Professional Level Options Module, Paper P6 (IRL) 1 Walter Osborne

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1 Answers

2 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2016 Answers 1 Walter Osborne Chartered Certified Accountants Any street Any town 8 November 2015 Mr Walter Osborne Any street Any town Re: Disposal of your businesses Dear Walter, I refer to our recent meeting and am writing to give you my advice on your exposure to Irish capital gains tax (CGT) and on the specific tax implications of the disposal of your Irish paint businesses. (i) (ii) Exposure to Irish CGT Implications of residence and domicile status You are neither resident nor ordinarily resident in Ireland in Individuals who are neither resident nor ordinarily resident in Ireland, irrespective of their domicile, are assessed to CGT on the chargeable gains realised on the disposal of the following specified assets: (1) land and buildings in Ireland including any interest in land (such as leases); (2) minerals or any rights, interests or other assets in relation to mining or minerals or the searching for minerals in Ireland; (3) assets situated in Ireland, which were used in, or acquired for use for the purposes of a trade carried on in Ireland; (4) unquoted shares deriving the greater part (i.e. 50% or more) of their value from (1) or (2). Applying this list of specified assets to your proposed disposals, there is a potential exposure to Irish CGT on some of those disposals as outlined further below. Applicability of retirement relief Retirement relief gives an exemption from CGT to certain individuals aged over 55, who are disposing of a business. However, it will not apply to your proposed disposals, because: the sales proceeds limit for individuals aged over 66 selling business assets (or shares in family companies) to persons other than their children is an aggregate 500,000; and when shares in a family company are being sold, there is a requirement that the individual disposing of the shares must have been a full-time working director for at least five years. This is clearly not so in your case as the majority of your time is spent on your UK business activities. Specific Irish tax implications of the disposal of the three businesses. The Blue Shop Premises Value added tax (VAT) The extension in May 2013 cost 200,000, which represents 28 5% of the proposed consideration for the sale of the premises of 700,000. As this is more than 25%, it constitutes a development of the property. The sale is scheduled to take place on 10 December 2015, which is within five years of the most recent development. Therefore the sale is subject to the transfer of a business provisions. The purchaser is deemed to incur VAT of 94,500 (13 5% x 700,000). Tutorial note: A new capital goods scheme life of 20 intervals will commence on the date of the transfer. CGT The premises are a specified asset and its disposal will trigger a chargeable gain of 200,000 ( 700, , ,000) and CGT payable of 66,000 ( 200,000 x 33%). The cost of the original extension is not allowable as it was not part of the asset on the date of sale. It will be necessary for you to apply for CGT clearance and provide a form CG50A to the purchaser (to avoid the withholding by the purchaser of 15% of the sales proceeds). Shares in Blue Shop Ltd (BSL) VAT VAT does not apply to the sale of shares. 25

3 CGT The greater part of the value of the BSL shares is not derived from either land and buildings or minerals, etc and therefore the shares are not specified assets and no Irish CGT will be payable by you on their disposal. The Red Shop Shares in Brush Ltd VAT As stated above, VAT does not apply to the sale of shares. CGT The shares in Brush Ltd ultimately derive their value from the assets of Red Shop Ltd (RSL). In this case the greater part (55 5% (( 350, ,000)/ 900,000)) of their value is derived from land and buildings. Therefore, the shares in Brush Ltd are specified assets and their disposal will trigger a chargeable gain of 870,000 ( 900,000 30,000) and CGT of 287,100 ( 870,000 x 33%). The Green Shop Sale of premises by Green Shop Ltd (GSL) to Mary VAT The premises are more than 20 years old and were not developed within five years prior to the sale, therefore, the sale to Mary was outside the scope of VAT. In addition, there was no capital goods scheme adjustment because the building was more than 20 years old and there was no significant development in the last ten years. Company chargeable gains Mary is a participator in GSL. Therefore, even though the consideration for the sale of the premises to her was 50,000 less than market value, GSL is treated as disposing of the premises at their full market value of 200,000. This results in a company chargeable gain of 41,700 ( 200,000 ( 100,000 x 1 583)) and a corporation tax liability of 13,761 (33% x 41,700) payable by GSL. Dividend withholding tax (DWT) The 50,000 undervalue is treated as a distribution. DWT of 10,000 (20% x 50,000) is payable by GSL. This 10,000 may be reclaimed from Mary and in our calculation we have assumed that it will be reclaimed. Tutorial note: If Mary does not repay the DWT, it will be deemed to be a further distribution and DWT will apply to the 10,000. Income tax (IT) Mary will be taxed on the distribution at her marginal rate of 51%, i.e. 25,500, with a credit for the DWT paid. Her balancing IT liability is 15,500 ( 25,500 10,000). Stamp duty Stamp duty of 4,000 ( 200,000 x 2%) is payable by Mary. Tutorial note: Where there is a sale at undervalue, stamp duty is calculated based on the market value of the property transferred rather than the consideration paid. CGT implications for you and Mary As a result of the sale at undervalue, the base cost of Mary s and your shares in GSL is reduced by 25,000 each ( 50,000 x 50%). Capital acquisitions tax (CAT) There are no capital acquisitions tax implications, because the transfer of value is effectively from Mary and yourself to Mary. Gifts to oneself are ignored and transfers between spouses are not taxable. Disposal of assets and liquidation of GSL Disposal of assets Goodwill Corporation tax (CT) of 148,500 ( 450,000 x 33%) will be payable by GSL in relation to the chargeable gain on the disposal of the goodwill. Equipment The tax written down value of the equipment on the date of sale will be 40,000 ( 80,000 (4 x 12 5% x 80,000)). The sale of the equipment for 60,000 will trigger a balancing charge of 20,000, which is taxable at 12 5%, so a CT liability of 2,500 will arise. There is no capital gain on the disposal of the equipment as the price is below cost (and loss relief is not available). Inventory No CT will arise on the disposal of the inventory as it is not being disposed of for more than cost and it is not a chargeable asset. 26

4 VAT No VAT will arise on the disposal of the above three assets, due to the availability of transfer of undertaking relief. Liquidation The net funds in the company after the sale of the business and payment of liabilities amounts to 409,239. The calculation of this amount is included in the Appendix (Schedule 1). This will be distributed equally to you and Mary (as equal shareholders). At the time of the liquidation, cash would be the only asset in the company and therefore the shareholding in GSL would not be a specified asset. You and Mary would therefore each have a nil liability to Irish CGT. However, UK tax may be payable on this disposal. The CGT and liquidation calculations are included in the Appendix (Schedule 2). The after-tax proceeds arising from the liquidation will be 409,239 ( 409,239 ( 0 x 2)). (iii) After-tax proceeds from the disposal of the three businesses Proceeds of 2,626,639 will be available after payment of all taxes. The calculations of the total after-tax proceeds are included in the Appendix (Schedule 3). (iv) Recommendation re the disposal of the Red Shop business The apartment is presumably not a core business asset of RSL and not an essential part of the deal with Impression plc. If RSL were to dispose of this apartment, prior to the sale of the Brush Ltd shares to Impression plc and lodge the net proceeds to the company bank account, this would reduce the proportion of the value derived from land and buildings to below 50%. The shares in RSL (and thus in Brush Ltd) would no longer be a specified asset and no Irish CGT would be payable. The asset value of RSL would be the same as before, insofar as the apartment asset would have been replaced by an equivalent cash asset. There will be no company capital gain on the disposal of the apartment as its current market value is less than the original cost. The effect of the above would be a CGT saving of 287,100 on the disposal of the shares in Brush Ltd and a corresponding increase in the overall after-tax proceeds to 2,913,739. However, UK tax may be payable on this disposal. I hope that the above addresses your requirements but please feel free to contact us if you require any further assistance. Yours sincerely, A.N. Accountant Chartered Certified Accountants Appendix: Calculation of net proceeds arising from the liquidation of GSL (1) Net funds in company after the sale of the business and payment of liabilities Proceeds from sale of: Goodwill 450,000 Inventory 50,000 Equipment 60, ,000 Add: Cash at bank 190,000 Less: Payment of liabilities Trade payables (70,000) Bank loan (100,000) CGT re premises (13,761) DWT (assumed reclaimed) 0 CT balancing charge (2,500) CGT re goodwill (148,500) Liquidator s fees (6,000) Net funds 409,239 27

5 (2) Distribution to the shareholders by liquidation Total proceeds (from Schedule 1) 409,239 CGT calculation for each shareholder Each shareholder receives 50% 204,620 CGT at 33% Nil Net proceeds to each shareholder on the liquidation Walter Mary Total Capital distribution 204, , ,239 Less: CGT Nil Nil Nil Net proceeds 204, , ,239 (3) Summary Proceeds CGT IT/DWT Stamp After-tax (excl.vat) duty proceeds Blue Shop premises 700,000 (66,000) 634,000 BSL shares 1,000,000 1,000,000 Brush Ltd shares 900,000 (287,100) 612,900 GSL liquidation 409,239 (0) (4,000) 409,239 GSL premises disposal (25,500) (25,500) 3,009,239 (353,100) (25,500) (4,000) 2,626,639 2 Sam Baldwyn (a) Capital acquisitions tax (CAT) implications of bequests Specific bequests (1) Shares in Gaucho Ltd Donald and Katy inherited the shares in Gaucho Ltd from their father. They will be liable to CAT on the market value of this benefit and will be entitled to the lifetime class 1 tax-free threshold of 225,000. Where a benefit comprises shares in a private company, the market value attributed to those shares depends on whether the beneficiary, together with their family, has control of the company after taking the benefit, or not. Where control is present after taking the benefit, the shares are valued as a majority holding. Where control is not present, the shares are valued on a minority holding basis. In this case, both Donald and Katy will be considered majority shareholders after they receive this benefit, because their family will hold 60% of the company shares. Therefore they will each receive a shareholding valued at 450,000 (30 x 15,000). Business property relief provides for the reduction in the taxable value of a benefit by 90% where the benefit comprises business assets or shares in a trading company. In order to qualify in the case of an inheritance, the disponer (Sam) must have owned the shares for a minimum period of two years prior to death. This is the case. In addition, the beneficiary must satisfy certain conditions, one of which is that they own more than 25% of the shares in the company after taking the inheritance. Both Donald and Katy will own more than 25% of the shares after taking the inheritance and so will qualify for business property relief. Therefore their taxable benefit will be 45,000 each ( 450,000 x 10%). (2) Business premises Business property relief also applies to the inheritance of premises which were owned personally by a shareholder provided the following conditions are met: the property must have been used by the company for at least two years; the transfer must be in conjunction with a transfer of the shares in the company by a controlling shareholder; and both the shares and the property must be taken by the same individual(s). All of the above conditions have been complied with in this case. Therefore, Donald and Katy will each receive a taxable benefit of 15,000 (( 300,000 x 50%) x 10%) in respect of the business premises. 28

6 (3) Principal private residence (PPR) in Dublin Donald receives a taxable benefit of 400,000. (4) Commercial property in London A transaction is subject to CAT if either the disponer or the donee are Irish resident or if the property is situated in Ireland. As both Sam and Katy are Irish resident, the inheritance of the commercial property in London is subject to CAT and Katy receives a taxable benefit of 500,000. (5) Irish government securities As the disponer (Sam) is Irish resident and the property is situated in Ireland, Charlie receives a taxable benefit of 100,000. He will have a lifetime class 2 tax-free threshold of 30,150 to set against this gift. Tutorial note: Irish government securities may be exempt from CAT when taken by a non-domiciled, non-ordinarily resident individual. As Charlie is Irish domiciled, this exemption does not apply. Residue The goodwill of the partnership (valued at 200,000) along with the cash of 76,000 will form the residue of the estate. Donald and Katy will each receive a taxable benefit of 138,000 ( 276,000 x 50%). Summary of CAT payable Donald Katy Charlie Inheritance from Sam Shares in Gaucho Ltd 45,000 45,000 Business premises 15,000 15,000 PPR 400,000 Commercial property 500,000 Residue 138, ,000 Government securities 100,000 Total 598, , ,000 Less: Class 1/1/2 threshold (225,000) (225,000) (30,150) Taxable benefit 373, ,000 69,850 CAT at 33% 123, ,090 23,051 Tutorial note: Katy s previous gift from Charlie is not aggregated with the inheritance from her father, because they are different classes of disponer. (b) (c) CAT effect of proposed actions (1) A disclaimer is not effective for CAT purposes if it is in favour of someone else. The effect of the proposed disclaimer by Donald of the PPR in favour of Katy would be as follows: Donald would still be taxed on the inheritance of the PPR from his father (as in (a) above). Katy would be taxed on a gift from her brother valued at 400,000, less the small gifts exemption of 3,000. Her remaining class 2 tax-free threshold (after deducting the previous gift from her uncle) would be 20,150. Therefore, additional CAT of 124,361 would be payable (( 400,000 3,000 20,150) x 33%). (2) The proposed gift by Katy of her shareholding in Gaucho Ltd and her interest in the business premises to Donald would have the following consequences: The business property relief granted to Katy on her inheritance would be clawed back, as the six-year holding period will not have been complied with. Therefore, she would be subject to CAT on the remaining 90% of the value of both the shares and the premises, which would result in additional CAT payable of 178,200 (( 405, ,000) x 33%). Business property relief would not be available to Donald, as the shares would not have been held by the donor (Katy) for the requisite five-year period for a gift. Therefore, Donald would receive a taxable gift of 600,000 ( 450, ,000). The small gifts exemption and the class 2 threshold of 30,150 would apply, and the tax payable would be 187,061 (( 600,000 3,000 30,150) x 33%). The implications for Donald of Jim Steele selling his shares to him at an undervalue would be as follows: Stamp duty would apply at 1% of the market value of the shares. Donald would effectively have received a gift of the undervalue amount from Jim. Business property relief would reduce the taxable value of the gift by 90% as Jim has held the shares for the requisite five-year period (subject to Donald holding the shares for the six-year holding period to avoid a claw-back). 29

7 The gift would be subject to the class 3 lifetime tax-free threshold of 15,075. The CAT liability may be offset by any capital gains tax (CGT) payable by Jim on the same benefit. Donald s CGT base cost for a future disposal of the shares would be their market value. 3 Sounds Ltd (a) Close company status A close company is one which is under the control of five or fewer participators or of participators who are directors (regardless of the number). The shareholdings of participators and their associates are aggregated and treated as one person for the purposes of the above test. In this case, the combined shareholdings of Ben Wilson and his associates Caroline, Rhonda and Conor amount to 170 shares. When these are combined with the shareholdings of any four of the remaining shareholders, the total shareholding held by the five participators amounts to more than 50% of the total. Sounds Ltd is therefore a close company. (b) (1) Interest on directors loans from Ben and Rhonda Interest paid to directors, who control more than 5% of the ordinary share capital, is treated as a distribution to the extent that the interest paid exceeds 13% of the lower of: the total amount of the loans (or average balance if they fluctuate); and the nominal issued share capital (plus the share premium account, if there is one) at the beginning of the accounting period. Where there are two or more recipients of interest, the overall limit is apportioned between them in proportion to the interest paid to each. 13% of share capital ( 400 x 13%) 52 13% of loans ( 20,000 x 13%) 2,600 Maximum allowable interest (lower figure) 52 Total interest paid to directors 2,000 Balance treated as a distribution 1,948 Therefore, Sounds Ltd must disallow interest of 1,948 in its corporation tax computation. Dividend withholding tax (DWT) of 390 (20% x 1,948) is payable by Sounds Ltd within 14 days of the end of the month when the distribution was made. The DWT is recoverable from Ben ( 195) and Rhonda ( 195), and if it is not repaid, a second distribution (of the DWT amount) will be deemed to have taken place. Sounds Ltd must also deduct income tax of 10 ( 52 x 20%) from the allowable interest and pay it over to the Revenue. Ben and Rhonda will be assessed to income tax on: the allowable interest (of 26 each) under Schedule D, Case IV and will receive a credit for the income tax deducted at source (as above) by Sounds Ltd; and the gross distribution ( 974 each) under Schedule F and will receive a credit for the DWT deducted (as above). (2) Loan to Conor Conor is neither a director nor an employee of Sounds Ltd, but is a participator. Implications for Sounds Ltd A loan to a participator results in the close company being assessed to tax at the standard rate of 20%. The loan is treated as a net payment made under deduction of tax at the standard rate. Therefore, income tax of 5,000 ( 20,000/0 8 x 20%) will form part of Sounds Ltd s corporation tax liability for the accounting period in which the loan is made. When the loan (or part thereof) is repaid by Conor, the related corporation tax can be reclaimed from the Revenue. Implications for Conor Conor will not be assessed to income tax on a benefit in kind as he is not an employee or director of Sounds Ltd. However, he will be deemed to receive a gift of the free use of the money, calculated as the interest foregone by Sounds Ltd as a result of lending the money to him. It is expected that this gift will be covered by the small gifts exemption and so no capital acquisitions tax (CAT) will be chargeable. 30

8 (3) Expense payments on behalf of Conor Implications for Sounds Ltd Expenses and benefits paid by a close company to or for participators who are not employed by it are treated as distributions. Therefore, the 5,000 should be added back in the corporation tax computation as disallowable and DWT of 1,250, (20% x 5,000) is payable by Sounds Ltd, and reclaimable from Conor (as for (1) above). Implications for Conor Conor will be taxed on the distribution at his marginal rate of income tax and will receive a credit for the DWT deducted. (c) Corporation tax liability for the year ended 31 December 2015 Trading income per accounts 500,000 Add-back: Excess interest paid to directors 1,948 Travel and accommodation disallowed 5, ,948 Less: Capital allowances (20,000) Case I income 486,948 Less: Trading loss brought forward (20,000) 466,948 Case III interest 2,000 Case V income 40,000 Less: Rental loss brought forward (10,000) 30,000 Total income 498,948 Adjusted chargeable gain 2, ,948 Taxed as follows: Case I: 466,948 x 12 5% 58,369 Case III: 2,000 x 25% 500 Case V: 30,000 x 25% 7,500 Chargeable gain: 2,000 x 12 5% ,619 Income tax on loan to participator 5,000 71,619 (d) Surcharge calculation for the year ended 31 December 2015 Calculation of distributable investment and estate income Case III 2,000 Case V 40,000 42,000 Franked investment income 700 Estate and investment income 42,700 Less: Corporation tax at 25% on investment and estate income (10,500) 32,200 Less: Trading company reduction 7 5% (2,415) Distributable investment and estate income 29,785 Less: Distributions Excess interest treated as a distribution (1,948) Expenses paid on behalf of a participator (5,000) Undistributed investment and estate income 22,837 Surcharge at 20% 4,567 31

9 4 Genoa Ltd (a) Options available on the maturity of the pension fund Lump sum A maximum of 25% of the fund can be taken as a lump sum. The first 200,000 will be exempt from tax. This is a lifetime limit. The next 300,000 will be liable to tax at a flat rate of 20% and this 20% tax cannot be reduced by allowances, deductions or charges. Amounts above 500,000 will be taxed as emoluments to the individual and taxed at their marginal rate of income tax plus universal social charge (USC). Tutorial note: If the pension value of the fund on maturity is calculated to be over 2 million, the excess is taxed under Schedule D Case IV at 40%. The pension administrator is primarily responsible for collecting and paying this tax. Balance Alison and Eva have the following options with respect to the balance of the fund (75%): (i) Purchase an annuity. The annuity would cease on the demise of the relevant director. (ii) Transfer the balance of the pension fund at retirement to an approved retirement fund (ARF). They would each continue to own the fund after retirement and if there are assets in the fund on their death those assets will form part of their estate. Any withdrawals from the ARF are treated as income and PAYE is operated by the fund manager. It will not be necessary for either of the directors to set up an approved minimum retirement fund as both Alison and Eva are expected to have more than the required 12,700 guaranteed pension per annum from another source. (b) (1) Additional directors remuneration Implications for Genoa Ltd The company can claim a corporation tax (CT) deduction for the total additional remuneration of 200,000. This would reduce the CT liability by 25,000 ( 200,000 x 12 5%). Tutorial note: The company will not be responsible for employer s PRSI on the additional remuneration, as the directors are treated as self-employed contributors chargeable under class S. Implications for the directors The directors would be subject to income tax on the additional remuneration at their marginal rate (40%), together with self-employed PRSI (4%) and USC (8%). Their overall marginal tax rate will be 52%. They would be allowed a deduction for income tax purposes in relation to their pension contributions. In the case of each director, the net relevant earnings of 172,000 would be limited to the overall earnings cap of 115,000. Alison would have a maximum allowable contribution of 23,000 ( 115,000 x 20%). The additional taxes on her 2015 income would, therefore, be 42,800 (( 100,000 x 52%) ( 23,000 x 40%)). Eva will have a maximum allowable contribution of 34,500 ( 115,000 x 30%). The additional taxes on her 2015 income will be 38,200 (( 100,000 x 52%) ( 34,500 x 40%)). In both cases the unrelieved pension contributions may be carried forward for relief in future years. Summary The tax implications are summarised as follows: CT saving by the company 25,000 Additional taxes on income payable by the directors (81,000) (56,000) (2) Payment of a dividend Implications for Genoa Ltd The company would not receive any tax relief in respect of the payment of the dividends. It would be obliged to account for dividend withholding tax (DWT) of 40,000 (20% x 200,000). Implications for the directors The directors would be subject to tax at their marginal tax rate of 52% on the gross dividend received, with a credit for the DWT withheld. Dividends are not relevant earnings for the purposes of relief for retirement annuity contributions. Therefore the allowable deductions for the pension contribution would be restricted to the appropriate percentage of their existing remuneration, as follows: 32

10 Alison would have a maximum allowable contribution of 14,400 ( 72,000 x 20%). The additional taxes on her 2015 income would be 26,240 (( 100,000 x 32%) (40% + 4% + 8% 20%) ( 14,400 x 40%)). Eva would have a maximum allowable contribution of 21,600 ( 72,000 x 30%). The additional taxes on her 2015 income will be 23,360 (( 100,000 x 32%) ( 21,600 x 40%)). Again, the unrelieved contributions may be carried forward for relief in future years. Summary The tax implications are summarised as follows: CT saving by the company Nil DWT payable by the company (40,000) Additional taxes on income payable by the directors (49,600) (89,600) Conclusion It is clear from the above that alternative 1 (payment of additional remuneration) is preferable, because: it results in a CT saving for the company; and the remuneration is counted as net relevant earnings in relation to the allowable pension contribution limits. However, the amount available to invest by the directors is still considerably curtailed by the substantial taxes payable on the additional remuneration. (c) More tax efficient recommendation It is recommended that Genoa Ltd set up an occupational pension scheme for the benefit of each director and invest 100,000 directly into each scheme. The scheme must be approved by the Revenue prior to the commencement of contributions. Implications for Genoa Ltd The company will be allowed a deduction for the cost of the contribution in computing its Schedule D Case I income for the year in which it makes the contribution. There will be a CT saving of 25,000 ( 200,000 x 12 5%). It is essential that the contributions are made prior to the year end of 31 December 2015 if they are to be deductible for CT purposes in Implications for the directors There are no tax implications for the directors. The contribution by the company is not regarded as income and is not taken into account for the purposes of computing income tax, PRSI or USC. The tax implications of this option are summarised as follows: CT saving by the company 25,000 Additional taxes on income payable by directors Nil 25,000 5 Christine Wood (a) Value added tax (VAT) Songbird Ltd The training activity is exempt. VAT must not be charged on sales of training courses and it must not be reclaimed on related inputs. VAT on property Songbird Ltd would have claimed back 40,500 ( 300,000 x 13 5%), being all of the VAT arising on the purchase of the property on the basis of its expected 100% recovery. The capital goods scheme (CGS) regulates the deductibility of input VAT on a building over the VAT life of that building which in this case is 20 years (intervals). The use of the building is reviewed at the end of every interval. The initial interval is at the end of the first year (31 January 2016) and subsequent intervals occur at the accounting year end, which in Songbird Ltd s case is 31 December. At the end of the initial interval, the proportion of taxable use (80%) was less than the proportion of input VAT recovered on the acquisition of the property (100%) and, therefore, an adjustment is required. Songbird Ltd must pay back VAT of 8,100 (20% x 40,500) as part of its return for March/April Tutorial note: The amount of VAT is payable as VAT due for the tax period immediately after the initial period. 33

11 The reference deduction amount for future intervals will be 1,620 ((80% x 40,500)/20). If the taxable usage of the buildings falls in future years (as expected), then the company will be required to calculate the interval deduction amount (based on the actual taxable usage in the interval) and repay the difference between this and the reference deduction amount of 1,620 to the Revenue. VAT inputs on overheads Songbird Ltd must ensure that VAT input credits are not claimed on expenditure directly related to the training activity. In cases where a single bill covers the entire premises, e.g. telephone or electricity, the non-deductible portion of VAT should be calculated and excluded from the inputs reclaimed. It appears that 20% is an appropriate percentage to use in this regard. VAT on equipment The Italian supplier will not charge Italian VAT to Songbird Ltd if they provide a valid VAT registration number. Songbird Ltd must account for VAT on the reverse charge basis. This means that output VAT of 3,450 (23% x 15,000) must be accounted for. In this case, an input credit will not be available because the goods will be used solely for the purposes of a non-taxable activity, so 3,450 will be payable to the Revenue. (b) (c) Corporation tax Albatross Ltd and Songbird Ltd It will not be possible, under the current structure, to offset the expected losses in Albatross Ltd against the expected profits in Songbird Ltd, as the companies do not form a loss group. The only option under the current structure is for Albatross Ltd to carry forward its losses to offset against the future profits of that company (if such profits arise). A loss group would allow for the offset of the losses between the two companies, resulting in a total tax saving over the next three years of 37,500 ( 100,000 x 3 x 12 5%). Recommendation formation of a loss group Christine should incorporate a new company (H Ltd) to become the holding company of both Albatross Ltd and Songbird Ltd. H Ltd could then make an offer to Christine to acquire her share capital in the two existing companies. The terms of the offer would be that additional shares in H Ltd would be issued to Christine in return for her shares in Albatross Ltd and Songbird Ltd. Tax consequences Capital gains tax (CGT) A share for share exchange (as proposed) does not give rise to a charge to CGT, provided it is shown that the exchange was effected for bona fide commercial reasons and did not form part of an arrangement or scheme of which the main purpose or one of the main purposes was the avoidance of tax. Arranging a group structure so as to facilitate the availability of group loss reliefs is not considered to have an avoidance purpose. The new shares received in H Ltd would take the same date of acquisition and cost incurred as the target companies of Albatross Ltd and Songbird Ltd. It is a condition of the relief that H Ltd acquires both Albatross Ltd and Songbird Ltd. Stamp duty There is a similar share for share exemption from stamp duty. To avail of this exemption, H Ltd must acquire at least 90% of the share capital of Albatross Ltd and Songbird Ltd. The exemption will be clawed back if Albatross Ltd or Songbird Ltd leave the group within two years. Capital gains tax (CGT) The original base cost of the property ( 410,000) will be reduced by the amount of the loan written off ( 50,000) to give a CGT base cost of 360,000. Therefore, Christine will have an allowable loss of 60,000 ( 300, ,000). The annual exemption cannot be used to increase the allowable loss. The loss may be offset against any capital gains realised by Christine in future years on assets other than development land. 34

12 Professional Level Options Module, Paper P6 (IRL) Advanced Taxation (Irish) December 2016 Marking Scheme This marking scheme is given as a guide to markers in the context of the suggested answer. Scope is given to markers to award marks for alternative approaches to a question, including relevant comment, and where well-reasoned conclusions are provided. This is particularly the case for essay based questions where there will often be more than one definitive solution. Available Maximum 1 (i) Chargeable on specified assets only 1 0 List the specified assets (0 5 x 4) 2 0 Walter will not qualify for retirement relief 1 0 Reasons why he will not qualify for RR (ii) The Blue Shop Premises VAT The extension constitutes development (> 25%) 1 0 Disposal is (within five years) 0 5 Transfer of business provisions apply 1 0 Calculation of VAT 0 5 CGT Premises are a specified asset 0 5 Calculation of the chargeable gain and CGT 1 0 Cost of original extension not allowable 0 5 CGT clearance 0 5 Shares in BSL VAT does not apply on the sale of shares 0 5 Not specified assets so no Irish CGT payable 1 5 The Red Shop VAT does not apply on the sale of shares 0 5 CGT Calculation demonstrating that the shares are specified assets 1 5 Calculation of chargeable gain and CGT 1 0 The Green Shop Sale of premises by GSL to Mary Premises are not subject to VAT (with reasons) 2 0 CGT company Identification of sale at undervalue to participator 1 0 Calculation of company chargeable gain 1 0 DWT Applicable and calculation 1 0 May be reclaimed from Mary 0 5 IT Calculation of overall and balancing liability 1 0 Stamp duty calculation 1 0 CGT Walter and Mary Reduction of base cost by amount of undervalue 1 0 CAT No CAT implications, with reasons 1 0 Disposal of assets CT on goodwill 1 0 Balancing charge on equipment 1 0 No CT on inventory 0 5 No VAT 1 0 Liquidation Calculation of net funds: Appendix (1) 1 5 Calculation of CGT liability for the shareholders: Appendix (2) 1 5 Calculation of net proceeds to shareholders: Appendix (2) (iii) Summary of after-tax proceeds available

13 Available Maximum (iv) Dispose of the apartment in RSL 1 0 CGT consequences for the share disposal 1 0 No company capital gain on the disposal 0 5 Identification of CGT savings/effect on overall proceeds Professional marks Format and presentation of the letter 1 0 Effectiveness of written communication 1 0 Appropriate use of support schedules/appendix 1 0 Logical flow of calculations (a) Class 1 threshold applies to Donald and Katy 0 5 Specific bequests Shares in Gaucho Ltd Shares will be valued as a majority holding, with reasons 1 5 Calculation of value of shares received 0 5 Business property relief (BPR), brief explanation 1 0 Sam satisfies two-year minimum ownership period 1 0 Beneficiaries satisfy 25% ownership condition 1 0 Calculation of taxable benefit after BPR 0 5 Premises Conditions for premises to qualify for BPR (0 5 x 3) 1 5 Calculation of taxable benefit after BPR 0 5 Donald receives a taxable benefit of the PPR 0 5 London commercial property to Katy subject to CAT, with reasons 1 0 Irish government securities to Charlie subject to CAT, with reasons 1 0 Class 2 threshold applies 0 5 Residue Goodwill is part of the residue 0 5 Calculation of taxable benefit 1 0 Summary of benefits received and CAT payable (b) Effect of Donald s proposed disclaimer Disclaimer is not effective if it is in favour of someone else 1 0 Donald still taxed on PPR inheritance from father 0 5 Katy taxed on a gift from her brother (class 2) 1 0 Calculation of Katy s additional tax 1 5 Effect of proposed gifts from Katy Clawback of BPR previously granted to Katy, with reason 1 0 Calculation of additional tax payable 1 0 BPR will not apply to Donald, with reason 1 0 Calculations of Donald s CAT payable (c) Stamp duty would apply at 1% 1 0 Undervalue would be treated as a gift 1 0 BPR would apply 1 0 Class 3 lifetime threshold would apply 1 0 CAT liability offset by Jim s CGT liability 1 0 Donald s CGT base cost is market value

14 Available Maximum 3 (a) Definition of close company 1 0 Application to Sounds Ltd (b) Interest on directors loans Explanation of 13% restriction 1 5 Calculation of the allowable interest and balance as a distribution 1 5 CT add-back 0 5 DWT calculation and explanation 1 5 Requirement to deduct IT at 20% from allowable interest 0 5 IT for Ben and Rhonda on interest and distribution 1 5 Loan to Conor Implications for Sounds Ltd: On making the loan 1 0 On repayment of the loan 0 5 Implications for Conor 2 0 Expense payments on behalf of Conor Implications for Sounds Ltd 1 5 Implications for Conor (c) Various sources of income 2 5 Taxation of income (d) Calculation of distributable investment and estate income 3 5 Remainder of calculation

15 Available Maximum 4 (a) Lump sum 25% of fund may be taken 1 0 Taxation of lump sum 1 5 Balance of fund Annuity 1 0 ARF 2 0 AMRF not required, with reason (b) Additional directors remuneration Implications for the company 1 0 Implications for the directors Marginal tax rate 0 5 NRE limited by overall earnings cap 0 5 Calculation of maximum allowable contributions (0 5 marks x 2) 1 0 Calculation of additional tax (0 5 marks x 2) 1 0 Carry forward of unused contributions 0 5 Summary 0 5 Dividend Implications for the company 1 5 Implications for the directors Marginal 52% tax rate on dividends with DWT credit 1 0 Dividends not NRE 0 5 Calculation of maximum allowable contributions (0 5 marks x 2) 1 0 Calculation of additional tax (0 5 marks x 2) 1 0 Summary 0 5 Recommendation of alternative (1), with reasons (c) Recommend an occupational pension scheme 1 0 Prior Revenue approval required 0 5 Implications for the company 1 0 Implications for the directors 1 5 Summary

16 Available Maximum 5 (a) VAT on property Calculation of 40,500 initial claim 0 5 Requirements of CGS for 20 years/intervals 1 0 Identification of requirement to adjust at the end of the first interval 1 0 Calculation of adjustment amount and date of payment 1 5 Calculation of reference deduction amount 1, Explanation of possible refunds at future intervals 1 0 VAT on inputs re overheads, etc 1 5 VAT on equipment (b) Offset of losses between the companies is not currently possible 1 0 Only possible to carry forward in Albatross Ltd 0 5 Calculation of the tax benefit of a loss group 0 5 Formation of a loss group (steps) 3 0 Tax consequences CGT 3 5 Stamp duty (including clawback) (c) Treatment of loan written off 1 0 Calculation of allowable loss 1 0 Treatment of loss