Fundamentals Level Skills Module, Paper F6 (IRL)

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2 Fundamentals Level Skills Module, Paper F6 (IRL) Taxation (Irish) December 2008 Answers 1 (a) Tom Dunne s Case 1 assessments: Applying the normal commencement rules, Tom s income assessable would be: 2005 Actual, from 1 October 2005 to 31 December 2005 Adjusted income year end 30 September ,000 12,000 x 3/12 3, Accounting period of 12 months ending in 2006 Adjusted income year end 30 September 2006 of 12,000 12, Actual, adjusted income from 1 January 2007 to 30 June 2007 Nine month period to 30 June 2007, Loss of 10,000. (10,000) x 6/9 (6,667) Total originally assessed 8,333 The assessments for 2005/2006/2007 may be revised due to either of the conditions cited below: (i) Short lived business relief Relief available to individuals whose business cease during the third tax year and the total assessable profits under the normal basis of assessment exceed the actual profits earned from the date of commencement to the date of cessation. The taxpayer will make a formal claim by 31 October 2007 and all years will be based on actual. OR (ii) The revenue commissioners will insist on the strict statutory basis for a loss incurred in the first three years of commencement Actual, from 1 October 2005 to 31 December 2005 Adjusted income year end 30 September ,000 12,000 x 3/12 3, Actual from 1 January 2006 to 31 December 2006 Year end 30 September 2006, 12,000 x 9/12 9,000 Period end 30 June 2007, ( 10,000) x 3/9 ( 3,333) 5, Actual, from 1 January 2007 to 30 June Period end 30 June 2007, loss of 10,000 (10,000) x 6/9 (6,667) Total assessed (equals actual net profit earned over life of business) 2,000 15

3 (b) Income tax computation of Tom and Susan Dunne for 2007 Notes Tom Sch E Salary (1 month) 3,000 Benefit in kind Meals (n/a) (1) nil Preferential interest (2) 133 Holiday break (3) 100 Car (4) ,858 Sch D Case 1 (loss) nil Susan Sch D Case ,000 Sch F Irish dividend ( 6000/0 8) 7,500 Gross income 26,358 Less Trading loss relief (6,667) Total/Taxable Income 19,691 Tax 19,691 at 20% 3,938 Less: Non refundable tax credits Married persons 3,520 PAYE (5) 772 Dependant relative 80 Home carers tax credit (6) 0 Rent relief (7) 720 5,092 nil Less refundable tax credits PAYE paid 570 Dividend withholding tax 1,500 Tax Refund (8) 2,070 Notes: 1 Meals provided to staff generally in a canteen or company restaurant do not constitute a benefit in kind. 2 Only 1 month s preferential interest will apply as Tom only started to work for the company on 1 December ,000 x (12% 4%)/ Where the benefit derives from the payment of expenses by the employer on behalf of the employee, then the cost incurred by the employer is taken as the benefit in kind. 4 Expected business miles for the year are 9,000, therefore, the taxable percentage to be applied to the original market value is 30%. Also the car was only available for one month. 30% x 25,000/ The PAYE tax credit is the lower of 1,760 or 3,858 x 20% i.e The home carers tax credit is not available as the caring spouse has income in their own right of more than 5, Rent relief is given on a maximum of 3,600 for a married couple aged under 55 years. As this is less than the rent paid of 9,600 the relief is 3,600 x 20% i.e The tax refund is restricted to the PAYE paid and the dividend withholding tax (DWT) as a refund cannot result from the non-refundable credits exceeding the tax due. (c) Where an individual incurs a trading loss they can elect to have it offset against gross income (before charges and relief s) of the current year (s.381 TCA 1997). The order of relief is as follows: the earned income of the individual; his/her unearned income; the earned income of his/her spouse; and then the unearned income of his/her spouse. Any loss then unrelieved can be carried forward and set off against the income of the trade in future years (s.382 TCA 1997). Relief will be given against the first available Case 1 income. 16

4 2 (a) Green Homes Ltd Corporation tax computation for the year to 30 September Working Net trading profit before tax 2,905,200 Add: Depreciation in Cost of sales 150,000 in Overheads 50,000 Repairs and Maintenance: capital expenditure 152,000 Motor expenses (1) 2,071 Legal and professional: penalty for illegal dumping 4,000 planning and design of canteen 12,000 Entertainment: suppliers at an exhibition 7,000 Sundry expenses: capital expenditure 25, ,071 Less: Other Income dividends from Irish resident company 30,000 dividend from UK resident company 9,000 profit on disposal of asset 379,000 Capital allowances (2) 9,441 (427,441) Adjusted Case 1 income 2,879,830 Case 111 income UK dividend 9,000 Capital gain (3) 523,083 Total profits 3,411,913 Tax payable 2,879, ,083 at 12 5% 425,364 9,000 at 25% 2,250 Total corporation tax 427,614 Workings: (1) The only adjustment necessary to motor expenses is in respect of lease payments, where the cost of a leased car exceeds the allowable cost for the relevant period. The allowable cost limit for accounting periods ending after 1 January 2007 is 24,000. The private use of the cars is irrelevant when computing the allowable motor expenses for a company. Restriction 04XX ,000 24,000 6,800 x 28, ,000 24,000 05XX8745 5,500 x 1,100 Restriction 30,000 Total lease payment restriction 2,071 (2) Capital allowances Delivery truck Car Office Furniture Original cost 100,000 38,000 60,000 Restricted cost 1 October ,000 23,000 60,000 Disposals (30,000) Additions 16,529 Restricted cost 30 September ,000 23,000 46,529 Tax Written Down Value (TWDV) 1 October ,500 20,125 0 Disposals (from (i)) 0 Additions (from (ii)) 16,529 Wear and Tear 12 5% (12,500) (2,875) (2,066) TWDV 30 September ,000 17,250 15,463 Total capital allowances (12, , ,066 8,000) 9,441 Note: There is no industrial buildings allowance (IBA) because the canteen does not qualify as an industrial building given the circumstances of this business. 17

5 (i) Disposal of office furniture Sales proceeds 8,000 TWDV 0 Balancing charge 8,000 (ii) Addition of four EPOS systems Cost including VAT 20,000 Less VAT 20000/1 21 * 21 (3,471) Net cost of additions 16,529 (3) Capital gain on disposal of site Sales proceeds 500,000 Less disposal costs (15,000) Site cost 200,000 Stamp duty 12,000 Total cost 212,000 Part disposal formula: Cost x Sales Proceeds Sales proceeds + market value of remainder 212,000 x 500,000 = 132, , ,000 Relevant cost 132,500 Indexation factor 1999/ Indexed relevant cost of site (158,073) Gain on disposal 326,927 Adjust gain: Calculate the CGT at 20% on the gain 326,927 x 20% 65,385 Gain will be taxed at 12 5% 65, Gain for Corporation Tax purposes 523,080 (b) The due date for payment of the companies corporation tax is 21 August 2007 for the preliminary tax of 90%; and 21 June 2008 for the balance of 10% The filing date for Green Homes Ltd tax return is 21 June (c) (i) As Beautiful Homes Ltd is an Irish Resident company the dividend paid to this company is exempt from dividend withholding tax (DWT). As Henry Kirk, is a UK resident individual the dividend paid to him is also exempt from DWT, because he is not resident or ordinarily resident in Ireland but resident in another EU member state and/or resident in a country with which Ireland has a double taxation agreement. Green Homes Ltd must deduct DWT from dividend paid to Patrick O Reilly and Seamus Kirk as they are Irish tax resident individuals. (ii) The due date of payment of the DWT deducted is 14 August 2007, i.e. by the 14th day of the month following the payment of the dividend. 18

6 3 (a) Sally s capital gains tax liability for Gain on the disposal of the house (including development gain). Sales proceeds 500,000 Less disposal costs (6,300) 493,700 Market Value (MV) of house at date of acquisition 30,000 Indexation factor 1980/ Indexed cost of house (97,200) House extension October 1997, no indexation due to development gain (50,000) Gain on disposal 346,500 Less exempt gain from below 139,608 Gain liable to capital gains tax 206,892 Compute gain on house excl development gain. Current use value (CUV) of house 350,000 Less proportionate disposal costs 6,300 x 350,000/ 500,000 (4,410) 345,590 Indexed cost of house (as above) (97,200) House extension as above (50,000) Gain on disposal relating to principal private residence (PPR) element 198,390 Qualifying periods of residence Occupied/ Non deemed Qualifying Occupied years years 1 May 1980 to 30 April 1986 (occupied) 6 1 May 1986 to 30 April 1992 (employed elsewhere in Ireland) May 1992 to 30 April 2000 (occupied) 8 1 May 2000 to 30 April 2006 (not allowable) 6 1 May 2006 to 30 April 2007 (last 12 months) Total period of ownership equals 27 years, thus the exempt fraction is 19/27. Exempt amount is: 198,390 x 19/27 139,608 2 Loss on disposal of car A car is normally not a taxable asset for an individual as it is a wasting asset. However, in this case as the car was for the purpose of Sally s business any gain would be taxable based on the percentage business use of the car. But as the car was bought for 32,000 and is sold for 19,000 there is clearly no gain. Any loss will be dealt with through the capital allowance system. 3 Gain on disposal of shares Where shares are sold out of a holding which was acquired at different times the FIFO basis applies. As rights issues and bonus issues are treated as acquired at the same time as the holding which gives rise to them, the disposal will come entirely from the May 1997 acquisition of shares. Date Transaction No of shares Initial cost Enhancement expenditure 1 May 1997 Purchase 1,000 3, April 2001 Rights issue 250 1,100 1 May 2005 Bonus issue ,500 3,000 1, October 2007 Disposal (1,400) (2,800) (1,027) The % of shares disposed of was 1400/1500 or 93%, therefore the cost of the disposal comprises of 93% of the cost of the original holding and 93% of the cost of the rights issue. 19

7 Gain of disposal Indexation factor Sale proceeds of shares, 7,000 Cost Initial holding (2,800) (3,450) Rights (1,027) (1,175) Gain on shares 2,375 Summary of disposals 1 January October 2007 to 30 September to 31 December Sale of house 206,892 Sale of car 0 Sale of shares 2,375 Total gains 206,892 2,375 Annual exemption (1,270) 0 Net gains taxable 205,622 2,375 Tax at 20% 41, (b) The due dates for payment of the capital gains tax is 31 October 2007 for the 41,124 relating to the 30 April disposal and 31 January 2008 for the 475 relating to the 21 October 2007 disposal. 4 (a) John Walsh VAT liability for the period November/December 2007 Amount VAT excluding VAT VAT Output VAT rate Cash received from accounting/ 21% 70,000 14,700 auditing/tax Note Input VAT Hotel bill accommodation only 13 5% Stationery 1 21% 4, Electricity % 1, ,239 Net VAT payable 13,461 Notes 1 Qualifying activities turnover 81,000 Non qualifying activities 9,000 Total turnover 90,000 % of qualifying to non qualifying activities 90% Stationery 5,000 Qualifying activity percentage 90% VAT reclaimed on Stationery of 4,500 2 % of qualifying to non qualifying activities 90% Electricity 2,000 Qualifying activity percentage 90% VAT reclaimed on electricity of 1,800 (b) In order to be eligible to apply to account for VAT on a Cash Receipts Basis the trader must either derive 90% of his/her turnover from supplies made to unregistered persons; or the traders turnover must not be likely to exceed 1 million per annum. 20

8 (c) A taxable person must submit a VAT return and pay any VAT that is due by the 19th day of the month following the end of the return period. If no return is submitted the Revenue may issue an estimate of VAT due, which will become due and payable if the taxpayer does not subsequently submit a return and pay the VAT liability with interest. Interest is charged per day or part day that the tax is outstanding and penalties may also be incurred for non-compliance. 5 An employee works under a contract of service and a self-employed individual under a contract for services. The main factors used in deciding whether an individual is employed or self-employed for tax purposes are: 1. The degree of control exercised over the person performing the work. In the case of an employee the manner and method of working will be controlled by the employer; whereas a self-employed individual will normally be able to determine how the service is performed. 2. The extent to which the individual benefits from the employment rights arising from legislation, such as the right to receive regular remuneration, including sickness and holiday pay and redundancy in the case of an employee. 3. The degree to which the payment received is based on results, rather than on a time basis (hourly, weekly or monthly). This together with the need to make good any faulty or substandard work at his/her own expense is an indicator of self-employment. 4. The extent to which the individual has flexibility in relation to his/her hours of work. An employee will be committed to work regular or specified hours as determined by the employer; whereas a self-employed individual will have the option to work when he/she chooses, subject to the need to fulfill the agreed task/contract. 5. The degree of financial risk taken. For someone who is self-employed financial risk will arise from the uncertainty of return as a result of not being paid on a regular basis; being in a position to incur a loss as well as a profit; and conversely the ability to benefit from sound management. Such an individual will also be responsible for the investment in and management of his/her business. 6. The extent to which the individual is responsible for providing necessary equipment and facilities. A self-employed individual will be expected to provide his/her own equipment and office facilities; whereas in the case of an employee these would be provided by the employer, other than possibly the small tools of the trade in the case of a craftsman. 7. The degree of integration with the activities of the employing business. The work of an employee usually forms an integral part of the employer s business and is not an accessory to it. This is less likely to be the case for someone who is self employed performing a specific service. This factor is also usually reflected in the length of the engagement. 8. The degree of exclusivity of the relationship. An employee will be obliged to work personally and usually exclusively for his/her employer; whereas a self-employed individual will have the right of substitution or ability to sub-contract and will work for more than one, often many persons or businesses. 9. The extent to which the individual has an obligation to undertake the work offered and the employer to continue to offer further work. An employee will normally not be in a position to decline work and have an expectation of continued work (employment); this is not the case with someone who is self-employed. NOTE: only FIVE factors are required. 21

9 Fundamentals Level Skills Module, Paper F6 (IRL) Taxation (Irish) December 2008 Marking Scheme 1 (a) Applying the commencement and cessation rules 3 Short lived business 1 Strict statutory basis 1 Revised assessments 2 (b) Sch E salary 0 5 Benefit in kind Meals exempt 0 5 Preferential interest 1 5 Holiday break cost 1 Car 1 5 Sch D case 1 loss(as nil) 0 5 Case Sch F 1 Loss relief 1 Tax payable 0 5 Non refundable tax credits Married persons 0 5 PAYE 1 Dependent relative 0 5 Home Carers(as nil) 0 5 Rent relief 1 Refundable tax credits PAYE 0 5 DWT 0 5 Identify correct tax refund 1 Marks 7 14 (c) Against current year income 1 Order of offset (4 x 0 5) 2 Carried forward against case

10 Marks 2 (a) Net profit before tax 0 5 Addbacks Depreciation in Cost of sales 0 5 Depreciation in overheads 0 5 Repairs and maintenance: capital expenditure 0 5 Motor expenses: restriction of leasing costs 1 No adjustment for private use 0 5 Legal and professional: penalty 0 5 planning and design of canteen 0 5 Entertainment: suppliers 0 5 Sundry expenses: capital expenditure 0 5 Deductions Other income: Irish dividend 0 5 UK dividend 0 5 Profit on sale of site 0 5 No adjustment for Stock written off 0 5 Goods misappropriated by staff 0 5 Painting and decoration/maintenance 0 5 Replacement of roof 0 5 Motor running expenses 0 5 Collection of debts/negotiation of contract 0 5 Staff entertaining 0 5 Bad debts 0 5 Loan interest 0 5 Donation 0 5 Capital allowances Restricted cost of motor car 0 5 Balancing charge 1 5 Addition of 4 EPOS systems net of VAT 1 5 Wear and tear allowances (3 x 0 5) 2 Schedule D Case Capital gain: Sale proceeds less disposal costs 0 5 Total cost of asset being disposed 0 5 Relevant cost based on part disposal formula 1 5 Indexation of relevant cost 0 5 Adjustment of capital gain for corporation tax (mark given 1 for the adjusted amount not the specific working) Corporation tax payable (2 x 0 5) 1 23 (b) Preliminary tax payment 0 5 Balance payment date 0 5 Corporation tax return date 1 2 (c) UK resident individual 1 5 Irish resident company 1 Irish shareholders (d) Payment date for DWT

11 Marks 3 (a) (i) Disposal of the house Sales proceeds less disposal costs 0 5 Cost equals market value at acquisition date 1 Indexed acquisition cost 0 5 House extension at cost (no indexation) 1 Gain excluding development gain Current use value 1 Adjusted disposal costs 1 Indexed acquisition cost 0 5 Extension cost 0 5 Qualifying periods of residence (5 x 0 5) 2 5 Exempt fraction 0 5 Exempt amount (ii) Car Loss not available 0 5 Explanation of treatment (iii) Shares Disposal entirely from May 1997 purchase (FIFO basis) 1 Initial purchase of shares 0 5 Rights issue 0 5 Bonus issue 0 5 Number and cost of shares disposed of 1 Gain including indexed cost of shares 1 5 Summary of disposal Annual exemption 1 Tax payable (2 x 0 5) 1 7 (b) Dates of payment, (2 x 1) (a) Output VAT only on cash received from qualifying activities 2 No VAT on exempt financial services activity 0 5 Percentage of qualifying to non-qualifying activities 1 VAT deductible on stationery at correct amount 1 Include VAT on stationery even though not paid 1 VAT deductible on electricity at correct amount 1 5 No VAT on wages 0 5 Allow VAT on hotel accommodation only 2 Show net VAT payable amount (b) Two alternative conditions (2 x 1) 2 (c) Due date 1 Revenue can issue estimate 1 Daily interest 0 5 Possible penalties ANY FIVE factors: 1 mark for each factor identified maximum 5 1 mark for brief discussion on each factor identified maximum