computation of R&D credit for VLL 1 Use of R&D credit in each company (3 x 1 mark) 3 Procedure for repayment from Revenue over 33 months for Zeta 14 (ii) Holding company exemption to apply based on conditions 1 Both Reed and Zeta part of capital gains group transfer of property to Zeta at no gain/no loss 1 Zeta deemed to have sold and reacquired building on leaving group 1 Calculation of resultant gain/tax 1 Zeta also liable to CGT on sale of building after leaving group 1 Calculation of resultant gain/tax 7 (iii) If HHL purchases the trade profits liable to Irish corporation tax Rate depends on degree of involvement in management 2 Interest as trading expense 1 Credit available for UK tax paid Subsequent sale of asset subject to CGT If shares purchased, interest relief available on funds borrowed, subject to conditions 2 Interest allowed in the year incurred but cannot be carried forward 1 Group relief available 1 Subsidiary taxable in UK only Dividends liable to Irish corporation tax with credit for underlying UK tax 1 10 Format and presentation of briefing notes 1 Effectiveness of written communication

13 Marks 2 (a) (i) There should be a significant tax advantage to incorporate 1 Calculation of tax liability as a sole trader 2 Calculation of corporation tax 1 Calculation of tax liability as employee 2 Identification of close company/surcharge issue 1 Calculation of surcharge 1 Overall conclusion supported by calculation of tax saving 1 10 (ii) CGT on chargeable assets on transfer of trade Relief available if all assets transferred, excluding cash 1 Partial deferral available on consideration comprised of shares 1 Calculation of relief and reduction in share base cost 2 No deferral if premises do not transfer to company 1 VAT will not apply provided both parties are registered 1 Stamp duty will apply to goodwill, premises and debtors 1 8 (iii) Incorporation causes cessation to occur Calculation of assessable profits for both dates 3 Conclusion 4 Format and presentation of the memorandum 1 Effectiveness of written communication 1 2 (b) Julie will be considered a child for retirement relief 1 Tom owns 25% of the shares Company is a trading company Tom must be full-time director for ten years Circumstances in which Tom will qualify as full-time director 1 Necessary for premises to transfer to company on incorporation

14 Marks 3 (a) Disposal to trust liable to CGT based on market value 1 Joanne connected to trust 1 Losses ring-fenced 1 Identification of losses figure carried forward Computation of CGT on disposal of shares 1 Date of payment 5 (b) (i) Martin Martin liable to CAT on life interest in apartment Calculation of liability 1 Liable to income tax on rental income (ii) Jack Jack not liable on income while he is a minor Joanne taxable on income as settlor 1 Tax paid refundable from trust Jack liable to income tax from age 18 to 25 Jack liable to CAT on market value when vests at 25 1 (iii) Tim Liable to CAT on life interest in equities Class 3 threshold applies Calculation of CAT 1 Liable to income tax on dividends 8 (c) (i) Martin s death Jack absolutely entitled to property on Martin s death Calculation of CAT liability No small gift allowance as benefit taken on a death 1 (ii) Tim s gift Tim s life interest gives rise to two benefits 1 Calculation of tax re remainder from Joanne 1 Calculation of tax re life interest from Tim

15 Marks 4 (a) (i) Resident and ordinarily resident for 2005 Resident and ordinarily resident for Annual leave ignored, non-resident for 2007, 2008 and 2009 Ordinary resident for 2007, 2008 and 2009, not for Resident status for (ii) Income taxable in Ireland 1 Limited remittance basis 1 Taxable income without relief Conditions for relief: employee 2 Employer 1 6 (b) Liability to CAT dependent on residence/ordinary residence status 1 Jim not resident at the date of death 1 Will not be liable even if he becomes resident for (c) Residents liable on Irish gains and remitted foreign gains 1 If disposes of property when non-resident, no Irish CGT If resident but proceeds not remitted, no Irish CGT If resident at time of disposal and proceeds remitted, liable to Irish CGT on remitted amount 1 Calculation of CGT Revenue will deem chargeable gain to be remitted first 1 Postpone return to Ireland until 3 October to avoid becoming resident in But loss of limited remittance basis

16 Marks 5 (a) Investment will qualify for seed capital relief Conditions of relief: individual 2 company Relief set against any two tax years in preceding six 1 100,000 annual maximum Interest relief on loan to purchase shares 1 Cannot claim both seed capital relief and interest relief 6 (b) Option under approved scheme exempt from income tax Shares cannot be sold within three years Must be available to all eligible employees Key employees can get higher options subject to 30% rule 1 Option price must be at market value at date of grant Need to agree market value in advance Annual reporting requirement 4 (c) Inducement package liable to tax under Schedule E 1 (d) Sale of goods within the State liable to VAT Section 13A authorisation will apply as sales outside State exceed 75% 1 Zero rating of purchases in the State 1 Zero rating of inter community supplies 1 Conditions to be satisfied 2 VAT can be reclaimed from Irish trader if a difficulty arises Reporting requirements VIES/Interstat Sales outside of EU are zero rated 1 Documentary evidence required